EXHIBIT 10.5
RHYTHMS NETCONNECTIONS INC.
SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
March 3, 1999
TABLE OF CONTENTS
PAGE
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1. Purchase and Sale of Stock and Warrant. . . . . . . . . . . . . . . . . . . . 1
1.1 SALE AND ISSUANCE OF PREFERRED STOCK AND WARRANT.. . . . . . . . . . . . 1
1.2 CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Representations and Warranties of the Company.. . . . . . . . . . . . . . . . 1
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. . . . . . . . . . . . . . 2
2.2 CAPITALIZATION AND VOTING RIGHTS.. . . . . . . . . . . . . . . . . . . . 2
2.3 SUBSIDIARIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 VALID ISSUANCE OF PREFERRED STOCK, WARRANT AND COMMON STOCK. . . . . . . 3
2.6 CONSENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.7 PRODUCT WARRANTY AND PRODUCT LIABILITY.. . . . . . . . . . . . . . . . . 4
2.8 LITIGATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 PROPRIETARY INFORMATION AGREEMENTS.. . . . . . . . . . . . . . . . . . . 4
2.10 INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 COMPLIANCE WITH OTHER INSTRUMENTS. . . . . . . . . . . . . . . . . . . . 5
2.12 AGREEMENTS; ACTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.13 RELATED-PARTY TRANSACTIONS.. . . . . . . . . . . . . . . . . . . . . . . 7
2.14 PERMITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.15 ENVIRONMENTAL AND SAFETY LAWS. . . . . . . . . . . . . . . . . . . . . . 7
2.16 MANUFACTURING AND MARKETING RIGHTS.. . . . . . . . . . . . . . . . . . . 8
2.17 DISCLOSURE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.18 REGISTRATION RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.19 CORPORATE DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.20 TITLE TO PROPERTY AND ASSETS.. . . . . . . . . . . . . . . . . . . . . . 9
2.21 EMPLOYEE BENEFIT PLANS.. . . . . . . . . . . . . . . . . . . . . . . . . 9
2.22 FINANCIAL STATEMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. . . . . . . . . . . . . . . . . . . 9
2.24 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.25 MINUTE BOOKS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.26 LABOR AGREEMENTS AND ACTIONS.. . . . . . . . . . . . . . . . . . . . . . 10
2.27 INVENTORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.28 NOTES AND ACCOUNTS RECEIVABLE. . . . . . . . . . . . . . . . . . . . . . 11
2.29 POWERS OF ATTORNEY.. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.30 GUARANTIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. Representations and Warranties of the Investor. . . . . . . . . . . . . . . . 11
3.1 AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. . . . . . . . . . . . . . . . . . . . 11
3.3 DISCLOSURE OF INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 12
3.4 INVESTMENT EXPERIENCE. . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 ACCREDITED INVESTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.6 RESTRICTED SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . 12
4. Covenants of the Investor.. . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1 FURTHER LIMITATIONS ON DISPOSITION.. . . . . . . . . . . . . . . . . . . 12
PAGE
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4.2 LEGENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 CORPORATE SECURITIES LAW.. . . . . . . . . . . . . . . . . . . . . . . . 13
4.4 VOTING TRUST AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . 14
4.5 WAIVER OF "PIGGY-BACK" REGISTRATION RIGHTS.. . . . . . . . . . . . . . . 14
5. Conditions of Investor's Obligations at the Closing.. . . . . . . . . . . . . 14
5.1 REPRESENTATIONS AND WARRANTIES.. . . . . . . . . . . . . . . . . . . . . 14
5.2 PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.3 COMPLIANCE CERTIFICATE.. . . . . . . . . . . . . . . . . . . . . . . . . 14
5.4 QUALIFICATIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.5 PROCEEDINGS AND DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . 15
5.6 OPINION OF COMPANY COUNSEL.. . . . . . . . . . . . . . . . . . . . . . . 15
5.7 BOARD OF DIRECTORS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.8 INVESTORS' RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 15
5.9 XXXX-XXXXX-XXXXXX. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6. Conditions of the Company's Obligations at the Closing. . . . . . . . . . . . 15
6.1 REPRESENTATIONS AND WARRANTIES.. . . . . . . . . . . . . . . . . . . . . 15
6.2 QUALIFICATIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.3 PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.4 INVESTORS' RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 16
6.5 VOTING TRUST AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . 16
7. Indemnification.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1 INDEMNITY BY COMPANY.. . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 INDEMNITY BY INVESTOR. . . . . . . . . . . . . . . . . . . . . . . . . . 17
8. Miscellaneous.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1 SURVIVAL OF WARRANTIES.. . . . . . . . . . . . . . . . . . . . . . . . . 17
8.2 SUCCESSORS AND ASSIGNS.. . . . . . . . . . . . . . . . . . . . . . . . . 17
8.3 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.4 COUNTERPARTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.5 TITLES AND SUBTITLES.. . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.6 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.7 FINDER'S FEE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.8 EXPENSES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.9 AMENDMENTS AND WAIVERS.. . . . . . . . . . . . . . . . . . . . . . . . . 18
8.10 SEVERABILITY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.11 AGGREGATION OF STOCK.. . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.12 ENTIRE AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SCHEDULE A - Schedule of Investors
SCHEDULE B - Schedule of Series A Preferred Holders
SCHEDULE C - Schedule of Series B Preferred Holders
SCHEDULE D - Schedule of Common Holders
EXHIBIT A - Restated Certificate of Incorporation
EXHIBIT B - Amended and Restated Investors' Right Agreement
EXHIBIT C - Voting Trust Agreement
EXHIBIT D - Form of Warrant
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SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
(the "Agreement") is made as of the 3rd day of March 1999, by and between
Rhythms NetConnections Inc., a Delaware corporation (the "Company"), and MCI
WorldCom Venture Fund, Inc. (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK AND WARRANT.
1.1 SALE AND ISSUANCE OF PREFERRED STOCK AND WARRANT.
(a) RESTATED CERTIFICATE. The Company shall adopt
and file with the Secretary of State of Delaware before the Closing (as
defined below) the Restated Certificate of Incorporation in the form attached
hereto as EXHIBIT A (the "Restated Certificate").
(b) PURCHASE OF PREFERRED STOCK AND WARRANT. Subject
to the terms and conditions of this Agreement, the Investor agrees to
purchase at the Closing (defined below) and the Company agrees to sell and
issue to such Investor at the Closing (i) that number of shares of the
Company's Series C Preferred Stock set forth opposite the Investor's name on
SCHEDULE A hereto; and (ii) a warrant, substantially in the form of EXHIBIT D
attached hereto (the "Warrant"), to purchase 600,000 shares of the Company's
Common Stock at an exercise price per share of $8.04 per share. The purchase
price of each share of Series C Preferred Stock shall be $8.04 per share and
the purchase price for each warrant to purchase one (1) share of Common Stock
shall be $0.001 per share.
1.2 CLOSING. The purchase and sale of the Series C
Preferred Stock shall take place at the offices of Xxxxxxx, Phleger &
Xxxxxxxx LLP, 000 Xxxx "X" Xxxxxx, Xxxxx 0000, Xxx Xxxxx California, at 11:00
a.m., on March 3, 1999, or at such other time and place as the Company and
the Investor mutually agree upon orally or in writing (which time and place
are designated as the "Closing"). At the Closing the Company shall deliver
to the Investor a certificate representing the Series C Preferred Stock and
the Warrant which such Investor is purchasing at the Closing (as set forth on
Schedule A) against delivery to the Company by such Investor of a check or
wire transfer in the amount of the purchase price therefor payable to the
Company's order.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Investor that, except as set forth on a
Schedule of Exceptions furnished to the Investor, which exceptions shall be
deemed to be representations and warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The
Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
corporate power and authority to enter into this Agreement and to carry on
its business as now conducted and as proposed to be conducted. The Company
is duly
qualified to transact business and is in good standing in each jurisdiction
in which the failure so to qualify would have a material adverse effect on
its business or properties.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized
capital of the Company consists, or will consist prior to the Closing, of:
(i) PREFERRED STOCK. 20,676,353 shares of
Preferred Stock (the "Preferred Stock"), of which 12,900,000 have been
designated Series A Preferred Stock of which 12,855,094 are issued and
outstanding (as set forth on Schedule B) and which are currently convertible
into 25,710,188 shares of Common Stock, of which 4,044,943 have been
designated Series B Preferred Stock all of which are issued and outstanding
(as set forth on Schedule C) and which are currently convertible into
8,089,886 shares of Common Stock and 3,731,410 shares of which have been
designated Series C Preferred Stock all of which will be sold pursuant to
this Agreement. The rights, privileges and preferences of the Series C
Preferred Stock as of the Closing will be as stated in the Company's Restated
Certificate attached hereto as EXHIBIT A.
(ii) COMMON STOCK. 70,439,653 shares of common
stock ("Common Stock"), of which 7,119,208 shares are issued and outstanding
and are owned by the persons, and in the numbers specified in Schedule D
hereto, and of which 365,096 shares are held by the Company as treasury
stock. The outstanding shares of common stock are all duly and validly
authorized and issued, fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the
Securities Act of 1933, as amended, and any relevant state securities laws,
or pursuant to valid exceptions therefrom.
(iii) Except for (A) the Warrant to be issued
under this Agreement, (B) the conversion privileges of each of the Series A
Preferred Stock and the Series B Preferred Stock and the Series C Preferred
Stock to be issued under this Agreement, (C) the rights provided in paragraph
2.4 of the Amended and Restated Investors' Rights Agreement (the "Investors'
Rights Agreement") of even date herewith in the form attached hereto as
EXHIBIT B, (D) the Company's reservation of 9,727,942 shares of Common Stock
for issuance to employees, directors and consultants pursuant to options
granted, and to be granted in the future, under a stock option plan, (E)
warrants to purchase up to 3,944,000 shares of Common Stock issued in
connection with the Company's sale and issuance of 290,000 units consisting
of 13-1/2% senior discount notes and warrants, all pursuant to that certain
Purchase Agreement dated April 28,1998 and (F) a warrant to purchase up to
478,650 shares of Common Stock issued in connection with a lease financing
there are not outstanding any options, warrants, rights (including conversion
or preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. The Company is not a party or
subject to any agreement or understanding, and, to the Company's knowledge,
there is no agreement or understanding between any persons and/or entities,
which affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company.
2.3 SUBSIDIARIES. The Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
association, or other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this
2
Agreement and the Investors' Rights Agreement, the performance of all
obligations of the Company hereunder and thereunder and the authorization,
issuance (or reservation for issuance), sale and delivery of the Series C
Preferred Stock and Warrant being sold hereunder and the Common Stock
issuable upon conversion of the Series C Preferred Stock and upon exercise of
the Warrant has been taken or will be taken prior to the Closing, and this
Agreement and the Investors' Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance with their
respective terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
2.5 VALID ISSUANCE OF PREFERRED STOCK, WARRANT AND COMMON
STOCK.
(a) The Series C Preferred Stock and Warrant which
are being purchased by the Investor hereunder, when issued, sold and
delivered in accordance with the terms hereof for the consideration expressed
herein, will be duly and validly issued, fully paid and nonassessable and,
based in part upon the representations of the Investor in this Agreement,
will be issued in compliance with all applicable federal and state securities
laws and will be free of restrictions on transfer other than restrictions on
transfer under this Agreement and the Investors' Rights Agreement and under
applicable state and federal securities law. The Common Stock issuable upon
conversion of the Series C Preferred Stock and/or upon exercise of the
Warrant purchased under this Agreement has been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Restated
Certificate, shall be duly and validly issued, fully paid and nonassessable,
and issued in compliance with all applicable securities laws and will be free
of restrictions on transfer other than restrictions on transfer under this
Agreement and the Investors' Rights Agreement and under applicable state and
federal securities law, as presently in effect, of the United States and each
of the states whose securities laws govern the issuance of any of the
Securities (as defined in Section 3.2) hereunder.
(b) The outstanding shares of Common Stock, Series A
Preferred Stock and Series B Preferred Stock are all duly and validly
authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable federal and state securities laws.
2.6 CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with,
any person or entity not a party hereto or any federal, state, local or
provincial governmental authority on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement, except for the filing pursuant to Section 25102(f) of the
California Corporate Securities Law of 1968, as amended, and the rules
thereunder, which filing will be effected within 15 days of the sale of the
Series C Preferred Stock hereunder.
2.7 PRODUCT WARRANTY AND PRODUCT LIABILITY. Each product
manufactured, sold, leased, or delivered by the Company has been in material
conformity with all applicable contractual commitments and all express and
implied warranties, and the Company has no
3
liability (and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand
against the Company giving rise to any liability) for replacement or repair
thereof or other damages in connection therewith. The Company has received
no customer complaints concerning its products and/or services, nor has it
had any of its products returned by a purchaser thereof. The Company has no
material liability (and there is no basis for any present or future action,
suit, proceeding, hearing, investigation, charge, complaint, claim, or demand
against any of them giving rise to any liability) arising out of any injury
to individuals or property as a result of the ownership, possession, or use
of any product manufactured, sold, leased, or delivered by the Company.
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or, to its knowledge, currently threatened against the
Company. The foregoing includes, without limitation, actions pending or
threatened involving the prior employment of any of the Company's employees,
their use in connection with the Company's business of any information or
techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company currently pending or
which the Company intends to initiate.
2.9 PROPRIETARY INFORMATION AGREEMENTS. Each employee,
officer and consultant of the Company has executed a Proprietary Information
and Inventions Agreement in the form provided to the Investor. The Company,
after reasonable investigation, is not aware that any of its employees,
officers or consultants are in violation thereof, and the Company will use
its best efforts to prevent any such violation.
2.10 INTELLECTUAL PROPERTY. The Company has sufficient title
and ownership of all patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
necessary for its business as now conducted and as proposed to be conducted
without any conflict with or infringement of the rights of others. There are
no outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity. The Company
has not interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights, or processes of
third parties, nor has the Company received any communications alleging that
the Company has violated or, by conducting its business as proposed, would
violate any of the patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights, processes, or
other proprietary rights of any other person or entity. The Company is not
aware after due inquiry of its employees that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order
of any court or administrative agency, that would interfere with the use of
his or her best efforts to promote the interests of the Company or that would
conflict with the Company's business as proposed to be conducted. Neither
the execution nor delivery of this Agreement and the Investors' Rights
4
Agreement, nor the carrying on of the Company's business by the employees of
the Company, nor the conduct of the Company's business as proposed, will, to
the Company's knowledge after due inquiry of its employees, conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any law, contract, covenant or instrument under which any of
such employees is now subject to or obligated. The Company does not believe
it is or will be necessary to utilize any inventions of any of its employees
(or people it currently intends to hire) made prior to their employment by
the Company.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS. (i) The Company is
not in violation or default of any provisions of its Certificate of
Incorporation or Bylaws or of any instrument, judgment, order, writ, decree,
lien, indenture, mortgage, lease, or contract to which it is a party or by
which it is bound or of any provision of federal or state statute, rule or
regulation applicable to the Company. The execution, delivery and
performance of this Agreement, the Investors' Rights Agreement or any
ancillary agreements and the consummation of the transactions contemplated
hereby and thereby, and the issuance and sale of Securities (as defined in
Section 3.2), will not result in any such violation, will not permit the
acceleration of the maturity of, or be in conflict with or constitute, with
or without the passage of time and giving of notice, either a default under
any such provision, instrument, judgment, order, writ, decree, lien,
indenture, mortgage, lease, contract, statute, rule, or regulation, or an
event which results in the creation of any lien, charge or encumbrance upon
any assets of the Company or the Securities or the suspension, revocation,
impairment, forfeiture, or nonrenewal of any material permit, license,
authorization, or approval applicable to the Company, its business or
operations or any of its assets or properties; and (ii) there is no judgment,
order, writ or decree issued by a court of law that specifically names the
Company.
2.12 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated
hereby and by the Investors' Rights Agreement, there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, affiliates, or any affiliate thereof.
(b) There are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which the Company is a party or by which it is bound which may
involve (i) obligations of the Company (contingent or otherwise) of, or
payments to the Company individually in excess of $100,000 or, in case of
agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which the Company is a party or by
which it is bound are individually less than $100,000, in excess of $250,000
in the aggregate, or (ii) the license of any patent, copyright, trade secret
or other proprietary right to or from the Company or (iii) provisions
restricting or affecting the development, manufacture or distribution of the
Company's products or services, or (iv) indemnification by the Company with
respect to infringement of proprietary rights.
(c) The Company has not (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness for
money borrowed or any other liabilities individually in excess of $100,000
or, in the case of indebtedness and/or liabilities individually less than
$100,000, in excess of $250,000 in the aggregate, (iii) made any loans or
advances to any person,
5
other than ordinary advances for travel expenses, or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than the sale of its
inventory in the ordinary course of business.
(d) For the purposes of subsections (b) and (c)
above, all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same person or
entity (including persons or entities the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.
(e) The Company is not a party to and is not bound by
any contract, agreement or instrument, or subject to any restriction under
its Restated Certificate or Bylaws, which adversely affects its business as
now conducted or as proposed to be conducted, its properties or its financial
condition.
(f) The Company has not engaged in the past three (3)
months in any discussion (i) with any representative of any corporation or
corporations regarding the consolidation or merger of the Company with or
into any such corporation or corporations, (ii) with any corporation,
partnership, association or other business entity or any individual regarding
the sale, conveyance or disposition of all or substantially all of the assets
of the Company in a transaction or series of related transactions in which
more than fifty percent (50%) of the voting power of the Company is disposed
of, or (iii) regarding any other form of acquisition, liquidation,
dissolution or winding up of the Company.
(g) As of the Closing, the Company has not incurred
any expenses and has no liabilities individually in excess of $100,000 or, in
the case of expenses and/or liabilities individually less than $100,000, in
excess of $250,000 in the aggregate.
2.13 RELATED-PARTY TRANSACTIONS. No employee, officer, or
director of the Company or member of his or her immediate family is indebted
to the Company, nor is the Company indebted (or committed to make loans or
extend or guarantee credit) to any of them. To the best of the Company's
knowledge, none of such persons has any direct or indirect ownership interest
in any firm or corporation with which the Company is affiliated or with which
the Company has a business relationship, or any firm or corporation that
competes with the Company, except that employees, officers, or directors of
the Company and members of their immediate families may own stock in publicly
traded companies that may compete with the Company. No member of the
immediate family of any officer or director of the Company is directly or
indirectly interested in any material contract with the Company.
2.14 PERMITS. The Company has all franchises, permits,
licenses, and other similar authorities necessary for the conduct of its
business as now being conducted by it, the lack of which could materially and
adversely affect the business, properties, prospects, or financial condition
of the Company and believes it can obtain, without undue burden or expense,
any similar authority for the conduct of its business as planned to be
conducted. The Company is not in default in any material respect under any of
such franchises, permits, licenses, or other similar authority.
6
2.15 ENVIRONMENTAL AND SAFETY LAWS.
(i) The Company is not in violation of any federal, state,
local or foreign statute, regulation, ordinance or other provision having the
force or effect of law, any judicial or administrative order or
determination, any contractual obligation or any common law concerning public
health and safety, worker health and safety, or pollution or protection of
the environment, including without limitation any of those relating to the
presence, use, production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
release, threatened release, control, or cleanup of any hazardous materials,
substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, each as amended and
as now or hereafter in effect (referred to herein collectively as the
"Environmental, Health, and Safety Requirements"), and no material
expenditures are or will be required in order to comply with the
Environmental, Health, and Safety Requirements.
(ii) The Company has obtained and complied with, and is in
compliance with, all permits, licenses and other authorizations that are
required pursuant to all Environmental, Health, and Safety Requirements for
the occupation of its facilities and the operation of its business.
(iii) The Company has not received any written or oral notice,
report or other information regarding any actual or alleged violation of
Environmental, Health, and Safety Requirements, or any liabilities or
potential liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any investigatory, remedial or corrective obligations,
relating to Company or its facilities arising under the Environmental,
Health, and Safety Requirements.
(iv) None of the following exists at any property or facility
owned or operated by the Company: (1) underground storage tanks, (2)
asbestos-containing material in any form or condition, (3) materials or
equipment containing polychlorinated biphenyls, or (4) landfills, surface
impoundments, or disposal areas.
(v) The Company has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled, or released
any substance, including without limitation any hazardous substance, or owned
or operated any property or facility (and no such property or facility is
contaminated by any such substance) in a manner that has given or would give
rise to liabilities, including any liability for response costs, corrective
action costs, personal injury, property damage, natural resources damages or
attorney fees, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), the Solid
Waste Disposal Act, as amended ("SWDA"), or any of the Environmental, Health,
and Safety Requirements.
(vi) Neither this Agreement nor the consummation of the
transaction that is the subject of this Agreement will result in any
obligations for site investigation or cleanup, or notification to or consent
of government agencies or third parties, pursuant to any of the so-called
"transaction-triggered" or "responsible property transfer" Environmental,
Health, and Safety Requirements.
7
(vii) The Company has not, either expressly or by operation of
law, assumed or undertaken any liability, including without limitation any
obligation for corrective or remedial action, of any person or entity
relating to the Environmental, Health, and Safety Requirements.
(viii) No facts, events or conditions relating to the past or
present facilities, properties or operations of the Company will prevent,
hinder or limit continued compliance with the Environmental, Health, and
Safety Requirements, give rise to any investigatory, remedial or corrective
obligations pursuant to the Environmental, Health, and Safety Requirements,
or give rise to any other liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise) pursuant to the Environmental, Health, and Safety
Requirements, including without limitation any relating to onsite or offsite
releases or threatened releases of hazardous materials, substances or wastes,
personal injury, property damage or natural resources damage.
2.16 MANUFACTURING AND MARKETING RIGHTS. The Company has not
granted rights to manufacture, produce, assemble, license, market, or sell
its products to any other person and is not bound by any agreement that
affects the Company's exclusive right to develop, manufacture, assemble,
distribute, market, or sell its products.
2.17 DISCLOSURE. The Company has fully provided the Investor
with all the information which such Investor has requested for deciding
whether to purchase the Series C Preferred Stock and all information that is
material to enable such Investor to make such decision. Neither this
Agreement, the Investors' Rights Agreement, nor any other statements or
certificates made or delivered in connection herewith or therewith contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements herein or therein not misleading.
2.18 REGISTRATION RIGHTS. Except as provided in the
Investors' Rights Agreement, the Company has not granted or agreed to grant
any registration rights, including piggyback rights, to any person or entity.
2.19 CORPORATE DOCUMENTS. Except for amendments necessary to
satisfy representations and warranties or conditions contained herein (the
form of which amendments has been approved by the Investor), the Certificate
of Incorporation and Bylaws of the Company as currently in effect are in the
form previously provided to the Investor.
2.20 TITLE TO PROPERTY AND ASSETS. The Company owns its
property and assets free and clear of all mortgages, liens, loans and
encumbrances, except such encumbrances and liens which arise in the ordinary
course of business and do not materially impair the Company's ownership or
use of such property or assets. With respect to the property and assets it
leases, the Company is in compliance with such leases and holds a valid
leasehold interest free of any liens, claims or encumbrances.
2.21 EMPLOYEE BENEFIT PLANS. The Company does not have any
Employee Benefit Plan as defined in the Employee Retirement Income Security
Act of 1974.
2.22 FINANCIAL STATEMENTS. The Company has provided to the
Investor copies of its unaudited balance sheet and statement of operations at
September 30, 1998 and for the
8
period then ended (the "Financial Statements"). The Financial Statements are
true, complete and correct, present fairly the financial condition of the
Company and the results of operations as of the date of such statements and
have been prepared in accordance with generally accepted accounting
principles ("GAAP"), except that the unaudited Financial Statements do not
contain the footnotes required by GAAP. The Financial Statements accurately
set forth and describe the financial condition and operating results of the
Company as of the date, and for the period, indicated therein, subject to
normal year-end audit adjustments.
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has
filed all tax returns and reports required by law. These returns and reports
are true and correct in all material respects. The Company has paid all
taxes and other assessments due, except those contested by it in good faith
which are listed in the Schedule of Exceptions. The provision for taxes of
the Company as shown in its Financial Statements is adequate for taxes due or
accrued as of the date thereof. The Company has not elected pursuant to the
Internal Revenue Code of 1986, as amended ("Code"), to be treated as a
Subchapter S corporation or a collapsible corporation pursuant to Section
341(f) or Section 1362(a) of the Code, nor has it made any other elections
pursuant to the Code (other than elections which relate solely to methods of
accounting, depreciation or amortization) which would have a material effect
on the Company, its financial condition, its business as presently conducted
or proposed to be conducted or any of its properties or material assets.
2.24 INSURANCE. The Company has in full force and effect and
shall maintain fire and casualty insurance policies, with extended coverage,
sufficient in amount (subject to reasonable deductibles) to allow it to
replace any of its properties that might be damaged or destroyed. The
Company shall also maintain broad form comprehensive general liability
insurance in the minimum amount of $2,000,000 per year.
2.25 MINUTE BOOKS. The minute books of the Company provided
to the Investor contain a complete summary of all meetings of directors and
stockholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.
2.26 LABOR AGREEMENTS AND ACTIONS. The Company is not bound
by or subject to (and none of its assets or properties is bound by or subject
to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
knowledge of the Company, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the knowledge of the Company
threatened, which could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted), nor is the Company aware of any labor organization activity
involving its employees. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. Subject to general
principles related to wrongful termination of employees, the employment of
each officer and employee of the Company is terminable at the will of the
Company.
9
2.27 INVENTORY. All inventory of the Company consists of raw
materials and supplies, manufactured and purchased parts, goods in process,
and finished goods, all of which is merchantable and fit for the purpose for
which it was procured or manufactured, and none of which is slow-moving,
obsolete, damaged, or defective, subject only to the reserve for inventory
writedown set forth on the face of the Company's most recent balance sheet
(rather than in any notes thereto) as adjusted for the passage of time
through the Closing in accordance with the past custom and practice of the
Company.
2.28 NOTES AND ACCOUNTS RECEIVABLE. All notes and accounts
receivable of the Company are reflected properly on the Company's books and
records, are valid receivables subject to no setoffs or counterclaims, are
current and collectible, and will be collected in accordance with their terms
at their recorded amounts, subject only to the reserve for bad debts set
forth on the face of the Company's most recent balance sheet (rather than in
any notes thereto) as adjusted for the passage of time through the Closing in
accordance with the past custom and practice of the Company.
2.29 POWERS OF ATTORNEY. There are no outstanding powers
of attorney executed on behalf of the Company.
2.30 GUARANTIES. The Company is not a guarantor or
otherwise is liable for any liability or obligation (including indebtedness)
of any other person or entity other than its wholly owned subsidiaries.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor
hereby represents and warrants to the Company that:
3.1 AUTHORIZATION. The Investor has full power and
authority to enter into this Agreement, the Warrant, the Investors' Rights
Agreement and the Voting Trust Agreement and each such agreement constitutes
its valid and legally binding obligation, enforceable in accordance with its
terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
Federal or state securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement and
the Warrant are made with the Investor in reliance upon such Investor's
representation to the Company that the Series C Preferred Stock and the
Warrant to be received by such Investor and the Common Stock issuable upon
conversion and/or exercise thereof (collectively, the "Securities") will be
acquired for investment for such Investor's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that such Investor has no present intention of selling, granting any
participation in, or otherwise distributing the same. The Investor does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities. The Investor has full power and
authority to enter into this Agreement.
10
3.3 DISCLOSURE OF INFORMATION. The Investor has had an
opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offering of the Series C Preferred Stock and
the Warrant. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 2 of this Agreement
or the right of the Investor to rely thereon.
3.4 INVESTMENT EXPERIENCE. The Investor acknowledges that
it is able to fend for itself, can bear the economic risk of its investment
and has such knowledge and experience in financial or business matters that
it is capable of evaluating the merits and risks of the investment in the
Series C Preferred Stock and the Warrant. If other than an individual, it
has not been organized for the purpose of acquiring the Series C Preferred
Stock or the Warrant.
3.5 ACCREDITED INVESTOR. The Investor is an "accredited
investor" within the meaning of SEC Rule 501 of Regulation D, as presently in
effect.
3.6 QUALIFIED INSTITUTIONAL BUYER. The Investor is a
"qualified institutional buyer" within the meaning of SEC Rule 144A, as
presently in effect.
3.7 RESTRICTED SECURITIES. It understands that the
Securities it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from
the Company in a transaction not involving a public offering and that under
such laws and applicable regulations such Securities may be resold without
registration under the Securities Act of 1933, as amended (the "Act"), only
in certain limited circumstances. In this connection, Investor is familiar
with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
4. COVENANTS OF THE INVESTOR.
4.1 FURTHER LIMITATIONS ON DISPOSITION.
(a) Without in any way limiting the representations
set forth above, the Investor further agrees not to make any disposition of
all or any portion of the Securities unless and until the transferee has
agreed in writing for the benefit of the Company to be bound by this Section
4.1 and Section 7, provided and to the extent such sections are then
applicable, and the Investors' Rights Agreement and:
(i) There is then in effect a Registration
Statement under the Act covering such proposed disposition and such
disposition is made in accordance with such Registration Statement; or
(ii) (A) Such Investor shall have notified the
Company of the proposed disposition and shall have furnished the Company with
a detailed statement of the circumstances surrounding the proposed
disposition, and (B) if reasonably requested by the Company, such Investor
shall have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not require
registration of such shares under the Act. It is agreed that the Company
will not require opinions of counsel for transactions made pursuant to Rule
144 except in unusual circumstances.
11
(b) Notwithstanding the provisions of paragraph (a)
above, (i) no such Registration Statement or opinion of counsel shall be
necessary for a transfer (A) by an Investor which is a partnership to a
partner of such partnership or a retired partner of such partnership who
retires after the date hereof, or to the estate of any such partner or
retired partner or to the transfer by gift, will or intestate succession of
any partner to his spouse or to the siblings, lineal descendants or ancestors
of such partner or his spouse, or (B) to an "affiliate" of the Investor as
that term is defined in Rule 405 promulgated by the Securities and Exchange
Commission under the Act, if the transferee agrees in writing to be subject
to the terms hereof to the same extent as if he were an original Investor
hereunder, and (ii) no transferee shall be required, as a condition to any
transfer of Securities by the Investor, to agree to be bound by this Section
4.1, if the transferee is acquiring such Securities pursuant to a
Registration Statement under the Act or in a transaction made pursuant to
Rule 144.
4.2 LEGENDS. It is understood that the certificates
evidencing the Securities (and the Common Stock issuable upon conversion
and/or exercise thereof) may bear one or all of the following legends:
(a) "These securities have not been registered under
the Securities Act of 1933. They may not be sold, offered for sale, pledged
or hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
(b) Any legend required by the laws of the State of
California, including any legend required by the California Department of
Corporations and Sections 417 and 418 of the Code.
4.3 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
4.4 VOTING TRUST AGREEMENT. In the event that the Company
has not had a registration statement for a public offering of Common Stock
with an effective date within six months of the Closing, then the Investor
shall at such time enter into and execute a voting trust agreement, in
substantially the form attached hereto as EXHIBIT C.
4.5 WAIVER OF "PIGGY-BACK" REGISTRATION RIGHTS. The
Investor hereby waives, solely with respect to the Company's filing, within
six months of the Closing, of a registration statement under the Act in
connection with an initial public offering of its Common Stock, any
"piggy-back" registration rights it may have under Section 1.3 of the
Investors' Rights
12
Agreement; PROVIDED, HOWEVER, that such waiver shall only be deemed effective
if the Company shall obtain a similar waiver of such rights on behalf of all
other holders of Registrable Securities (as defined in the Investors' Rights
Agreement) under the Investors' Rights Agreement.
5. CONDITIONS OF INVESTOR'S OBLIGATIONS AT THE CLOSING. With
respect to the Closing, the obligations of the Investor under subsections 1.1
and 1.2 of this Agreement are subject to the fulfillment on or before the
Closing of each of the following conditions, the waiver of which shall not be
effective against the Investor unless such Investor consents thereto:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of
the date of the Closing with the same effect as though such representations
and warranties had been made on and as of the date of Closing.
5.2 PERFORMANCE. The Company shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or
before the Closing.
5.3 COMPLIANCE CERTIFICATE. The President of the Company
shall have delivered to the Investor at the Closing a certificate certifying
that the conditions specified in Sections 5.1 and 5.2 have been fulfilled and
stating that there has been no adverse change in the business, affairs,
operations, properties, assets or condition of the Company since the date of
this Agreement.
5.4 QUALIFICATIONS. The Commissioner of Corporations of the
State of California shall have issued a permit qualifying the offer and sale
of the Series C Preferred Stock and the Warrant and the underlying Common
Stock to the Investor pursuant to this Agreement, or such offer and sale
shall be exempt from such qualification under the California Corporate
Securities Law of 1968, as amended. Any other authorizations, approvals, or
permits, if any, of any governmental authority or regulatory body of the
United States or of any state that are required in connection with the lawful
issuance and sale of the Series C Preferred Stock pursuant to this Agreement,
shall be duly obtained and effective as of the Closing.
5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
and all documents incident thereto shall be reasonably satisfactory in form
and substance to the Investor, and the Investor shall have received all such
counterpart original and certified or other copies of such documents as such
Investor may reasonably request.
5.6 OPINION OF COMPANY COUNSEL. The Investor shall have
received from Xxxxxxx, Xxxxxxx & Xxxxxxxx LLP, counsel for the Company, an
opinion, dated the date of the Closing, in form and substance satisfactory to
the Investor.
5.7 BOARD OF DIRECTORS. The Board of Directors of the
Company as of the Closing shall consist of Xxxxxxxxx Xxxxx, Xxxxx Xxxxxxx,
Xxxxx Xxxxxxx, Xxx Xxxxxxxx, Xxxxxxx Xxxxxxxx, Xxxx Xxxxxxx and Xxxxx Xxxxx.
13
5.8 INVESTORS' RIGHTS AGREEMENT. The Company and the
Investor shall have entered into the Investors' Rights Agreement in the form
attached as EXHIBIT B.
5.9 XXXX-XXXXX-XXXXXX. All applicable waiting periods (and
any extensions thereof) under the Xxxx-Xxxxx-Xxxxxx Antitrust Improvements
Act of 1976, as amended, shall have expired or otherwise been terminated and
the parties shall have received all other required authorizations, consents,
and approvals of governments and governmental agencies.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING. The
obligations of the Company to the Investor under this Agreement are subject
to the fulfillment on or before the Closing of each of the following
conditions by the Investor:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of
the date of the Closing with the same effect as though such representations
and warranties had been made on and as of the Closing.
6.2 QUALIFICATIONS. The Commissioner of Corporations of the
State of California shall have issued a permit qualifying the offer and sale
to the Investor of the Series C Preferred Stock and the Warrant and the
Common Stock issuable upon the conversion and/or exercise thereof or such
offer and sale shall be exempt from such qualification under the California
Corporate Securities Law of 1968, as amended. Any other authorizations,
approvals, or permits, if any, of any governmental authority or regulatory
body of the United States or of any state that are required in connection
with the lawful issuance and sale of the securities pursuant to this
Agreement shall be duly obtained and effective as of the Closing.
6.3 PERFORMANCE. The Investor shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or
before the Closing.
6.4 INVESTORS' RIGHTS AGREEMENT. The Company and the
Investor shall have entered into the Investors' Rights Agreement in the form
attached as EXHIBIT B.
6.5 VOTING TRUST AGREEMENT. The Company and the Investor
shall have entered into the Voting Trust Agreement in the form attached as
EXHIBIT C.
7. INDEMNIFICATION.
7.1 INDEMNITY BY COMPANY. Company shall indemnify and hold
Investor harmless from and against any and all liability (including, without
limitation, strict liability), loss, damage, or deficiency (including,
without limitation, reasonable attorneys' fees and associated costs)
resulting from any misrepresentation, breach of warranty, or nonfulfillment
of any agreement on the part of Company under this Agreement or under any
certificate or other instrument furnished or to be furnished by Company
hereunder, and from the ownership, management, operations, and interests of
Company prior to Closing, and from any act or omission of Company, or its
agents, employees, and independent contractors in respect of periods prior to
the Closing. To be entitled to such indemnification, Investor must give
Company written notice of the assertion by a third party, to which Investor
has knowledge, of
14
any claim with respect to which Investor might bring a claim for
indemnification hereunder, and in all events must have supplied such notice
to Company within the applicable period for defense of such claim by Company.
Upon Company's agreement to indemnify Investor hereunder, Company shall have
the right, at Company's own expense, to defend and litigate any such third
party claim. In no event shall Company be liable for the acts or omissions
of prior owners, operators, or managers of the Investor or their agents,
independent contractors, or employees, including, without limitation, any
liability arising out of or in connection with claims which occurred prior to
the Closing.
7.2 INDEMNITY BY INVESTOR. Investor shall indemnify and
hold Company harmless from and against any and all liability (including,
without limitation, strict liability), loss, damage or deficiency (including,
without limitation, reasonable attorneys' fees and associated costs)
resulting from any misrepresentation, breach of warranty, or nonfulfillment
under any agreement on the part of Investor under this Agreement or under any
certificate or other instrument furnished by Investor or to be furnished by
Investor hereunder, and from any act or omission of Investor, or its agents,
employees, and independent contractors in respect of periods prior to the
Closing. To be entitled to such indemnification, Company must give Investor
written notice of the assertion by a third party, to which Company has
knowledge, of any claim with respect to which Company might bring a claim for
indemnification hereunder, and in all events must have provided such notice
within the applicable period for defense of such claim by Investor. Upon
Investor's agreement to indemnify Company hereunder, Investor shall have the
right, at Investor's own expense, to defend and litigate any such third party
claim. In no event shall Investor be liable for the acts or omissions of
prior owners, operators, or managers of the Company or their agents,
independent contractors, or employees, including, without limitation, any
liability arising out of or in connection with claims which occurred prior to
the Closing.
8. MISCELLANEOUS.
8.1 SURVIVAL OF WARRANTIES. The warranties, representations
and covenants of the Company and the Investor contained in or made pursuant
to this Agreement shall survive the execution and delivery of this Agreement
and the Closing and shall in no way be affected by any investigation of the
subject matter thereof made by or on behalf of the Investor or the Company.
8.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Securities sold hereunder or any
Common Stock issued upon conversion and/or exercise thereof). Nothing in
this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
8.3 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Delaware without regard to choice of
law principles.
15
8.4 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
8.5 TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
8.6 NOTICES. Unless otherwise provided, any notice required
or permitted under this Agreement shall be given in writing and shall be
deemed effectively given upon receipt, and shall be addressed to the party to
be notified at the address indicated for such party on the signature page
hereof, or at such other address as such party may designate by ten (10)
days' advance written notice to the other parties.
8.7 FINDER'S FEE. Each party represents that it neither is
nor will be obligated for any finders' fee or commission in connection with
this transaction. The Investor agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Investor or any of its
officers, partners, employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless the
Investor from any liability for any commission or compensation in the nature
of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
8.8 EXPENSES. Irrespective of whether the Closing is
effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement or the Restated Certificate, the
prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party
may be entitled.
8.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may
be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of a majority of the Common Stock issued or issuable upon conversion of the
Series C Preferred Stock issued or issuable pursuant to this Agreement. Any
amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any Securities purchased under this Agreement at
the time outstanding (including securities into which such Securities are
convertible and/or exercisable), each future holder of all such securities,
and the Company.
8.10 SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall
be interpreted as if such provision were so excluded and shall be enforceable
in accordance with its terms.
16
8.11 AGGREGATION OF STOCK. All shares of the Preferred Stock
held or acquired by affiliated entities or persons shall be aggregated
together for the purpose of determining the availability of any rights under
this Agreement.
8.12 ENTIRE AGREEMENT. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
17
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RHYTHMS NETCONNECTIONS INC.
By: /s/ Xxxxxxxxx Xxxxx
----------------------------------
Xxxxxxxxx Xxxxx, President
Address: 0000 Xxxxx Xxxxxx Xxxxxxx
Xxxxxxxxx, XX 00000-0000
INVESTOR:
MCI WORLDCOM VENTURE FUND, INC.
By: /s/ Xxxxx Xxxxx
---------------------------------
Its: President
--------------------------------
Address: 0000 Xxxxxxxxxxxx Xxxxxx, X.X.
----------------------------------
Xxxxxxxxxx, XX 00000
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[SIGNATURE TO STOCK PURCHASE AGREEMENT]
SCHEDULE A
Schedule of Investor
AGGREGATE NUMBER OF SERIES C NUMBER OF
SHARE WARRANT AGGREGATE PURCHASE PREFERRED SHARES WARRANT SHARES
PURCHASE PURCHASE PRICE PAID TO BE ISSUED TO BE ISSUED AT
INVESTOR PRICE PRICE AT CLOSING AT CLOSING CLOSING
-------- ----- ----- ---------- ---------- -------
MCI WorldCom Venture $30,000,000 $600 $30,000,600 3,731,410 600,000
Fund, Inc.
TOTALS $30,000,000 $600 $30,000,600 3,731,410 600,000
----------- ---- ----------- --------- -------
----------- ---- ----------- --------- -------
SCHEDULE B
Schedule of Series A Preferred Holders
TOTAL SERIES
FIRST CLOSING (JULY 3, 1997) A STOCK
Enterprise Partners III, L.P. 1,380,000
Enterprise Partners III Associates, L.P. 120,000
Enterprise Partners IV, L.P. --
Brentwood Associates VII, L.P. 1,060,000
Brentwood Affiliates Fund, L.P. 60,000
Xxxxxxx Xxxxxxx Xxxxxxxx & Xxxxx VIII 1,462,500
KPCB VIII Information Sciences Zaibatsu Fund II 37,500
DLJ Capital Corporation 30,000
DLJ First ESC L.L.C. 150,000
Sprout Capital VII, L.P. 1,304,843
The Sprout CEO Fund, L.P. 15,157
Xxxxx Investors II, LLC 125,000
Stanford University 15,000
---------
FIRST CLOSING TOTAL 5,760,000
---------
---------
SECOND CLOSING (JULY 29, 1997)
Brentwood Associates VII, L.P. 380,000
SECOND CLOSING TOTAL 380,000
---------
---------
FIRST & SECOND CLOSING TOTAL 6,140,000
---------
---------
FRIENDS AND FAMILY CLOSING (DECEMBER 23, 1997)
Other Purchasers 210,000
TOTAL SERIES
THIRD CLOSING (DECEMBER 23, 1997) A STOCK
Enterprise Partners III, L.P. 1,380,000
Enterprise Partners III Associates, L.P. 120,000
Brentwood Associates VII, L.P. 1,440,000
Brentwood Affiliates Fund, L.P. 60,000
Xxxxxxx Xxxxxxx Xxxxxxxx & Xxxxx VIII 1,462,500
KPCB VIII Information Sciences Zaibatsu Fund II 37,500
DLJ Capital Corporation 30,000
DLJ First ESC L.L.C. 150,000
Sprout Capital VII, L.P. 1,304,843
The Sprout CEO Fund, L.P. 15,157
Xxxxx Investors II, LLC 125,000
Stanford University 15,000
Xxxxxxxxx X. Xxxxx 365,094
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THIRD CLOSING TOTAL 6,505,094
----------
----------
FIRST, SECOND & THIRD CLOSING TOTAL 12,855,094
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----------
SCHEDULE C
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Schedule of Series B Preferred Holders
Number of Shares
Enron Communications Group, Inc. 2,247,191
Enterprise Partners III, L.P. 413,483
Enterprise Partners III Associates, L.P. 35,955
Xxxxxxx Xxxxxxx Xxxxxxxx & Xxxxx VIII 414,202
KPCB VIII Founders Fund 24,000
KPCB Information Sciences Zaibatsu 11,236
Fund II
Brentwood Associates VII, L.P. 431,461
Brentwood Affiliates Fund, L.P. 17,977
DLJ Capital Corporation 8,989
DLJ First ESC L.L.C. 44,944
Sprout Capital VII, L.P. 390,966
The Sprout CEO Fund, L.P 4,539
TOTAL 4,044,943
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SCHEDULE D
Schedule of Common Holders
Number of Shares
Enterprise Partners III, L.P. 1,104,902
Enterprise Partners III Associates, L.P. 96,078
Enterprise Partners IV, L.P. 600,490
Employees of the Company who have
exercised stock options 5,157,738
---------
TOTAL 6,959,208
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EXHIBIT A
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RESTATED CERTIFICATE OF INCORPORATION
RESTATED CERTIFICATE OF INCORPORATION
OF RHYTHMS NETCONNECTIONS INC.,
a Delaware Corporation
Rhythms NetConnections Inc., a corporation organized and existing under
the laws of the state of Delaware, hereby certifies as follows:
1. The name of the corporation is Rhythms NetConnections Inc. The
corporation was originally incorporated under the name "Accelerated
Connections, Inc." The date the corporation filed its original Certificate
of Incorporation with the Secretary of State was February 27, 1997.
2. This Restated Certificate of Incorporation restates and amends the
provisions of the original Certificate of Incorporation of this corporation
as heretofore in effect and was duly adopted by the corporation's Board of
Directors in accordance with Sections 241 and 245 of the General Corporation
Law of the State of Delaware.
3. The text of the Certificate of Incorporation is hereby restated to
read as herein set forth in full:
ARTICLE I
The name of this corporation is Rhythms NetConnections Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 00 Xxx Xxxxxxx Xxxx, Xxxx xx Xxxxx, Xxxxxx of Kent 19901. The
name of its registered agent at such address is CorpAmerica, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. CLASSES OF STOCK. This corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the corporation is
authorized to issue is Ninety One Million One Hundred Sixteen Thousand Six
(91,116,006) shares. Seventy Million Four Hundred Thirty-Nine Thousand Six
Hundred Fifty-Three (70,439,653) shares shall be Common Stock, $0.001 par
value per share and Twenty Million Six Hundred Seventy-Six Thousand Three
Hundred Fifty-Three (20,676,353) shares shall be Preferred Stock, $0.001 par
value per share.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this Restated Certificate of Incorporation may
be issued from time to time in series. The rights, preferences, privileges,
and restrictions granted to and imposed on (i) the Series A Preferred Stock,
which series shall consist of 12,900,000 shares, (ii) the Series B Preferred
Stock, which series shall consist of 4,044,943 shares, and (iii) the Series C
Preferred Stock, which series shall consist of 3,731,410 shares, are as set
forth below in this Article IV(B). The Board of Directors is hereby
authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon additional series of Preferred Stock,
and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective
voting rights which have been or may be granted to the Preferred Stock or
series thereof in Certificates of Determination or the corporation's Restated
Certificate of Incorporation ("Protective Provisions"), but notwithstanding
any other rights of the Preferred Stock or any series thereof, the rights,
privileges, preferences and restrictions of any such additional series may be
subordinated to, pari passu with (including, without limitation, inclusion in
provisions with respect to liquidation and acquisition preferences,
redemption and/or approval of matters by vote or written consent), or senior
to any of those of any present or future class or series of Preferred or
Common Stock. Subject to compliance with applicable Protective Provisions,
the Board of Directors is also authorized to increase or decrease the number
of shares of any series (other than the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock) prior or subsequent to the issue
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
1. DIVIDEND PROVISIONS.
(a) Subject to the rights of series of Preferred Stock
which may from time to time come into existence, the holders of shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall be entitled to receive dividends, out of any assets legally
available therefor, prior and in preference to any declaration or payment of
any dividend (payable other than in: (a) Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive,
directly or indirectly, additional shares of Common Stock of this
corporation; or (b) capital stock of other persons (including without
limitation subsidiaries of this corporation) or options or rights to purchase
any such capital stock) on the Common Stock of this corporation, at the rate
of (i) $0.08 per share of Series A Preferred Stock per annum, $0.356 per
share of Series B Preferred Stock per annum and $0.6432 per share of Series C
Preferred Stock per annum, or (ii) if greater, the amount per annum which
would be paid per share of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, as the case may be, on the number of shares of
Common Stock into which such share is convertible as of the record date fixed
for determination of the stockholders entitled to receive such distribution
(assuming conversion of all convertible Preferred Stock), payable quarterly
when, as and if declared by the Board of Directors. Such dividends shall not
be cumulative. Dividends paid in a
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form other than cash shall be deemed to be the fair value thereof as
determined by the Board of Directors irrespective of any accounting treatment.
(b) In the event this corporation shall declare a
distribution payable in capital stock of other persons or options or rights
to purchase any such capital stock, then, (i) in the event this corporation
distributes at the same time (A) common stock of another person and (B)
Series A preferred stock, Series B preferred stock and Series C preferred
stock of such other person, with rights, preferences, privileges and
restrictions substantially the same as the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, and the number of shares of
common stock, Series A preferred stock, Series B preferred stock and Series C
preferred stock distributed are in substantially the same relative
proportions as this corporation's then outstanding shares of Common Stock,
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock, then (V) all such common stock shall be distributed to the Common
Stock, (W) all such Series A Preferred Stock shall be distributed to the
Series A Preferred Stock, (X) all such Series B Preferred Stock shall be
distributed to the Series B Preferred Stock, and (Y) all such Series C
Preferred Stock shall be distributed to the Series C Preferred Stock and (ii)
in all other cases the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be entitled (together with
the Common Stock) to a proportionate share, and no more, of any such
distribution as though the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock were the holders of the number
of shares of Common Stock of this corporation into which their respective
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock are convertible as of the record date fixed for the
determination of the stockholders entitled to receive such distribution.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or
winding up of this corporation, either voluntary or involuntary, subject to
the rights of series of Preferred Stock which may from time to time come into
existence, the holders of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of this corporation to
the holders of Common Stock by reason of their ownership thereof, an amount
per share equal to the sum of (i) $1.00 for each outstanding share of Series
A Preferred Stock, $4.45 for each outstanding share of Series B Preferred
Stock and $8.04 for each outstanding share of Series C Preferred Stock
(hereafter referred to as the "Original Series A Issue Price", "Original
Series B Issue Price," and "Original Series C Issue Price", respectively),
and (ii) an amount equal to declared but unpaid dividends on such share. If
upon the occurrence of such event, the assets and funds thus distributed
among the holders of the Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock shall be insufficient to permit the payment to
such holders of the full aforesaid preferential amounts, then, subject to the
rights of series of Preferred Stock which may from time to time come into
existence, the entire assets and funds of the corporation legally available
for distribution shall be distributed ratably among the holders of the Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in
proportion to the product of the liquidation preference of each such share
and the number of such shares owned by each such holder.
(b) After the distributions described in subsection
(a) above have been paid, subject to the rights of series of Preferred Stock
which may from time to time come into
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existence, the remaining assets of the corporation available for distribution
to stockholders shall be distributed among the holders of Common Stock pro
rata based on the number of shares of Common Stock held by each.
(c) A consolidation or merger reorganization of this
corporation with or into any other corporation or corporations, or the
effectuation by the corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the corporation is
disposed of, or a sale, conveyance or disposition of all or substantially all
of the assets of this corporation shall be deemed to be a liquidation within
the meaning of this Section 2.
3. CONVERSION. The holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT.
i) Subject to subsection (c), each share of
Series A Preferred Stock, each share of Series B Preferred Stock and each
share of Series C Preferred Stock shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such share at the
office of this corporation or any transfer agent for the Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock, into such number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing (A) the Original Series A Issue Price for each share of Series A
Preferred Stock, (B) the Original Series B Issue Price for each share of
Series B Preferred Stock and (C) the Original Series C Issue Price for each
share of Series C Preferred Stock, by the Conversion Price at the time in
effect for such share. The initial Conversion Price per share for shares of
Series A Preferred Stock shall be the Original Series A Issue Price, the
initial Conversion Price per share for shares of Series B Preferred Stock
shall be the Original Series B Issue Price and the initial Conversion Price
per share for shares of Series C Preferred Stock shall be the Original Series
C Issue Price; provided, however, that the Conversion Price for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
be subject to adjustment as set forth in subsection 3(c).
ii) Each share of Series A Preferred Stock,
each share of Series B Preferred Stock and each share of Series C Preferred
Stock shall automatically be converted into shares of Common Stock at the
Conversion Price at the time in effect for such Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock immediately upon the
earlier of (A) the consummation of the corporation's sale of its Common Stock
in a bona fide, firm commitment underwriting pursuant to a registration
statement under the Securities Act of 1933, as amended, the public offering
price of which is not less than $20,000,000 in the aggregate or (B) the date
upon which the corporation obtains the consent of the holders of 66-2/3% of
the then outstanding shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock.
(b) MECHANICS OF CONVERSION. Before any holder of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this corporation or of any transfer agent for the
particular series of
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Preferred Stock, and shall give written notice by mail, postage prepaid, to
this corporation at its principal corporate office, of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued.
This corporation shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series A Preferred Stock, Series B Preferred
Stock and/or Series C Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such conversion
shall be deemed to have been made immediately prior to the close of business
on the date of such surrender of the shares of Series A Preferred Stock,
Series B Preferred Stock and/or Series C Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder
or holders of such shares of Common Stock as of such date. If the conversion
is in connection with an underwritten offer of securities registered pursuant
to the Securities Act of 1933, the conversion may, at the option of any
holder tendering such Preferred Stock for conversion, be conditioned upon the
closing with the underwriter of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Series A Preferred Stock, Series B
Preferred Stock and/or Series C Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock, SeriesB Preferred Stock and/or
Series C Preferred Stock until immediately prior to the closing of such sale
of securities.
(c) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK.
The Conversion Prices of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock shall be subject to adjustment from time
to time as follows:
i) A. Except as otherwise set forth in subsection
3(c)(i)(F) with respect to the Series C Preferred Stock, upon each issuance
by the corporation of any Additional Stock (as defined below), after the date
hereof, without consideration or for a consideration per share less than the
Conversion Price for such series in effect immediately prior to the issuance
of such Additional Stock, the Conversion Price for such series in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this clause (i)) be adjusted to a price determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
issuance (including, without limitation, the number of shares of Common Stock
issuable upon the conversion of all outstanding Preferred Stock and all other
convertible securities and the exercise of all outstanding options, warrants
or other rights to purchase Common Stock or other securities convertible into
Common Stock) plus the number of shares of Common Stock which the aggregate
consideration received by the corporation for such issuance would purchase at
such Conversion Price; and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance
(including, without limitation, the number of shares of Common Stock issuable
upon the conversion of all outstanding Preferred Stock and all other
convertible securities and the exercise of all outstanding options, warrants
or other rights to purchase Common Stock or other securities convertible into
Common Stock) plus the number of shares of such Additional Stock.
B. No adjustment of the Conversion Price for the
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock shall be made in an
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amount less than one cent per share, provided that any adjustments which are
not required to be made by reason of this sentence shall be carried forward
and shall be either taken into account in any subsequent adjustment made
prior to 3 years from the date of the event giving rise to the adjustment
being carried forward, or shall be made at the end of 3 years from the date
of the event giving rise to the adjustment being carried forward. Except to
the limited extent provided for in subsections 3(c)(i)(E)(3) and
3(c)(i)(E)(4), no adjustment of such Conversion Price pursuant to this
subsection 3(c)(i) shall have the effect of increasing the Conversion Price
above the Conversion Price in effect immediately prior to such adjustment.
C. In the case of the issuance of Common Stock
for cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions or other
expenses allowed, paid or incurred by this corporation for any underwriting
or otherwise in connection with the issuance and sale thereof.
D. In the case of the issuance of the Common
Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as
determined by the Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether before,
on or after the date upon which any shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock were first issued (the
"Purchase Date" with respect to such series)) of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible
into or exchangeable for Common Stock or options to purchase or rights to
subscribe for such convertible or exchangeable securities, the following
provisions shall apply for all purposes of this subsection 3(c)(i) and
subsection 3(c)(ii):
1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
subsections 3(c)(i)(C) and (c)(i)(D)), if any, received by the corporation upon
the issuance of such options or rights plus the exercise price provided in such
options or rights (without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.
2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability,
including, without limitation, the passage of time, but without taking into
account potential antidilution adjustments) for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights
to subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the
time such securities were issued or such options or rights were issued and
for a consideration equal to the consideration, if any, received by
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the corporation for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the additional consideration, if any, to be received by the
corporation (without taking into account potential antidilution adjustments)
upon the conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be determined in
the manner provided in subsections 3(c)(i)(C) and (c)(i)(D)).
3. In the event of any change in the number
of shares of Common Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or
in exchange for such convertible or exchangeable securities, including, but
not limited to, a change resulting from the antidilution provisions thereof,
the Conversion Price of the Series A Preferred Stock, Series B Preferred
Stock and/or Series C Preferred Stock, as applicable, and to the extent in
any way affected by or computed using such options, rights or securities,
shall be recomputed to reflect such change, but no further adjustment shall
be made for the actual issuance of Common Stock or any payment of such
consideration upon the exercise of any such options or rights or the
conversion or exchange of such securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or
exchangeable securities, the Conversion Price of the Series A Preferred
Stock, Series B Preferred Stock and/or Series C Preferred Stock, as
applicable, to the extent in any way affected by or computed using such
options, rights or securities or options or rights related to such
securities, shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable securities which
remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the
exercise of the options or rights related to such securities.
5. The number of shares of Common Stock
deemed issued and the consideration deemed paid therefor pursuant to
subsections 3(c)(i)(E)(1) and (2) shall be appropriately adjusted to reflect
any change, termination or expiration of the type described in either
subsection 3(c)(i)(E)(3) or (4).
F. Upon each issuance by the corporation of any
Additional Stock (as defined below), after the Purchase Date for the Series C
Preferred Stock, without consideration or for a consideration per share less
than the Conversion Price for such Series C Preferred Stock in effect
immediately prior to the issuance of such Additional Stock, the Conversion
Price for such Series C Preferred Stock in effect immediately prior to each
such issuance shall forthwith (except as otherwise provided in this clause
(i)) be adjusted to a price (calculated to the nearest cent) equal to the
consideration per share for which such Additional Stock is issued; provided,
however, that at such time as such Conversion Price has been adjusted
pursuant to this subsection 3(c)(i)(F) to a price per share equal to the
Original Series B Issue Price (as adjusted for stock splits, stock dividends,
combinations and other recapitalizations) any further adjustment to such
Conversion Price shall be made pursuant to subsection 3(c)(i)(A) and the
provisions of this subsection 3(c)(i)(F) shall no longer apply. If such
Additional Stock is issued for no consideration, then the consideration per
share shall be deemed to be $0.001.
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ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 3(c)(i)(E))
by this corporation after the applicable Purchase Date other than
A. Common Stock issued pursuant to a transaction
described in subsection 3(c)(iii) hereof, or
B. shares of Common Stock issuable or issued to
employees, consultants or directors of this corporation directly or pursuant to
a stock option plan or restricted stock plan approved by the Board of Directors
of this corporation, or
C. shares of Common Stock issued upon conversion of
the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock, or
D. shares of Common Stock issued or issuable (I) in a
public offering before or in connection with which all outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
will be converted to Common Stock or (II) upon exercise of warrants or rights
granted to underwriters in connection with such a public offering, or
E. shares of Common Stock issued or issuable to
persons or entities with which the corporation has business relationships
provided such issuances are for other than primarily equity financing purposes
approved by the Board of Directors, or
F. shares of Common Stock or Preferred Stock issued
or issuable (I) in a private placement pursuant to Rule 144A of the Securities
Act of 1933, as amended, or (II) upon exercise of warrants or rights granted to
purchasers in connection with such placement.
iii) In the event the corporation should at any time
or from time to time after the Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock
or other securities or rights convertible into, or entitling the holder
thereof to receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date
(or the date of such dividend distribution, split or subdivision if no record
date is fixed), the Conversion Price of the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock then in effect shall be
appropriately decreased so that the number of shares of Common Stock issuable
on conversion of each share of such series shall be increased in proportion
to such increase of the aggregate of shares of Common Stock outstanding and
those issuable with respect to such Common Stock Equivalents with the number
of shares issuable with respect to Common Stock Equivalents determined from
time to time in the manner provided for deemed issuances in subsection
3(c)(i)(E).
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iv) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is decreased by a combination
of the outstanding shares of Common Stock, then, following the record date of
such combination, the Conversion Price for the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock then in effect shall be
appropriately increased so that the number of shares of Common Stock issuable
on conversion of each share of such series shall be decreased in proportion
to such decrease in outstanding shares.
(d) RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction provided for
elsewhere in this Section 3) provision shall be made so that the holders of
the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock the
number of shares of stock or other securities or property of the Company or
otherwise, to which a holder of Common Stock deliverable upon conversion
would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 3 with respect to the rights of the holders of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock after
the recapitalization to the end that the provisions of this Section 3
(including adjustment of the Conversion Price then in effect and the number
of shares purchasable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock) shall be applicable after
that event as nearly equivalent as may be practicable.
(e) NO IMPAIRMENT. This corporation will not, by amendment
of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by this corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3 and in the
taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock against impairment.
(f) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
i) No fractional shares shall be issued upon
conversion of the Series A Preferred Stock, Series B Preferred Stock and/or
Series C Preferred Stock, and the number of shares of Common Stock to be
issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on
the basis of the total number of shares of Series A Preferred Stock, Series B
Preferred Stock and/or Series C Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Series A Preferred Stock, Series B
Preferred Stock and/or Series C Preferred Stock pursuant to this Section 3,
this corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and
-9-
furnish to each holder of Series A Preferred Stock, Series B Preferred Stock
and/or Series C Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This corporation shall, upon the written request at
any time of any holder of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock, furnish or cause to be furnished to such holder
a like certificate setting forth (A) such adjustment and readjustment, (B)
the Conversion Price at the time in effect, and (C) the number of shares of
Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of a share of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock.
(g) NOTICES OF RECORD DATE. In the event of any taking by
this corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, at least 20 days prior to the
date specified therein, a notice specifying the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
the amount and character of such dividend, distribution or right.
(h) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock; and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Preferred Stock, this corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes.
(i) NOTICES. Any notice required by the provisions of this
Section 3 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of this corporation.
4. VOTING RIGHTS.
(a) GENERAL VOTING RIGHTS. Except as set forth in
subsection 4(b) below, the holder of each share of Series A Preferred Stock,
the holder of each share of Series B Preferred Stock and the holder of each
share of Series C Preferred Stock shall have the right to one vote for each
share of Common Stock into which such share of Series A Preferred Stock, such
share of Series B Preferred Stock and/or such share of Series C Preferred
Stock could then be converted (with any fractional share determined on an
aggregate conversion basis being rounded to the nearest whole share), and
with respect to such vote, each such holder shall have
-10-
full voting rights and powers equal to the voting rights and powers of the
holders of Common Stock, and shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders' meeting in accordance with the by-laws
of this corporation, and shall be entitled to vote, together with holders of
Common Stock, with respect to any question upon which holders of Common Stock
have the right to vote.
(b) ELECTION OF DIRECTORS. Notwithstanding the provisions
of subsection 4(a) above, (i) so long as any shares of Series A Preferred
Stock are outstanding, the holders of the then outstanding shares of Series A
Preferred Stock, by a majority vote voting as a separate class, shall be
entitled to elect four (4) directors of the corporation (the "Series A
Directors") and the holders of Common Stock and Series A Preferred Stock, by
a majority vote voting as a single class, shall be entitled to elect one (1)
director of the corporation (the "Common/Series A Director"); (ii) so long as
any shares of Series B Preferred are outstanding, the holders of the then
outstanding shares of Series B Preferred Stock, by a majority vote voting as
a separate class, shall be entitled to elect one (1) director of the
corporation (the "Series B Director"); (iii) so long as any shares of Series
C Preferred are outstanding, the holders of the then outstanding shares of
Series C Preferred Stock, by a majority vote voting as a separate class,
shall be entitled to elect one (1) director of the corporation (the "Series C
Director"); and (iv) all remaining directors shall be elected by the holders
of the Preferred Stock and the holders of Common Stock, by a majority vote
voting as provided in paragraph 4(a) above. At any meeting held for the
purpose of electing or nominating directors, the presence in person or by
proxy of the holders of a majority of the Series A Preferred Stock then
outstanding shall constitute a quorum of the Series A Preferred Stock for the
election or nomination of the Series A Directors, the presence in person or
by proxy of the holders of a majority of the shares of Series B Preferred
Stock then outstanding, shall constitute a quorum of the Series B Preferred
Stock for the election or nomination of the Series B Director, the presence
in person or by proxy of the holders of a majority of the Series C Preferred
Stock then outstanding shall constitute a quorum of the Series C Preferred
Stock for the election or nomination of the Series C Director, the presence
in person or by proxy of the holders of a majority of the Common Stock and
Series A Preferred Stock, on an as-converted basis, then outstanding shall
constitute a quorum of the Common Stock and Series A Preferred Stock for the
election or nomination of the Common/Series A Director, and the presence in
person or by proxy of the holders of a majority of the Preferred Stock and
Common Stock, on an as-converted basis, then outstanding shall constitute a
quorum of the Preferred Stock and Common Stock for the election or nomination
of all remaining directors. A vacancy in any directorship elected solely by
the holders of Series A Preferred Stock shall be filled only by vote of the
holders of Series A Preferred Stock, a vacancy in the directorship elected
solely by the holders of the Series B Preferred Stock shall be filled only by
vote of the Series B Preferred Stock, a vacancy in the directorship elected
solely by the holders of the Series C Preferred Stock shall be filled only by
vote of the Series C Preferred Stock, a vacancy in the directorship elected
by the holders of the Common Stock and Series A Preferred Stock shall be
filled only by vote of the Common Stock and Series A Preferred Stock, voting
together as provided above, and a vacancy in any directorship elected by the
holders of Preferred Stock and Common Stock shall be filled only by the vote
of the holders of Preferred Stock and Common Stock voting as provided in
paragraph 4(a) above. Any director elected by the holders of Series A
Preferred Stock may be removed during such director's term of office, either
for or without cause, by and only by the affirmative vote of the holders of a
majority of the outstanding shares of Series A Preferred Stock, any
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director elected by the holders of Series B Preferred Stock may be removed
during such director's term of office, either for or without cause, by and
only by the affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock, any director elected by the holders of
Series C Preferred Stock may be removed during such director's term of
office, either for or without cause, by and only by the affirmative vote of
the holders of a majority of the outstanding shares of Series C Preferred
Stock, any director elected by the holders of Common Stock and Series A
Preferred Stock may be removed during such director's term of office, either
for or without cause, by and only by the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock and Series A Preferred
Stock, voting together as provided above, and any director elected by the
holders of Preferred Stock and Common Stock may be removed during such
director's term of office, either for or without cause, by and only by the
affirmative vote of the holders of a majority of the outstanding shares of
Preferred Stock and Common Stock, voting together as provided in paragraph
4(a) above.
5. PROTECTIVE PROVISIONS.
(a) SERIES C PREFERRED STOCK. Subject to the rights of
series of Preferred Stock which may from time to time come into existence, so
long as shares of Series C Preferred Stock are outstanding, this corporation
shall not without first obtaining the approval (by vote or written consent,
as provided by law) of the holders of at least a majority of the then
outstanding shares of Series C Preferred Stock, voting together as a separate
series on an as converted basis:
i) take any action that would materially and adversely
alter the rights, preferences or privileges of the Series C Preferred Stock
as a separate series in a manner that is dissimilar and disproportionate
relative to the manner in which the rights, preferences or privileges of the
Series A Preferred Stock and Series B Preferred Stock are altered; or
ii) authorize additional shares of Series C Preferred
Stock; or
iii) amend Article IV(B)(3)(a)(i) (provided that,
subject to Section IV(B)(5)(a)(i), the corporation shall not be prohibited
from amending Article IV(B)(3)(c)); or
iv) take any action that would alter the right of the
holders of the then outstanding shares of Series C Preferred Stock to elect
one (1) director of the corporation pursuant to subitem (iii) of Article
IV(B)4(b); or
v) amend this Article IV(B)5(a).
(b) SERIES B PREFERRED STOCK. Subject to the rights of
series of Preferred Stock which may from time to time come into existence, so
long as shares of Series B Preferred Stock are outstanding, this corporation
shall not without first obtaining the approval (by vote or written consent,
as provided by law) of the holders of at least a majority of the then
outstanding shares of Series B Preferred Stock, voting together as a separate
series on an as converted basis:
-12-
i) take any action that would materially and adversely
alter the rights, preferences or privileges of the Series B Preferred Stock
as a separate series in a manner that is dissimilar and disproportionate
relative to the manner in which the rights, preferences or privileges of the
Series A Preferred Stock are altered; or
ii) authorize additional shares of Series B Preferred
Stock; or
iii) take any action that would cause it to become a
"public utility" or a "holding company" as those terms are defined under the
Public Utility Holding Company Act of 1935, as amended; or
iv) amend Article IV(B)(3)(a)(i) (provided that,
subject to Section IV(B)(5)(b)(i), the corporation shall not be prohibited
from amending Article IV(B)(3)(c)); or
v) take any action that would alter the right of the
holders of the then outstanding shares of Series B Preferred Stock to elect
one (1) director of the corporation pursuant to subitem (ii) of Article
IV(B)4(b); or
vi) amend this Article IV(B)5(b).
(c) PREFERRED STOCK. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, so long as
shares of Series A Preferred Stock, Series B Preferred Stock and/or Series C
Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least 66-2/3% or more of the then outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock , voting together as a single class on an as converted basis:
i) sell, convey, or otherwise dispose of or encumber
all or substantially all of its property or business or merge into or
consolidate with any other corporation (other than a wholly owned subsidiary
corporation) or effect any transaction or series of related transactions in
which more than 50% of the voting power of the corporation is disposed of; or
ii) create any new class or series of stock or any
other securities convertible into equity securities of the corporation having
any preference over, or being on a parity with, the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock with respect to voting,
dividends or upon liquidation; or
iii) authorize additional shares of Preferred Stock.
6. STATUS OF CONVERTED STOCK. In the event any shares of Series
A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall
be converted pursuant to Section 3 hereof, the shares so converted shall be
cancelled and shall not be issuable by the corporation. The Certificate of
Incorporation of this corporation shall be appropriately amended to effect
the corresponding reduction in the corporation's authorized capital stock.
-13-
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the
corporation legally available therefor, such dividends as may be declared
from time to time by the Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of the corporation, the assets of the corporation shall be
distributed as provided in Article IV(B)2 hereof.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote for each share of Common Stock held by such
holder, and shall be entitled to notice of any stockholders' meeting in
accordance with the By-laws of this corporation, and shall be entitled to
vote upon such matters and in such manner as may be provided by law.
ARTICLE V
A. EXCULPATION. A director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived any improper personal benefit. If the Delaware General
Corporation Law is hereafter amended to further reduce or to authorize, with
the approval of the corporation's stockholders, further reductions in the
liability of the corporation's directors for breach of fiduciary duty, then a
director of the corporation shall not be liable for any such breach to the
fullest extent permitted by the Delaware General Corporation Law as so
amended.
B. INDEMNIFICATION. To the extent not prohibited by applicable law,
this corporation shall provide indemnification of (and advancement of
expenses to) such agents (and any other persons to which Delaware law permits
this corporation to provide indemnification) through bylaw provisions,
agreements with such agents or other persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to
the corporation, its stockholders, and others.
C. EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification of
any of the foregoing provisions of this Article V shall not adversely affect
any right or protection of a director, officer or agent of the corporation
(or any other person to which Delaware law permits this corporation to
provide indemnification) existing at the time of, or increase the liability
of any director, officer
-14-
or agent of the corporation (or other person) with respect to any acts or
omissions of such director, officer or agent (or other person) occurring
prior to, such repeal or modification.
ARTICLE VI
The corporation shall have perpetual existence.
ARTICLE VII
Except as otherwise provided in this Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind any or all of the Bylaws of the corporation.
ARTICLE VIII
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the corporation.
ARTICLE IX
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE X
The corporation shall not be subject to the provisions of Section 203 of
the Delaware General Corporation Law.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed as of this 2nd day of March, 1999.
RHYTHMS NETCONNECTIONS INC.
By:
----------------------------
Xxxxxxxxx Xxxxx, President
[SIGNATURE PAGE TO CERTIFICATE OF AMENDMENT]
EXHIBIT B
---------
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
B-1
RHYTHMS NETCONNECTIONS INC.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
March 3, 1999
TABLE OF CONTENTS
PAGE
----
1. Registration Rights.. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 REQUEST FOR REGISTRATION.. . . . . . . . . . . . . . . . . . . . . 2
1.3 COMPANY REGISTRATION.. . . . . . . . . . . . . . . . . . . . . . . 6
1.4 OBLIGATIONS OF THE COMPANY.. . . . . . . . . . . . . . . . . . . . 6
1.5 FURNISH INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 7
1.6 EXPENSES OF DEMAND REGISTRATION. . . . . . . . . . . . . . . . . . 7
1.7 EXPENSES OF COMPANY REGISTRATION.. . . . . . . . . . . . . . . . . 8
1.8 UNDERWRITING REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . 8
1.9 DELAY OF REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . 9
1.10 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. . . . . . . . . . .11
1.12 FORM S-3 REGISTRATION. . . . . . . . . . . . . . . . . . . . . . .11
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. . . . . . . . . . . . . . . . .12
1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. . . . . . . . . . .13
1.15 "MARKET STAND-OFF" AGREEMENT.. . . . . . . . . . . . . . . . . . .13
1.16 TERMINATION OF REGISTRATION RIGHTS.. . . . . . . . . . . . . . . .14
2. COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . .14
2.1 DELIVERY OF FINANCIAL STATEMENTS.. . . . . . . . . . . . . . . . .14
2.2 INSPECTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. . . . . . . .15
2.4 RIGHT OF FIRST OFFER.. . . . . . . . . . . . . . . . . . . . . . .15
2.5 EMPLOYEE STOCK POOL. . . . . . . . . . . . . . . . . . . . . . . .16
2.6 EXCLUDED INVESTMENTS.. . . . . . . . . . . . . . . . . . . . . . .16
3. COVENANTS OF THE INVESTORS. . . . . . . . . . . . . . . . . . . . . . .17
3.1 CERTAIN CORPORATE TRANSACTIONS.. . . . . . . . . . . . . . . . . .17
3.2 STANDSTILL.. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.3 ADDITIONAL PREFERRED INVESTORS.. . . . . . . . . . . . . . . . . .17
4. CORPORATE OPPORTUNITY MATTERS.. . . . . . . . . . . . . . . . . . . . .19
5. MISCELLANEOUS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.1 SUCCESSORS AND ASSIGNS.. . . . . . . . . . . . . . . . . . . . . .19
5.2 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.3 COUNTERPARTS.. . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.4 TITLES AND SUBTITLES.. . . . . . . . . . . . . . . . . . . . . . .19
5.5 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.6 EXPENSES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.7 AMENDMENTS AND WAIVERS.. . . . . . . . . . . . . . . . . . . . . .20
5.8 SEVERABILITY.. . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.9 AGGREGATION OF STOCK.. . . . . . . . . . . . . . . . . . . . . . .20
5.10 ENTIRE AGREEMENT; AMENDMENT; WAIVER. . . . . . . . . . . . . . . .20
(i)
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT ("Agreement")
is made as of the 3rd day of March, 1999, by and between Rhythms
NetConnections Inc., a Delaware corporation (the "Company"), and the
investors listed on SCHEDULE A hereto, each of which is herein referred to as
an "Investor."
RECITALS
WHEREAS, the Company and one or more of the Investors are parties
to the Series C Preferred Stock and Warrant Purchase Agreement of even date
herewith (the "Preferred Stock Agreement");
WHEREAS, certain of the Investors are presently holders of the
Company's Series A Preferred Stock and/or Series B Preferred Stock and have
entered into an Amended and Restated Investors' Rights Agreement with the
Company dated March 12, 1998 (the "Existing Rights Agreement"); and
WHEREAS, in order to induce the Company to enter into the Preferred
Stock Agreement and to induce one or more Investors to invest funds in the
Company pursuant to the Preferred Stock Agreement, all the Investors and the
Company wish to amend and restate the Existing Rights Agreement so that this
Agreement will supersede and replace the Existing Rights Agreement in its
entirety and will govern the rights of all the Investors to cause the Company
to register shares of the Company's common stock ("Common Stock") issuable to
any Investors upon conversion of their respective shares of the Company's
preferred stock ("Preferred Stock"), and certain other matters as set forth
in this Agreement.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The terms "register", "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document;
(c) The term "Registrable Securities" means (1) the Common Stock issuable
or issued upon conversion of the Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock (2) the 900,735 shares of Common Stock held by
Enterprise Partners as of the date of this Agreement, and (3) any Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
or Common Stock held by Enterprise Partners, excluding in all cases, however,
any Registrable Securities sold by a person in a transaction in which his
rights under this Section 1 are not assigned;
(d) The number of shares of Registrable Securities then outstanding and
the Registrable Securities held by any person shall each be determined by the
number of shares of Common Stock outstanding which are, and the number of
shares of Common Stock issuable pursuant to then exercisable or convertible
securities which are, Registrable Securities;
(e) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof; and
(f) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted
by the Securities and Exchange Commission ("SEC") which permits inclusion or
incorporation of substantial information by reference to other documents
filed by the Company with the SEC.
1.2 REQUEST FOR REGISTRATION.
(a) If the Company shall receive at any time after the earlier of (i)
March 11, 2002, or (ii) six (6) months after the effective date of the first
registration statement for a public offering of securities of the Company
(other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a SEC Rule 145 transaction), a written request
from the Holders of 60% or more of the Registrable Securities (the
"Initiating Holders") then outstanding that the Company file a registration
statement under the Act covering the registration of at least twenty percent
(20%) of the Registrable Securities then outstanding (or a lesser percent if
the anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $20,000,000), then the Company shall, within ten
(10) days of the receipt thereof, give written notice of such request to all
Holders and any other Holder may also request the registration of Registrable
Securities held by such Holder. The Company shall, subject to the limitations
of subsection 1.2(e), effect as soon as practicable, and in any event shall
use its best efforts to effect within 60 days of the receipt of such request,
the registration under the Act of all Registrable Securities which the
Holders request to be registered within twenty (20) days of the mailing of
such notice by the Company in accordance with paragraph 5.5.
(b) If the Company shall receive at any time after the earlier of (i)
March 11, 2002, or (ii) six (6) months after the effective date of the first
registration statement for a public offering of securities of the Company
(other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a SEC Rule 145 transaction), a written request
from Enron Communications Group, Inc. or any assignee of the rights of Enron
Communications Group, Inc. pursuant to Section 1.13 ("Enron") that the
Company file a registration statement under the Act covering the registration
of at least twenty percent (20%) of the Registrable Securities then held by
Enron (or a lesser percent if the anticipated aggregate offering price, net
of underwriting discounts and commissions, would exceed $20,000,000), then
the Company shall, within ten (10)
2
days of the receipt thereof, give written notice of such request to all other
Holders and any other Holder may also request the registration of Registrable
Securities held by such Holder. The Company shall, subject to the
limitations of subsection 1.2(f), effect as soon as practicable, and in any
event shall use its best efforts to effect within 60 days of the receipt of
such request, the registration under the Act of all Registrable Securities
which Enron and the Holders request to be registered within twenty (20) days
of the mailing of such notice by the Company in accordance with paragraph 5.5.
(c) If the Company shall receive at any time after the earlier of (i)
March 11, 2002, or (ii) six (6) months after the effective date of the first
registration statement for a public offering of securities of the Company
(other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a SEC Rule 145 transaction), a written request
from MCI Worldcom Venture Fund, Inc. or any assignee of the rights of MCI
Worldcom Venture Fund, Inc. pursuant to Section 1.13 ("MCI WorldCom") that
the Company file a registration statement under the Act covering the
registration of at least twenty percent (20%) of the Registrable Securities
then held by MCI WorldCom (or a lesser percent if the anticipated aggregate
offering price, net of underwriting discounts and commissions, would exceed
$20,000,000), then the Company shall, within ten (10) days of the receipt
thereof, give written notice of such request to all other Holders and any
other Holder may also request the registration of Registrable Securities held
by such Holder. The Company shall, subject to the limitations of subsection
1.2(g), effect as soon as practicable, and in any event shall use its best
efforts to effect within 60 days of the receipt of such request, the
registration under the Act of all Registrable Securities which MCI WorldCom
and the Holders request to be registered within twenty (20) days of the
mailing of such notice by the Company in accordance with paragraph 5.5.
(d) Subject to the limitations set forth in Section 2.6 hereof, in the
event that, subsequent to expiration of the Exclusion Period (as defined in
Section 2.6), an Excluded Investor (as defined in Section 2.6) acquires
greater than five percent (5%) of the Common Stock of the Company (on a fully
diluted, as converted to Common Stock basis) (the "Excluded Investment"),
then if the Company shall receive a written request from MCI WorldCom that
the Company file a registration statement under the Act covering the
registration of all of the Registrable Securities then held by MCI WorldCom,
then the Company shall, within ten (10) days of the receipt thereof, give
written notice of such request to all other Holders and any other Holder may
also request the registration of Registrable Securities held by such Holder.
The Company shall, subject to the limitations of subsection 1.2(h), effect as
soon as practicable, and in any event shall use its best efforts to effect
within the later to occur of (i) sixty (60) days of the receipt of such
request or (ii) one hundred eighty (180) days of the closing of the Excluded
Investment, the registration under the Act of all Registrable Securities
which MCI WorldCom and the Holders request to be registered within twenty
(20) days of the mailing of such notice by the Company in accordance with
paragraph 5.5.
(e) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall
so advise the Company as a part of their request made pursuant to this
Section 1.2 and the Company shall include such information in the written
notice referred to in subsection 1.2(a). The underwriter
3
will be selected by Initiating Holders holding a majority of the Registrable
Securities proposed to be included in the registration and shall be
reasonably acceptable to the Company. In such event, the right of any Holder
to include his Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with
the Company as provided in subsection 1.4(e)) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by the Initiating Holders holding a majority of the
Registrable Securities proposed to be included in the registration.
Notwithstanding any other provision of this Section 1.2, if the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Initiating
Holders shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated: (i) first, among all Holders thereof, including the Initiating
Holders, allocated among such Holders in proportion (as nearly as
practicable) to the amount of Registrable Securities of the Company proposed
to be included in the registration by each Holder; and (ii) second, to the
extent of any remaining shares that may be underwritten, to the holders of
any other securities.
(f) If Enron intends to distribute the Registrable Securities covered
by its request under subsection 1.2(b) by means of an underwriting, it shall
so advise the Company as a part of its request made pursuant to this Section
1.2 and the Company shall include such information in the written notice
referred to in subsection 1.2(b). The underwriter will be selected by Enron
and shall be reasonably acceptable to the Company. In such event, the right
of any other Holder to include its Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by Enron and such Holder) to
the extent provided herein. Enron and all Holders proposing to distribute
their securities through such underwriting shall (together with the Company
as provided in subsection 1.4(e)) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by Enron. Notwithstanding any other provision of this Section
1.2, if the underwriter advises the Company in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Company shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated: (i) first, to Enron or its assignee; (ii) second, to the extent
of any remaining shares that may be underwritten, among all other Holders
thereof in proportion (as nearly as practicable) to the amount of Registrable
Securities of the Company proposed to be included in the registration by each
such Holder; and (iii) third, to the extent of any remaining shares that may
be underwritten, to the holders of any other securities.
(g) If MCI WorldCom intends to distribute the Registrable Securities
covered by its request under subsection 1.2(c) by means of an underwriting, it
shall so advise the Company as a part of its request made pursuant to this
Section 1.2 and the Company shall include such information in the written notice
referred to in subsection 1.2(c). The underwriter
4
will be selected by MCI WorldCom and shall be reasonably acceptable to the
Company. In such event, the right of any other Holder to include its
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise
mutually agreed by MCI WorldCom and such Holder) to the extent provided
herein. MCI WorldCom and all Holders proposing to distribute their
securities through such underwriting shall (together with the Company as
provided in subsection 1.4(e)) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by MCI WorldCom. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Company in writing that marketing
factors require a limitation of the number of shares to be underwritten, then
the Company shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated: (i) first, to MCI WorldCom or its assignee; (ii) second, to the
extent of any remaining shares that may be underwritten, among all other
Holders thereof in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company proposed to be included in the
registration by each such Holder; and (iii) third, to the extent of any
remaining shares that may be underwritten, to the holders of any other
securities.
(h) If MCI WorldCom intends to distribute the Registrable Securities
covered by its request under subsection 1.2(d) by means of an underwriting,
it shall so advise the Company as a part of its request made pursuant to this
Section 1.2 and the Company shall include such information in the written
notice referred to in subsection 1.2(d). The underwriter will be selected by
MCI WorldCom and shall be reasonably acceptable to the Company. In such
event, the right of any other Holder to include its Registrable Securities in
such registration shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities
in the underwriting (unless otherwise mutually agreed by MCI WorldCom and
such Holder) to the extent provided herein. MCI WorldCom and all Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.4(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by MCI WorldCom. Notwithstanding any other
provision of this Section 1.2, if the underwriter advises the Company in
writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Company shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in
the underwriting shall be allocated: (i) first, to MCI WorldCom or its
assignee; (ii) second, to the extent of any remaining shares that may be
underwritten, among all other Holders thereof in proportion (as nearly as
practicable) to the amount of Registrable Securities of the Company proposed
to be included in the registration by each such Holder; and (iii) third, to
the extent of any remaining shares that may be underwritten, to the holders
of any other securities.
(i) The Company is obligated to effect only (i) two (2) such
registrations pursuant to subsection 1.2(a), (ii) one (1) such registration
pursuant to subsection 1.2(b), (iii) one (1) such registration pursuant to
subsection 1.2(c) and (iv) one (1) such registration pursuant to subsection
1.2(d).
5
(j) Notwithstanding the foregoing, if the Company shall furnish to
either Holders requesting a registration statement pursuant to this Section
1.2, to Enron or to MCI WorldCom, a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its
shareholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, the Company
shall have the right to defer taking action with respect to such filing for a
period of not more than one hundred twenty (120) days after receipt of the
request of the Initiating Holders, Enron or MCI WorldCom, as applicable;
provided, however, that the Company may not utilize this right more than
twice in any twelve month period.
1.3 COMPANY REGISTRATION. If (but without any obligation under
this Agreement to do so) the Company proposes to register (including for this
purpose a registration effected by the Company for shareholders other than
pursuant to this Agreement) any of its stock or other securities under the
Act in connection with the public offering of such securities solely for cash
(other than a registration relating solely to the sale of securities to
participants in a Company stock plan, or a registration on any form which
does not include substantially the same information as would be required to
be included in a registration statement covering the sale of the Registrable
Securities), the Company shall, at such time, promptly give each Holder
written notice of such registration. Upon the written request of any Holder
given within twenty (20) days after mailing of such notice by the Company in
accordance with Section 5.5, the Company shall, subject to (i) the provisions
of Section 1.8 and (ii) any senior "piggy-back" registration rights granted
by the Company pursuant to that certain Warrant Registration Rights Agreement
dated as of May 5, 1998 between the Company and Xxxxxxx Xxxxx & Co., Xxxxxxx
Lynch, Pierce, Xxxxxx & Xxxxx Incorporated and Xxxxxxxxx Lufkin & Xxxxxxxx
Securities Corporation or pursuant to that certain Warrant to Purchase Shares
of Common Stock granted to Sun Financial Group, Inc., dated as of May 19,
1998, cause to be registered under the Act all of the Registrable Securities
that such Holder has requested to be registered.
1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this
Section 1 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder,
keep such registration statement effective for up to one hundred twenty (120)
days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such
6
other documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or Blue Sky laws of such jurisdictions as shall be reasonably requested by
the Holders, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each
Holder participating in such underwriting shall also enter into and perform
its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a
result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
1.5 FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it, and the intended method of disposition of such securities as
shall be required to effect the registration of such Holder's Registrable
Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 if, due to the
operation of subsections 1.5(a) or 1.8, the number of shares or the
anticipated aggregate offering price of the Registrable Securities to be
included in the registration does not equal or exceed the number of shares or
the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in
subsections 1.2(a), 1.2(b), 1.2(c) or 1.2(d) or subsection 1.12(b)(2),
whichever is applicable. Any registration that is withdrawn without becoming
effective pursuant to this Section 1.5 shall not be counted as a registration
for purposes of Section 1.2(i).
1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the
Company, and the reasonable fees and disbursements of one counsel for the
selling Holders (selected by Holders of a majority of Registrable Securities
to be included in the registration if under subsection (a), by Enron if under
subsection 1.2(b) or by MCI WorldCom if under subsections 1.2(c) or 1.2(d))
("Holders' Counsel") shall be borne by the Company; provided, however, that
the Company
7
shall not be required to pay for any expenses of any registration proceeding
begun pursuant to Section 1.2 if the registration request is subsequently
withdrawn at the request of the Holders of a majority of the Registrable
Securities to be registered if under subsection 1.2(a), of Enron if under
subsection 1.2(b), or of MCI WorldCom if under subsections 1.2(c) or 1.2(d)
(in which case all participating Holders shall bear such expenses allocated
among them in proportion to the amount of Registrable Securities originally
proposed to be registered), unless the Holders of a majority of the
Registrable Securities if under subsection 1.2(a), of Enron if under
subsection 1.2(b), or of MCI WorldCom if under subsections 1.2(c) or 1.2(d)
agree to forfeit their or its right to one demand registration pursuant to
Section 1.2; provided further, however, that if at the time of such
withdrawal, the Holders, Enron or MCI WorldCom, as applicable, have learned
of a material adverse change in the condition, business, or prospects of the
Company from that known to the Holders, Enron or MCI WorldCom, as applicable,
at the time of their or its request and have withdrawn the request with
reasonable promptness following disclosure by the Company of such material
adverse change, then the Company shall pay such expenses and the Holders,
Enron or MCI WorldCom, as applicable, shall not be required to pay any of
such expenses and shall retain their or its rights pursuant to Section 1.2.
1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as
provided in Section 1.13), including (without limitation) all registration,
filing, and qualification fees, printers and accounting fees relating or
apportionable thereto, but excluding underwriting discounts and commissions
relating to Registrable Securities.
1.8 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 1.3 to include any of the
Holders' securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected
by it (or by other persons entitled to select the underwriters), and then
only in such quantity as the underwriters determine in their sole discretion
will not jeopardize the success of the offering by the Company. If the total
amount of securities, including Registrable Securities, requested by
shareholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters
determine in their sole discretion will not jeopardize the success of the
offering (the securities so included to be apportioned pro rata among the
selling shareholders according to the total amount of securities entitled to
be included therein owned by each selling Shareholder or in such other
proportions as shall mutually be agreed to by such selling shareholders) but
in no event shall (i) the amount of securities of the selling Holders
included in the offering be reduced below thirty percent (30%) of the total
amount of securities included in such offering, unless such offering is the
initial public offering of the Company's securities in which case the selling
shareholders may be excluded if the underwriters make the determination
described immediately above or (ii) notwithstanding (i) above, any shares
being sold by a shareholder exercising a demand registration right similar to
that granted in Section 1.2 be excluded from such offering. For purposes of
the preceding parenthetical concerning apportionment, for any selling
shareholder
8
which is a holder of Registrable Securities and which is a partnership or
corporation, the partners, retired partners and shareholders of such holder,
or the estates and family members of any such partners and retired partners
and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling shareholder", and any pro-rata reduction with
respect to such "selling shareholder" shall be based upon the aggregate
amount of shares carrying registration rights owned by all entities and
individuals included in such "selling shareholder", as defined in this
sentence.
1.9 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect
to the interpretation or implementation of this Section 1.
1.10 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners or officers, directors
and shareholders of each Holder, any underwriter (as defined in the Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the Securities Exchange Act of 1934, as
amended (the "1934 Act"), against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the Act, or the
1934 Act, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii)
the omission or alleged omission to state therein a material fact required to
be stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by the Company of the
Act, the 1934 Act, or any rule or regulation promulgated under the Act, or
the 1934 Act; and the Company will pay to each such Holder, underwriter or
controlling person any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement
contained in this subsection 1.10(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any
such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly
for use in connection with such registration by a Holder requesting
indemnification hereunder or any such underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any
other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of
the foregoing persons may become subject, under
9
the Act, or the 1934 Act insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such
registration; and each such Holder will pay any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.10(b), in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Holder,
which consent shall not be unreasonably withheld; provided, that, in no event
shall any indemnity under this subsection 1.10(b) exceed the gross proceeds
from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.10,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires and has acknowledged its
obligation to indemnify the indemnified party with respect to such action,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party (together with all other indemnified
parties which may be represented without conflict by one counsel) shall have
the right to retain one separate counsel, with the fees and expenses to be
paid by the indemnifying party, if representation of such indemnified party
by the counsel retained by the indemnifying party would be inappropriate due
to actual or potential differing interests between such indemnified party and
any other party represented by such counsel in such proceeding. The failure
to deliver written notice to the indemnifying party within a reasonable time
of the commencement of any such action shall not relieve such indemnifying
party of any liability to the indemnified party under this Section 1.10
except to the extent that the indemnifying party is prejudiced thereby in its
ability to defend such action, but the omission so to deliver written notice
to the indemnifying party will not relieve it of any liability that it may
have to any indemnified party otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10
is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the statements or
omissions that resulted in such loss, liability, claim, damage, or expense as
well as any other relevant equitable considerations. The relative fault of
the indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
10
(e) Notwithstanding the foregoing, to the extent that any
customary and reasonable provisions on indemnification and contribution
contained in the underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the foregoing provisions,
the provisions in the underwriting agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1.
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under
the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety
(90) days after the effective date of the first registration statement filed
by the Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at
any time after it has become subject to such reporting requirements), or that
it qualifies as a registrant whose securities may be resold pursuant to Form
S-3 (at any time after it so qualifies), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
1.12 FORM S-3 REGISTRATION. In case the Company shall receive from
the Holders of forty percent (40%) or more of the Registrable Securities a
written request or requests that the Company effect a registration on Form
S-3 and any related qualification or compliance with respect to all or a part
of the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other
Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written
request given within
11
15 days after receipt of such written notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this section 1.12: (1)
if Form S-3 is not available for such offering by the Holders; (2) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than
$5,000,000; (3) if the Company shall furnish to the Holders a certificate
signed by the President of the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such Form S-3
Registration to be effected at such time, in which event the Company shall
have the right to defer the filing of the Form S-3 registration statement for
a period of not more than 120 days after receipt of the request of the Holder
or Holders under this Section 1.12; provided, however, that the Company shall
not utilize this right more than once in any twelve month period; or (4) if
the Company has, within the twelve (12) month period preceding the date of
such request, already effected two registrations on Form S-3 for the Holders
pursuant to this Section 1.12.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt
of the request or requests of the Holders. All expenses incurred in
connection with a registration requested pursuant to Section 1.12, including
(without limitation) all registration, filing, qualification, printer's and
accounting fees and the reasonable fees and disbursements of Holders' Counsel
and counsel for the Company, shall be borne pro rata by the Holder or Holders
participating in the Form S-3 Registration. Registrations effected pursuant
to this Section 1.12 shall not be counted as demands for registration or
registrations effected pursuant to Section 1.2.
1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to subsection 1.2(a) may
be assigned (but only with all related obligations) by a Holder to a
transferee or assignee of such securities who, after such assignment or
transfer, holds at least 2,000,000 shares of Registrable Securities (subject
to appropriate adjustment for stock splits, stock dividends, combinations and
other recapitalizations), provided the Company is, within a reasonable time
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. The rights to cause the Company to register
Registrable Securities pursuant to subsection 1.2(b) may be assigned (but
only with all related obligations) by Enron to a transferee or assignee of
such securities who, after such assignment or transfer, holds at least
1,500,000 shares of Registrable Securities (subject to appropriate adjustment
for stock splits, stock dividends, combinations and other recapitalizations),
provided the Company is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights
are being assigned; and provided, further, that such assignment shall be
effective only if immediately following such transfer the further disposition
of such securities by the transferee or assignee is restricted under the Act.
The rights to cause the Company to register Registrable Securities pursuant
to subsections 1.2(c) or 1.2(d)
12
may be assigned (but only with all related obligations) by MCI WorldCom to a
transferee or assignee of such securities who, after such assignment or
transfer, holds at least 1,250,000 shares of Registrable Securities (subject
to appropriate adjustment for stock splits, stock dividends, combinations and
other recapitalizations), provided the Company is, within a reasonable time
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. For the purposes of determining the number of
shares of Registrable Securities held by a transferee or assignee, the
holdings of transferees and assignees of a partnership who are partners or
retired partners of such partnership (including spouses and ancestors, lineal
descendants and siblings of such partners or spouses who acquire Registrable
Securities by gift, will or intestate succession) shall be aggregated
together and with the partnership; provided that all assignees and
transferees who would not qualify individually for assignment of registration
rights shall have a single attorney-in-fact for the purpose of exercising any
rights, receiving notices or taking any action under this Section 1.
1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of 60% or more of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder (a) to include such securities in any registration filed under Section
1.2 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only
to the extent that the inclusion of his securities will not reduce the amount
of the Registrable Securities of the Holders which is included or adversely
affect the market for the Registrable Securities that are included or (b) to
make a demand registration which could result in such registration statement
being declared effective prior to the earlier of any of the dates set forth
in subsections 1.2(a), 1.2(b) or 1.2(c) or within one hundred twenty (120)
days of the effective date of any registration effected pursuant to Section
1.2.
1.15 "MARKET STAND-OFF" AGREEMENT. Each Investor hereby agrees
that, during the period of duration (such period not to exceed 180 days)
specified by the Company and an underwriter of common stock or other
securities of the Company, following the effective date of a registration
statement of the Company filed under the Act, it shall not, to the extent
requested by the Company and such underwriter, directly or indirectly sell,
offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of
(other than to donees or commonly-controlled affiliates of the transferor who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except common stock included in such registration;
provided, however, that:
(a) such agreement shall be applicable only to the first two
such registration statements of the Company which cover common stock (or
other securities) to be sold on its behalf to the public in an underwritten
offering; and
13
(b) all officers and directors of the Company and all other
persons with registration rights (whether or not pursuant to this Agreement)
enter into similar agreements.
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities
of each Investor (and the shares or securities of every other person subject
to the foregoing restriction) until the end of such period.
1.16 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be
entitled to exercise any right provided for in this Section 1 after five (5)
years following the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with
the initial firm commitment underwritten offering of its securities to the
general public.
2. COVENANTS OF THE COMPANY.
2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver
to each Investor holding at least 1,000,000 shares of Registrable Securities:
(a) as soon as practicable, but in any event within ninety
(90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement
of shareholder's equity as of the end of such year, and a schedule as to the
sources and applications of funds for such year, such year-end financial
reports to be in reasonable detail, prepared in accordance with generally
accepted accounting principles ("GAAP"), and audited and certified by
independent public accountants of nationally recognized standing selected by
the Company;
(b) as soon as practicable, but in any event within
forty-five (45) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited profit or loss statement,
schedule as to the sources and application of funds for such fiscal quarter
and an unaudited balance sheet as of the end of such fiscal quarter.
(c) within thirty (30) days of the end of each month, an
unaudited income statement and schedule as to the sources and application of
funds and balance sheet for and as of the end of such month, in reasonable
detail; and
(d) as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget for the next fiscal year,
prepared on a monthly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared,
any other budgets or revised budgets prepared by the Company.
2.2 INSPECTION. The Company shall permit each Investor, at such
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs,
finances and accounts with its officers, all at such reasonable times as may
be requested by the Investor; provided, however, that the Company
14
shall not be obligated pursuant to this Section 2.2 to provide access to any
information which it reasonably considers to be a trade secret or similar
confidential information.
2.3 TERMINATION OF INFORMATION AND INSPECTION COVENANTS. The
covenants set forth in subsections 2.1(c) and (d) and Section 2.2 shall
terminate as to Investors and be of no further force or effect when the sale
of securities pursuant to a registration statement filed by the Company under
the Act in connection with the firm commitment underwritten offering of its
securities raising at least $20,000,000 to the general public is consummated
or when the Company first becomes subject to the periodic reporting
requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event
shall first occur.
2.4 RIGHT OF FIRST OFFER. Subject to the terms and conditions
specified in this paragraph 2.4, the Company hereby grants to each Major
Investor (as hereinafter defined) a right of first offer with respect to
future sales by the Company of its Shares (as hereinafter defined). For
purposes of this Section 2.4, a Major Investor shall mean (i) any Investor
who holds at least 50% of such Investor's originally acquired shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock issued pursuant to (A) that certain Series A Preferred Stock Purchase
Agreement dated July 3, 1997 (the "Series A Agreement"), (B) that certain
Series B Preferred Stock Purchase Agreement dated March 12, 1998 (the "Series
B Agreement") or (C) the Preferred Stock Agreement, as applicable, and (ii)
any person who acquires at least (A) 10% of the Series A Preferred Stock (or
the common stock issued upon conversion thereof) issued pursuant to the
Series A Agreement, (B) 10% of the Series B Preferred Stock (or the common
stock issued upon conversion thereof) issued pursuant to the Series B
Agreement or (C) 10% of the Series C Preferred Stock (or the common stock
issued upon conversion thereof) issued pursuant to the Preferred Stock
Agreement. For purposes of this Section 2.4, Investor includes any general
or limited partners and affiliates of an Investor. An Investor shall be
entitled to apportion the right of first offer hereby granted it among itself
and its partners and affiliates in such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of
its capital stock ("Shares"), the Company shall first make an offering of
such Shares to each Major Investor in accordance with the following
provisions:
(a) The Company shall deliver a notice by certified mail
("Notice") to the Major Investors stating (i) its bona fide intention to
offer such Shares, (ii) the number of such Shares to be offered, and (iii)
the price and terms, if any, upon which it proposes to offer such Shares.
(b) Within 20 calendar days after receipt of the Notice, the
Major Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of common stock issued and held, or
issuable upon conversion of the Series A Preferred Stock, Series B Preferred
Stock and/or Series C Preferred Stock then held, by such Major Investor bears
to the total number of shares of common stock of the Company then outstanding
(assuming full conversion and exercise of all convertible or exercisable
securities) as of the date of the Notice.
15
The Company shall promptly, in writing, inform each Major Investor which
purchases all the shares available to it ("Fully-Exercising Investor") of any
other Major Investor's failure to do likewise. During the ten-day period
commencing after receipt of such information, each Fully-Exercising Investor
shall be entitled to obtain that portion of the Shares for which Major
Investors were entitled to subscribe but which were not subscribed for by the
Major Investors which is equal to the proportion that the number of shares of
common stock issued and held, or issuable upon conversion of Series A
Preferred Stock, Series B Preferred Stock and/or Series C Preferred Stock
then held, by such Fully-Exercising Investor bears to the total number of
shares of common stock issued and held, or issuable upon conversion of the
Series A Preferred Stock, Series B Preferred Stock and/or Series C Preferred
Stock then held, by all Fully-Exercising Investors who wish to purchase some
of the unsubscribed shares.
(c) If all Shares referred to in the Notice are not elected
to be obtained as provided in subsection 2.4(b) hereof, the Company may,
during the 60-day period following the expiration of the period provided in
subsection 2.4(b) hereof, offer the remaining unsubscribed portion of such
Shares to any person or persons at a price not less than, and upon terms no
more favorable to the offeree than those specified in the Notice. If the
Company does not enter into an agreement for the sale of the Shares within
such period, or if such agreement is not consummated within 60 days of the
execution thereof, the right provided hereunder shall be deemed to be revived
and such Shares shall not be offered unless first reoffered to the Major
Investors in accordance herewith.
(d) The right of first offer in this paragraph 2.4 shall not
be applicable (i) to the issuance or sale of common stock (or options
therefor) to employees, consultants or directors of the Company directly or
pursuant to a stock option plan or restricted stock plan approved by the
Board of Directors of the Company, (ii) to or after consummation of a bona
fide, firmly underwritten public offering of shares of common stock,
registered under the Act pursuant to a registration statement on Form S-1, at
an offering price of at least $20,000,000 in the aggregate, (iii) to the
issuance of securities pursuant to the conversion or exercise of convertible
or exercisable securities, (iv) to the issuance of securities in connection
with a bona fide business acquisition of or by the Company, whether by
merger, consolidation, sale of assets, sale or exchange of stock or otherwise
or (v) to the issuance of stock, warrants or other securities or rights to
persons or entities with which the Company has business relationships
provided such issuances are for other than primarily equity financing
purposes approved by the Board of Directors.
2.5 EMPLOYEE STOCK POOL. Any increase in the authorized number of
shares allocated to the Company's employee stock pool under the Company's
1997 Stock Option/Stock Issuance Plan shall be approved by the Board of
Directors.
2.6 EXCLUDED INVESTMENTS. The Company agrees that, for a period
of one year from the date hereof (the "Exclusion Period"), it shall not issue
any of its equity securities in a private offering to any of the following
entities (each an "Excluded Investor"): AT&T Corporation, Sprint
Corporation, Qwest Communications International, Inc., Level 3
Communications, Inc., WilTel, LLC, Frontier Corporation, British
Telecommunications plc, GTE Corp. and the Regional Xxxx Operating Companies.
Notwithstanding anything else in this
16
Agreement, if within thirty (30) days (unless such period is extended by the
mutual agreement of the Company and MCI WorldCom, Inc.) of the effective date
of that certain Framework Agreement dated as of the date hereof between the
Company and MCI WorldCom, Inc. (the "Framework Agreement"), MCI WorldCom,
Inc. has not executed any of the Carrier Services Agreement or the Network
Services Agreement or the OSS Licensing Agreement (as contemplated in the
Framework Agreement), the Exclusion Period shall terminate and the Company
thereafter shall be able to issue its equity securities to any of the
Excluded Investors and MCI WorldCom shall forfeit its demand registration
right granted pursuant to subsection 1.2(d) hereof.
3. COVENANTS OF THE INVESTORS.
3.1 CERTAIN CORPORATE TRANSACTIONS. In the event that the Board
of Directors of the Company and holders of a majority of the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock of the Company vote in favor of
a Corporate Transaction (as defined below), each Investor hereby agrees not
to take any action inconsistent with the pooling-of-interests accounting
treatment to the extent applicable to such Corporate Transaction, as
reasonably deemed necessary by the Company's Board of Directors, including
without limitation exercising any dissenter's rights any such Investor may
have or selling or purchasing any Company securities where prohibited under
the then applicable pooling-of-interests accounting rules. For purposes of
this Section 3.1, Corporate Transaction shall mean the acquisition of the
Company by another entity by means of any transaction or series of related
transactions (including, without limitation, any reorganization, merger or
consolidation) that results in the transfer of fifty percent (50%) or more of
the outstanding voting power of the Company.
3.2 STANDSTILL. Except as set forth in the Preferred Stock
Agreement, so long as an Investor has registration rights under this
Agreement, such Investor agrees not to purchase any additional shares of, or
securities convertible into or exercisable or exchangeable for any shares of,
any class of capital stock of the Company unless approved in advance by the
Board of Directors of the Company.
3.3 ADDITIONAL PREFERRED INVESTORS. Each Investor agrees to
permit other new preferred stock investors in the Company which are approved
by the Board of Directors to participate on a pari passu basis in the rights
of first offer, registration rights, information and access rights and the
protective provision rights held by the Investors set forth herein and in the
Restated Certificate of Incorporation.
4. CORPORATE OPPORTUNITY MATTERS. Except as expressly provided in
this Section 4, the Investors other than Enron (the "Rhythms Stockholders"
for purposes of this Section 4.1) and the Company acknowledge and agree that
neither Enron nor any of its Affiliates shall be expressly or implicitly
restricted or proscribed pursuant to this Agreement, the relationship that
exists between Enron and the Rhythms Stockholders, the relationship between
Enron and the Company or otherwise, from engaging in any type of business
activity or owning an interest in any type of business entity, regardless of
whether such business activity is (or such business entity engages in
businesses that are) in direct or indirect competition with the businesses or
17
activities of the Company or of any of its Affiliates (as defined below) or
any other person or entity. Without limiting the foregoing and except as
otherwise expressly provided in this Section 4, the Rhythms Stockholders and
the Company acknowledge and agree that (i) neither the Rhythms Stockholders,
the Company or its Affiliates nor any other person or entity shall have any
rights, by virtue of this Agreement, the relationship that exists between
Enron and the Rhythms Stockholders, the relationship between Enron and the
Company or otherwise, in any business venture or business opportunity of
Enron or any of its Affiliates, and Enron and such Affiliates shall have no
obligation to offer any interest in any such business venture or business
opportunity to the Rhythms Stockholders, the Company, any Affiliate of the
Company or any other person or entity, or otherwise account to the Rhythms
Stockholders, the Company, any Affiliate of the Company or any other persons
or entities in respect of any such business ventures, (ii) the activities of
Enron or any of its Affiliates that are in direct or indirect competition
with the activities of the Company or any of its Affiliates are hereby
approved by the Rhythms Stockholders and the Company, and (iii) it shall be
deemed not to be a breach of any fiduciary or other duties, if any and
whether express or implied, that may be owed by Enron or its Affiliates to
the Rhythms Stockholdersor the Company for Enron to permit itself or one of
its Affiliates to engage in a business opportunity in preference or to the
exclusion of the Rhythms Stockholders, the Company, its Affiliates or any
other person or entity.
4.1 Except as expressly provided in this Section 4, the
Investors other than MCI WorldCom (the "Rhythms Stockholders" for purposes of
this Section 4.2) and the Company acknowledge and agree that neither MCI
WorldCom nor any of its Affiliates shall be expressly or implicitly
restricted or proscribed pursuant to this Agreement, the relationship that
exists between MCI WorldCom and the Rhythms Stockholders, the relationship
between MCI WorldCom and the Company or otherwise, from engaging in any type
of business activity or owning an interest in any type of business entity,
regardless of whether such business activity is (or such business entity
engages in businesses that are) in direct or indirect competition with the
businesses or activities of the Company or of any of its Affiliates (as
defined below) or any other person or entity. Without limiting the foregoing
and except as otherwise expressly provided in this Section 4, the Rhythms
Stockholders and the Company acknowledge and agree that (i) neither the
Rhythms Stockholders, the Company or its Affiliates nor any other person or
entity shall have any rights, by virtue of this Agreement, the relationship
that exists between MCI WorldCom and the Rhythms Stockholders, the
relationship between MCI WorldCom and the Company or otherwise, in any
business venture or business opportunity of MCI WorldCom or any of its
Affiliates, and MCI WorldCom and such Affiliates shall have no obligation to
offer any interest in any such business venture or business opportunity to
the Rhythms Stockholders, the Company, any Affiliate of the Company or any
other person or entity, or otherwise account to the Rhythms Stockholders, the
Company, any Affiliate of the Company or any other persons or entities in
respect of any such business ventures, (ii) the activities of MCI WorldCom or
any of its Affiliates that are in direct or indirect competition with the
activities of the Company or any of its Affiliates are hereby approved by the
Rhythms Stockholders and the Company, and (iii) it shall be deemed not to be
a breach of any fiduciary or other duties, if any and whether express or
implied, that may be owe by MCI WorldCom or its Affiliates to the Rhythms
Stockholders or the Company for MCI WorldCom to permit itself or one of its
Affiliates to engage in a business opportunity in preference or to the
exclusion of the Rhythms Stockholders, the Company, its Affiliates or any
other person or entity.
18
4.2 For purposes of this Section 4, the term "Affiliate" shall
mean (i) a person or entity that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with another person or entity or (ii) a person or entity that owns
beneficially at least 50% of the equity of such other person or entity;
provided, however, that when used to refer to Affiliates of the Company (as
opposed to Affiliates of any other person or entity, such as Enron or MCI
WorldCom), shall only mean persons or entities controlled by the Company
(rather than persons or entities under common control with the Company), and
when used to refer to Affiliates of Enron or MCI WorldCom, shall exclude the
Company and its Affiliates. The term "control," including the correlative
terms "controlling," "controlled by" and "under common control with" shall
mean possession, directly or indirectly of the power to direct or cause the
direction of management or policies (whether through ownership of securities
or any partnership or other ownership interest, by contract or otherwise) of
a person or entity.
5. MISCELLANEOUS.
5.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and
be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Registrable Securities). Nothing in
this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
5.2 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Delaware without regard to choice of
law principles.
5.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.5 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon receipt addressed to the party to be notified at the
address indicated for such party on the signature page hereof, or at such
other address as such party may designate by ten (10) days' advance written
notice to the other parties.
5.6 EXPENSES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements
in addition to any other relief to which such party may be entitled.
19
5.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of 60% or more of the Registrable Securities then outstanding. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon
each holder of any Registrable Securities then outstanding, each future
holder of all such Registrable Securities, and the Company.
5.8 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
5.9 AGGREGATION OF STOCK. All shares of Registrable Securities
held or acquired by affiliated entities or persons shall be aggregated
together for the purpose of determining the availability of any rights under
this Agreement.
5.10 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement
(including the Exhibits hereto, if any) constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
20
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
RHYTHMS NETCONNECTIONS INC.
By:
-------------------------------
Xxxxxxxxx Xxxxx, President
Address: 0000 Xxxxx Xxxxxx Xxxxxxx
Xxxxxxxxx, XX 00000-0000
INVESTOR:
MCI WORLDCOM VENTURE FUND, INC.
By:
-------------------------------
Its: /s/ President
------------------------------
Address: 0000 Xxxxxxxxxxxx Xxxxxx, X.X.
-------------------------------
Xxxxxxxxxx, XX 00000
-------------------------------
ENRON COMMUNICATIONS GROUP, INC.
By:
-------------------------------
Its: Chairman
------------------------------
Address: 000 Xxxxxxxxx Xxxxxxxx Xxxxxx,
Xxxxx 000,
Xxxxxxxx, Xxxxxx 00000
ENTERPRISE PARTNERS III, L.P.
By:
-------------------------------
Its: General Partner
------------------------------
Address: 0000 Xxxxxxx, Xxxxx 000
Xx Xxxxx, XX 00000
Attn: Xxxxxxx Xxxxxxxx
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
ENTERPRISE PARTNERS III ASSOCIATES, L.P.
By:
------------------------------
Its: General Partner
------------------------------
Address: 0000 Xxxxxxx, Xxxxx 000
Xx Xxxxx, XX 00000
Attn: Xxxxxxx Xxxxxxxx
ENTERPRISE PARTNERS IV, L.P.
By:
-----------------------------
Its: General Partner
-----------------------------
Address: 0000 Xxxxxxx, Xxxxx 000
Xx Xxxxx, XX 00000
Attn: Xxxxxxx Xxxxxxxx
BRENTWOOD ASSOCIATES VII, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By:
-----------------------
Its: General Partner
-----------------------
Address: 0000 Xxxx Xxxx Xxxx
Xxxx. 0, Xxxxx 000
Xxxxx Xxxx, XX 00000
Attn: Xxxx Xxxxxxx
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
BRENTWOOD AFFILIATES FUND, L.P.
By: BRENTWOOD VII VENTURES, L.P.
Its General Partner
By:
------------------------------
Its: General Partner
------------------------------
Address: 0000 Xxxx Xxxx Xxxx
Xxxx. 0, Xxxxx 000
Xxxxx Xxxx, XX 00000
Attn: Xxxx Xxxxxxx
XXXXXXX XXXXXXX XXXXXXXX & XXXXX VIII
By:
------------------------------
Its: General Partner
-----------------------------
Address: 0000 Xxxx Xxxx Xxxx
Xxxxx Xxxx, XX 00000
Attn: Xxxxx Xxxxxxx
KPCB VIII FOUNDERS FUND
By:
------------------------------
Its: General Partner
-----------------------------
Address: 0000 Xxxx Xxxx Xxxx
Xxxxx Xxxx, XX 00000
Attn: Xxxxx Xxxxxxx
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
KPCB INFORMATION SCIENCES ZAIBATSU
FUND II
By:
------------------------------
Its: General Partner
-----------------------------
Address: 0000 Xxxx Xxxx Xxxx
Xxxxx Xxxx, XX 00000
Attn: Xxxxx Xxxxxxx
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Managing General Partner
By:
------------------------
Xxxxx Xxxxxxx, Attorney-in-Fact
Address: 0000 Xxxx Xxxx Xxxx
Xxxxxxxx 0, Xxxxx 000
Xxxxx Xxxx, XX 00000
Attn: Xxxxx Xxxxxxx
THE SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its General Partner
By:
------------------------------
Xxxxx Xxxxxxx, Attorney-in-Fact
Address: 0000 Xxxx Xxxx Xxxx
Xxxxxxxx 0, Xxxxx 000
Xxxxx Xxxx, XX 00000
Attn: Xxxxx Xxxxxxx
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
DLJ CAPITAL CORPORATION
By:
-------------------------------
Xxxxx Xxxxxxx, Attorney-in-Fact
Address: 0000 Xxxx Xxxx Xxxx
Xxxxxxxx 0, Xxxxx 000
Xxxxx Xxxx, XX 00000
Attn: Xxxxx Xxxxxxx
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans Management Corporation
Its: Manager
By:
------------------------------
Xxxxx Xxxxxxx, Attorney-in-Fact
Address: 0000 Xxxx Xxxx Xxxx
Xxxxxxxx 0, Xxxxx 000
Xxxxx Xxxx, XX 00000
Attn: Xxxxx Xxxxxxx
XXXXX INVESTORS II, LLC
By:
------------------------------
Its:
-----------------------------
Address:
-----------------------------
-----------------------------
------------------------------
Xxxxxxxxx Xxxxx
Address: 0000 Xxxxx Xxxxxx Xxxxxxx
Xxxxxxxxx, XX 00000-0000
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
XXXXXXXXXX & XXXXX
By:
------------------------------
Its:
-----------------------------
Address: 0000 X Xxxxxx, X.X., Xxxxx 000
Xxxxxxxxxx, X.X. 00000
---------------------------------
Xxxxxx Xxxxxxx
Address: 000 Xxxxxxxx Xxxxx, Xxx. 000
Xxxxxxxxx, XX 00000
---------------------------------
Xxxx Portugal
Address: 00 Xxxx 00xx Xxxxxx
Xxx Xxxx, XX 00000
---------------------------------
Xxxx X. Xxxx
Address: c/o Xxxxxxx Xxxxxx
0000 Xxxx Xxxx Xxxx
Xxxx. 0, Xxxxx 000
Xxxxx Xxxx, Xxxxxxxxxx 00000
---------------------------------
Xxxx X. Xxxxx
Address: c/o Xxxxxxx Xxxxxx
0000 Xxxx Xxxx Xxxx
Xxxx. 0, Xxxxx 000
Xxxxx Xxxx, Xxxxxxxxxx 00000
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
---------------------------------
Xxxxx X. Xxxxxx
Address: c/o Xxxxxxx Xxxxxx
0000 Xxxx Xxxx Xxxx
Xxxx. 0, Xxxxx 000
Xxxxx Xxxx, Xxxxxxxxxx 00000
---------------------------------
Xxxxxxx X. Xxxxxxx
Address: c/o Xxxxxxx Xxxxxx
0000 Xxxx Xxxx Xxxx
Xxxx. 0, Xxxxx 000
Xxxxx Xxxx, Xxxxxxxxxx 00000
---------------------------------
Xxxxx X. Xxxx
Address: c/o Xxxxxxx Xxxxxx
0000 Xxxx Xxxx Xxxx
Xxxx. 0, Xxxxx 000
Xxxxx Xxxx, Xxxxxxxxxx 00000
---------------------------------
Xxxx X. Xxxxxxx
Address: c/o Xxxxxxx Xxxxxx
0000 Xxxx Xxxx Xxxx
Xxxx. 0, Xxxxx 000
Xxxxx Xxxx, Xxxxxxxxxx 00000
---------------------------------
Xxxx Xxxxxxxxxx
Address: 0000 X Xxxxxx, X.X., Xxxxx 000
Xxxxxxxxxx, X.X. 00000
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
XXXXXXX, PHLEGER & XXXXXXXX LLP
By:
------------------------------
Its:
-----------------------------
Address: Spear Xxxxxx Xxxxx
Xxx Xxxxxx Xxxxxx
Xxx Xxxxxxxxx, Xxxxxxxxxx 00000
---------------------------------
Xxxxx X. Xxxxxxx
Address: Xxxxxxx, Phleger & Xxxxxxxx LLP
000 Xxxx "X" Xxxxxx, Xxxxx 0000
Xxx Xxxxx, Xxxxxxxxxx 00000
UMB AS TRUSTEE FOR XXXXXXX, PHLEGER
& XXXXXXXX RETIREMENT SAVINGS
TRUST FBO XXXX X. XXXXXXXXX
By:
------------------------------
Its:
-----------------------------
Address: 0000 Xxxxx Xxxxxx
Xxxxxx Xxxx, XX 00000
---------------------------------
Xxxxxx X. Xxxxxxx
Address: Xxxxxxx, Phleger & Xxxxxxxx LLP
000 Xxxx "X" Xxxxxx, Xxxxx 0000
Xxx Xxxxx, Xxxxxxxxxx 00000
[SIGNATURE PAGE TO AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
SCHEDULE A
INVESTOR
MCI Worldcom Venture Fund, Inc.
Enron Communications Group, Inc.
Enterprise Partners III, L.P.
Enterprise Partners III Associates, L.P.
Enterprise Partners IV, L.P.
Brentwood Associates VII, L.P.
Brentwood Associates Fund, X.X.
Xxxxxxx Xxxxxxx Xxxxxxxx & Xxxxx VIII
KPCB VIII Founders Fund
KPCB Information Sciences Zaibatsu Fund II
Sprout Capital VII, L.P.
The Sprout CEO Fund, L.P.
DLJ Capital Corporation
DLJ First ESC L.L.C.
Xxxxx Investors II, LLC
Stanford University
Xxxxxxxxx X. Xxxxx
Xxxxxxxxxx & Xxxxx
Xxxxxx Xxxxxxx
Xxxx Portugal
Xxxx X. Xxxx
Xxxx X. Xxxxx
Xxxxxxx X. Xxxxxx
Xxxxxxx X. Xxxxxxx
Xxxxx X. Xxxx
Xxxx X. Xxxxxxx
Xxxxxxx Xxxxxxxxxx
Xxxxxxx, Xxxxxxx & Xxxxxxxx LLP
Xxxxx X. Xxxxxxx
UMB as Trustee for Xxxxxxx, Phleger & Xxxxxxxx Retirement
Savings Trust FBO Xxxx X. Xxxxxxxxx
Xxxxxx X. Xxxxxxx
EXHIBIT C
VOTING TRUST AGREEMENT
C-1
VOTING TRUST AGREEMENT
THIS VOTING TRUST AGREEMENT (this "Agreement"), dated as of March
3, 1999, by and between MCI WorldCom Venture Fund, Inc., a stockholder of
Rhythms NetConnections Inc., a Delaware corporation (the "Company") (together
with transferees of voting trust certificates subsequently agreeing to be
bound by this Agreement, collectively referred to herein as the
"Beneficiaries" or individually as the "Beneficiary"), and the Company, as
voting trustee (with any successor to him as voting trustee, referred to
herein as the "Trustee").
WHEREAS, the Beneficiary owns or may in the future own shares of
Series C Preferred Stock, $0.001 par value ("Series C Preferred"), of the
Company in the amount set forth opposite its name on SCHEDULE A;
WHEREAS, the Beneficiary believes it is in its best interests and
in the best interests of the Company to transfer to the Trustee in trust for
the limited purpose of voting in elections on certain matters as described
herein all of the shares of Series C Preferred Stock of the Company either
presently owned by it or hereafter acquired by it by any means (all such
shares to be collectively referred to herein as "Shares"); and
WHEREAS, the Beneficiary desires to empower the Trustee to vote the
Shares owned by it in trust for it for the limited purpose of voting on
certain stockholder matters as described herein for the term of this
Agreement in the following manner.
NOW, THEREFORE, in consideration of the foregoing and of the
agreements contained herein, and in consideration of the transfer in trust to
the Trustee of the Shares, it is hereby agreed:
1. APPOINTMENT OF TRUSTEE. The Beneficiary hereby appoints the
Trustee to serve as trustee of the Rhythms NetConnections Inc. Voting Trust,
the trust established by this Agreement (the "Trust") and the Trustee hereby
accepts such appointment and agrees to act as trustee of the Trust in
accordance with the terms of this Agreement.
2. DEPOSIT OF STOCK AND ISSUANCE OF VOTING CERTIFICATES.
(a) The Beneficiary shall forthwith deliver to the Trustee
certificates for all Shares now owned by it, and will deliver to the Trustee
certificates for all Shares hereafter acquired by it by any means,
immediately upon becoming the owner thereof, duly endorsed for transfer or
accompanied by duly executed instruments of transfer. Promptly upon receipt
of such certificates, the Trustee shall cause such Shares to be transferred
and registered in the stock records of the Company in the name of "Trustee of
the Rhythms NetConnections Inc. Voting Trust" or a nominee name designated by
him, and shall cause the new share certificates to bear a legend stating that
the Shares evidenced thereby (the "Trustee Shares") are subject to the terms
of this Agreement.
(b) The Trustee shall issue and deliver to the Beneficiary a
Voting Trust Certificate (a "Certificate") in respect of the number and type
of Shares transferred to and held of record by the Trustee for the benefit of
the Beneficiary under this Agreement, in the form of EXHIBIT A hereto (except
that the Trustee may affix to a Certificate any restrictive legend borne by
the certificates for Shares in respect of which Shares the Certificate is
issued). Such Certificates shall be signed by the Trustee.
3. TRUSTEE'S POWERS AND DUTIES.
(a) STOCKHOLDER MATTERS. The Trustee shall vote the Trustee
Shares as follows:
(i) VOTE OF THE SERIES C PREFERRED. Only with respect
to a proposal for a Corporate Transaction (defined below), and only to the
extent such Corporate Transaction is submitted for a stockholder vote, in
which the Series C Preferred Stock has class or series voting rights (a
"Stockholder Proposal"), the Trustee shall vote the Trustee Shares for or
against such Stockholder Proposal, in the same proportion as a majority of
the then outstanding shares of Series A Preferred Stock and Series B
Preferred Stock, voting as a single class (the "Series A and B Majority"),
are voted or abstain. For purposes of this subsection (i), a Corporate
Transaction shall mean (A) any consolidation or merger reorganization with or
into any other corporation or corporations (including without limitation a
merger or consolidation as contemplated under Subchapter IX of the Delaware
General Corporation Law), or the effectuation of a transaction in which more
than 50% of the voting power is disposed of, or a sale, conveyance or
disposition of all or substantially all of the Company's assets or (B) the
issuance of equity securities in connection with a corporate partnering or
similar transaction.
(ii) OTHER STOCKHOLDER MATTERS. With respect to any
other proposal submitted for stockholder vote, the Trustee shall vote the
Trustee Shares in the manner directed (whether for, against or to abstain) by
the Beneficiary hereunder for whom the Trustee Shares are held; including,
without limitation, NOTWITHSTANDING subsection (i) above, with respect to any
proposal submitted for stockholder vote in connection with the following:
1. any action that would materially and adversely
alter the rights, preferences or privileges of the
Series C Preferred Stock as a separate series in a
manner that is dissimilar and disproportionate
relative to the manner in which the rights,
preferences or privileges of the Series A or B
Preferred Stock are altered; or
2. authorization of additional shares of Series C
Preferred Stock; or
3. any action that would alter the right of the
holders of the then outstanding shares of Series C
Preferred Stock to elect one (1) director of the
corporation pursuant to Article IV(B)4(b)(iii) of
the Restated Certificate of Incorporation; or
4. amendment of Article IV(B)5(a) of the Restated
Certificate of Incorporation.
2
(b) NOTICE TO BENEFICIARIES. With respect to any proposal
submitted for stockholder vote or written consent of which the Trustee
receives notice, the Trustee shall give written notice thereof, including a
copy of any such notice received by the Trustee and any other written
material addressing such proposal provided to stockholders or to the Trustee,
to the record holders of Certificates (as of the record date applicable to
the Trustee for Shares as to such vote) promptly upon receipt thereof by the
Trustee. For all matters covered by Section 3(a)(ii) above, the Trustee
shall request instructions from such holders as soon as reasonably possible,
but not later than ten (10) days prior to the date such vote is required;
PROVIDED, HOWEVER, that if the Trustee does not receive notice prior to ten
(10) days before such vote is due, the Trustee shall provide notice as soon
as reasonably possible as to the manner in which the Trustee Shares in which
they respectively have beneficial interests should be voted. Each record
holder of Certificates shall "vote" such beneficial interests for such
matters by returning written instructions to the Trustee, who shall vote the
shares in accordance with such instructions. For all matters covered by
Section 3(a)(i) above, the Trustee shall request from the Company and the
Company shall provide to the Trustee on the day prior to the deadline for
voting, the percentage of the Series A Preferred Stock and Series B Preferred
Stock voting on the proposal and the percentage of those voting that voted in
favor of the proposal, against the proposal, or that abstained with respect
to the proposal. The Trustee shall vote the Shares in the same percentage as
the Series A Preferred Stock and Series B Preferred Stock, voting as a single
class, and in the same percentage for, against and abstain as the vote of the
Series A Preferred Stock and Series B Preferred Stock voting as a single
class.
(c) SALES. The Trustee shall have no authority to sell or
otherwise dispose of or to pledge, encumber or hypothecate, any of the
Trustee Shares.
4. DIVIDENDS AND DISTRIBUTIONS. Upon the declaration of any
dividends or the payment of any other distribution of the Company with
respect to Trustee Shares held for the Beneficiary other than pro rata
distributions of additional voting shares of the Company, the Trustee shall
distribute or cause all such dividends and distributions to be distributed by
the Company to the Beneficiary. In the event of dissolution or liquidation
of the Company during the term of this Agreement in such manner as to entitle
the holders of shares to liquidating dividends in respect thereof, the
Trustee shall distribute or cause all such liquidating dividends with respect
to the Trustee Shares to be distributed by the Company to the Beneficiary.
5. THE TRUSTEE.
(a) THE TRUSTEE AS BENEFICIARY OR AFFILIATE. Any Trustee and any
firm or corporation of which such Trustee may be a member, agent, partner or
employee and any corporation, trust, or association of which such Trustee may
be a trustee, stockholder, director, officer, agent, or employee may contract
with or be or become pecuniarily interested, directly or indirectly, in any
matter or transaction to which the Company or any subsidiary or controlled or
affiliated corporation may be a party or in which it may be concerned, as
fully and freely as though such Trustee were not a Trustee hereunder. The
Trustee may act as an agent, employee, director and/or officer of the Company
or of any such subsidiary or controlled or affiliated corporation and,
subject to the terms of this Agreement, may vote the Trustee Shares in favor
of matters in which the Trustee or his affiliates are interested.
3
(b) SUCCESSOR TRUSTEES. The Trustee may resign by giving notice
of resignation to the Company and to the Beneficiary. Any successor Trustee
shall enjoy all the rights, powers, interests, and immunities of the Trustee
as originally constituted, and the title to the Trustee Shares of any Trustee
who may resign or be removed or become incapacitated (by death, disability or
otherwise) to act shall, upon such resignation or removal or incapacity, vest
in the successor Trustee. In the event of the removal, resignation, or
incapacity to act of any Trustee, a successor shall be appointed by the
Beneficiary, which successor shall be reasonably acceptable to the Company.
If, within 45 days following such removal, resignation or incapacity of the
Trustee the Beneficiary has not appointed a successor, a successor shall be
appointed by a majority vote of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock voting as a single class. The
Beneficiary may remove any Trustee with cause by written notice to the
Trustee and Board of Directors of the Company. In addition, a majority of the
Board of Directors of the Company may determine that any Trustee has become
incapacitated to act or may remove any Trustee for cause, in either case by
written consents. Notwithstanding any change in the Trustee, the
Certificates for the Trustee Shares may be (i) voted and/or (ii) endorsed and
transferred, by any successor Trustee with the same effect as if voted,
endorsed and transferred by the former Trustee. The Trustee is authorized
and empowered to cause any further transfer of said shares to be made which
may be necessary through the occurrence of any change of person acting as the
Trustee hereunder.
(c) RELATIONSHIP OF PARTIES. The Trust created by this Agreement
is not intended to be, and shall not be deemed to be, and shall not be
treated as a general partnership, limited partnership, joint venture,
corporation, or joint stock company or association. The relationship of the
Beneficiary to the Trustee shall be solely that of beneficiary of the Trust
created by this Agreement and its rights shall be limited to those conferred
upon it by this Agreement.
(d) CONSULTATION WITH OUTSIDE ADVISORS. The Trustee may consult
with legal counsel, which may be counsel to the Company or any of its
affiliates or any of its or its affiliates' officers, directors or partners.
(e) LIABILITY. In voting on all matters which may come before any
meeting of stockholders of the Company the Trustee shall vote the Trustee
Shares in the manner prescribed by this Agreement, and it is understood that
the Trustee shall not incur responsibility by reason of any error of judgment
or of law or by any matter or thing done or omitted under this Agreement,
except for his own individual gross negligence or willful misconduct. No
Trustee shall be liable in any event for acts or defaults of any other
Trustee or for acts or defaults of any employee, agent, proxy, or attorney in
fact of any other Trustee. The Trustee shall always be protected and free
from liability in acting upon any notice, request, consent, instruction,
certificate, declaration, telefax, guarantee, affidavit, or other paper or
document or signature reasonably believed by him to be genuine and to have
been signed by the proper party or parties or by the party or parties
purporting to have signed the same.
(f) THE TRUSTEE'S INDEMNITY. The Company shall indemnify, defend
and hold harmless the Trustee against any and all losses, damages,
liabilities, obligations, claims, demands, judgments, settlements,
governmental investigations, costs and expenses of any nature whatsoever,
including the reasonable fees and expenses of attorneys, accountants and
consultants
4
(collectively, "Damages"), incurred in connection with or arising from the
performance of his duties under this Agreement (except for his gross
negligence or willful misconduct). Such indemnification shall be paid as
incurred and on demand, subject to an undertaking by the Trustee to repay if
it is ultimately determined that he is not entitled to such indemnification.
In the event the Beneficiary shall request the Trustee to bring an action on
its behalf, such party shall pay in advance all the expense of prosecuting
such action and shall indemnify, defend and hold harmless the Trustee against
all Damages incurred in connection with such action; the Trustee shall have
no obligation to commence or proceed with such suit unless he is satisfied
that all necessary monies have been paid in advance or advanced to the
Trustee for this purpose.
6. RESTRICTIONS ON TRANSFER. The Certificates shall be
transferable only as provided in said Certificates and this Agreement. The
Beneficiary shall be at liberty to sell, transfer or otherwise dispose of its
Certificates issued hereunder; PROVIDED, that the transferee shall have
agreed in writing to be bound by this Agreement as though such transferee
originally executed this Agreement as a Beneficiary. All sales or transfers
shall be recorded in the Certificate Book (defined in Section 9 below) and
any proper sale or transfer made of any Certificate shall vest in the
purchaser or transferee all rights of the transferror and shall subject the
purchaser or transferee to the same limitations as those imposed on the
transferror by the terms of the Certificate so transferred, and by this
Agreement. Upon any such transfer, following execution of an agreement to be
bound by this Agreement by a purchaser or transferee and upon surrender to
the Trustee of any Certificate sold or transferred, duly endorsed for
transfer, the Trustee shall deliver a Certificate or Certificates to the
purchaser or transferee for the beneficial interest in the number and type of
Trustee Shares represented by the Certificate so sold or transferred. The
Trustee shall not be required to recognize any sale or transfer of a
Certificate not made in accordance with the provisions hereof unless the
person or persons claiming such ownership shall have produced indicia of
title satisfactory to the Trustee, and shall have deposited with the Trustee
indemnity satisfactory to him, and shall have executed an agreement to be
bound by this Agreement.
7. CONTINUANCE AND TERMINATION OF TRUST.
(a) TERM AND TERMINATION. This Agreement shall terminate on the
earlier of (i) March 3, 2009; (ii) the date of the closing of a bona fide,
firmly underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer
and sale of Common Stock of the Company to the public (the "Qualified Public
Offering"); (iii) effectuation by the Company of a transaction or series of
transactions in which the Company is consolidated or merged with or into any
other corporation or corporations and in which the Company is not the
surviving entity (but excluding a merger or consolidation of the Company with
the parent of the Company or one of the Company's majority owned subsidiaries
or an entity in which more than fifty percent (50%) of the voting control is
controlled by the persons or entities controlling more than fifty percent
(50%) of the voting control of the Company, whether or not the Company is the
surviving entity ("Excluded Merger")) or in which the Company sells all or
substantially all of its assets (other than to the parent of the Company or
one of the Company's majority owned subsidiaries an entity in which more than
fifty percent (50%) of the voting control is controlled by the persons or
entities controlling more than fifty percent (50%) of the voting control of
the Company ("Excluded Sale"); or (iv) the effective date of the liquidation
or dissolution of the Company (other than as a
5
result of an Excluded Merger or Excluded Sale). Notwithstanding the
foregoing, this Agreement may (before a Qualified Public Offering has
occurred) be extended to a date certain after a Qualified Public Offering by
the written consent of the Beneficiary and of the Trustee (such extension not
to be beyond March 3, 2009). This Agreement may be renewed and the term of
the Trust extended at any time within the two (2) years prior to the
expiration of the Trust for additional periods not exceeding ten (10) years
from the expiration date of the Trust as originally fixed, or as last
extended, by the written agreement of the Beneficiary and of the Trustee (an
"Extension Agreement"), as to the Shares beneficially owned by the
Beneficiary. In the event of such extension, the Trustee shall, prior to the
expiration as hereinabove provided, as originally fixed, or as theretofore
extended, as the case may be, file in the Executive Office (as defined below)
a copy of the agreement extending the expiration date of this Agreement and
thereupon the duration of this Agreement shall be extended for the period
fixed by such Extension Agreement; PROVIDED, HOWEVER, that no such Extension
Agreement shall affect the rights or obligations of persons not parties
thereto. Except as otherwise provided in this Agreement, the trust created
by this Agreement is hereby expressly declared to be irrevocable.
(b) CONSOLIDATION, EXCHANGE, RECAPITALIZATION. In the event of a
consolidation, share-for-share exchange, recapitalization or other
reorganization involving the Company (other than a transaction described in
Section 7(a) herein), this Agreement shall be effective and shall remain in
force for its full term, substituting, where appropriate, for the Shares
issued in such consolidation, exchange, recapitalization or other
reorganization.
(c) ACTIONS FOLLOWING TERMINATION.
(i) As soon as practicable after the termination of this
Agreement, the Trustee shall by formal assignment of the Trustee Shares cause
the Company to deliver to the Beneficiary share certificates or securities
representing the number of Shares together with any other property
distributed in respect of such Shares and not yet delivered to the beneficial
owner, upon the surrender of such Certificates properly endorsed.
(ii) If the Beneficiary cannot be located or fails or refuses
to surrender Certificates in exchange for shares and/or other property as
aforesaid, the Trustee may in his discretion deliver said shares and/or other
property to the Company for the benefit of the person or persons entitled
thereto. Upon any such delivery the Trustee shall be fully acquitted and
discharged with respect to the delivery of said shares and/or other property.
8. RECORD DATE. The Trustee shall use, as the record date for
the determination of the Beneficiary entitled to receive payment of any
dividend or other distribution, or any allotment of rights, or to exercise
rights in respect of any other lawful action, or to vote on any matter, the
record date so fixed by the Company with respect to the Shares. When a
record date is so fixed, the Beneficiary of record on that date is entitled
to receive the dividend, distribution, or allotment of rights, or to vote, or
to exercise of the rights, as the case may be, notwithstanding any transfer
of Certificates after the record date. The record date for determining
Beneficiaries for any purpose other than set forth in this Section shall be
at the close of business on the day on which the Trustee adopts the
resolution relating thereto, or the sixtieth day prior to the date of such
other action, whichever is later.
6
9. INSPECTION OF RECORDS. The Trustee shall keep at 0000 Xxxxx
Xxxxxx Xxxxxxx, Xxxxxxxxx, Xxxxxxxx 00000-0000, or such other address at
which the Company's principal executive office may be located (the "Executive
Office"), correct books of account of all his business and transactions, and
a book to be known as the "Certificate Book" containing the names of all
persons who are Beneficiaries, showing their places of residence, the number
and type of shares represented by the Certificates held by them, and the date
they became the owners thereof. This Agreement shall be open for inspection
by any stockholder of the Company, a Beneficiary, or the agent of either upon
the same terms as the record of stockholders of the Company is open to
inspection by stockholders.
10. LOST OR STOLEN CERTIFICATES. If a Certificate shall be lost,
stolen, mutilated, or destroyed, the Trustee, in his discretion, may issue a
duplicate of such Certificate upon receipt of evidence of such fact
satisfactory to him, and upon receipt of an indemnity satisfactory to him,
and upon receipt of the existing Certificate, if mutilated.
11. Miscellaneous.
(a) FILING OF AGREEMENT. The Trustee shall cause to be filed a
copy of this Agreement, and every amendment (including the written consent of
the Trustee as required pursuant to Section 7(a) hereof) or supplement
hereto, in the registered office of the Company in the State of Delaware and
at the Executive Office, which Agreement shall be open to the inspection of
any stockholder of the Company or any Beneficiary of this Agreement during
business hours of the Company.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall bind the Trustee
and the Beneficiary hereunder and each and all of the heirs, executors,
administrators, personal representatives, successors, and assigns thereof,
and shall inure to the benefit of the Trustee, his successors, the
Beneficiary, and its permitted transferees.
(c) NOTICES. Unless otherwise expressly provided herein, all
notices, requests, demands, instructions, documents and other communications
to be given hereunder by any party to another shall be in writing, shall be
sent to the address/fax number set forth below (provided that any party may
at any time change its address for notice or other such information by giving
written notice thereof in accordance with this Section), and shall be deemed
to be duly given upon the earliest of (i) hand delivery, (ii) the first
business day after sending by reputable overnight delivery service for
next-day delivery, (iii) the third business day after sending by first class
United States mail, postage prepaid, (iv) the time of successful facsimile
transmission (or in the event the time of receipt of the fax in the city
where the fax is received is not during regular business hours on a business
day, then at the customary hour for the opening of business on the next
business day), or (v) the date actually received by the other party:
(x) If to Beneficiary, to the address of the Beneficiary
appearing on the records of the Trustee.
7
(y) If to the Trustee to: Rhythms NetConnections Inc.
0000 Xxxxx Xxxxxx Xxxxxxx
Xxxxxxxxx, XX 00000-0000
FAX No.: (000) 000-0000
(d) COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original but all of which
taken together shall constitute one instrument.
(e) ENFORCEABILITY. If in any judicial proceedings, a court shall
refuse to enforce any of the provisions of this Agreement, then such
unenforceable provision shall be deemed modified or limited so as to
effectuate, to the maximum extent possible, the parties' expressed intent,
and if no such modification or limitation could render it enforceable it
shall be eliminated from this Agreement, and in any event the remaining
provisions of this Agreement shall remain in full force and effect.
(f) ENTIRE AGREEMENT. This Agreement is the entire agreement of
the parties with respect to the subject matter hereof, and supersedes all
prior and contemporaneous negotiations, understandings, arrangements and
agreements. The Beneficiary represents and warrants that this Agreement is
fully integrated and not in need of parol evidence in order to reflect the
intention of the parties. Moreover, the Beneficiary acknowledges (i) that it
intends the literal words of the Agreement to govern and for all prior and
contemporaneous negotiations, drafts and other extrinsic communications to
have no significance or evidentiary effect and (ii) that this Agreement has
been fully negotiated by the parties and that accordingly it shall be
construed "evenly" and not for or against any party. By signing this
Agreement, the Beneficiary further acknowledges that it has consulted with
legal counsel about the effect of this Section 11(f) and understands its
effect.
(g) COMPENSATION OF THE TRUSTEE; PAYMENT OF COSTS. The Trustee
shall not be entitled to any compensation for its services as the Trustee.
The Trustee agrees that Beneficiary shall have no obligation to pay to the
Trustee any amount whatsoever as fees or in respect to the Trustee's costs or
expenses related to this Agreement, except as provided in Sections 5(f) and
11(k). The Trustee will look solely to the Company for reimbursement of any
amounts incurred or expended by it in connection with its duties under this
Agreement, except as provided in Sections 5(f) and 11(k), and expressly
waives any rights which it might otherwise have to charge the trust corpus
for any costs, fees or expenses related to this Agreement, or to withhold any
amounts from or set off any amounts against the shares received by it in
trust or any distributions thereon.
(h) AMENDMENT AND MODIFICATION. This Agreement may not be
amended, modified or terminated, except with the written consent of the
Trustee, holders of a majority in interest of the Shares and a Series A and B
Majority; PROVIDED, HOWEVER, that the addition of Beneficiaries or Shares
after the original date of execution of this Agreement shall not be
considered an amendment or modification.
8
(i) GOVERNING LAW. This Agreement shall be governed by the internal
laws of the State of Delaware without regard to principles of conflict of laws.
(j) SECTION 218. This Agreement is intended to create a voting
trust pursuant to and subject to Section 218 of the Delaware General
Corporation Law. If for any reason such voting trust is determined to be
invalid or unenforceable, this Agreement and the relationship of the parties
hereunder shall be deemed to be and shall be reconstituted as a voting
agreement under Section 218(c), and all provisions of this Agreement shall
apply to the maximum extent possible to effectuate the intention of the
parties that the substantive provisions hereof shall govern the voting of
Shares by or for the parties hereto.
(k) COSTS AND EXPENSES. If the Beneficiary unsuccessfully
challenges all or any portion of this Agreement, or if the Trustee
successfully sues the Beneficiary to enforce or confirm this Agreement, the
Beneficiary shall be liable for the other party's or parties' attorneys'
fees, costs and expenses. In no event shall the Trustee be liable for the
Beneficiary's attorneys' fees, costs and expenses.
(l) EQUITABLE REMEDIES. Each of the parties hereby acknowledges
and agrees that the legal remedies available, in the event the covenants and
agreements made in this Agreement are violated, would be inadequate and that
any party shall be entitled, without posting any bond or other security, to
temporary, preliminary and permanent injunctive relief, specific performance
and other equitable remedies in the event of such a violation, in addition to
any other remedies which such party may have at law or in equity.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
9
IN WITNESS WHEREOF, the Beneficiary has set its hands on the signature page
attached hereto, and the Trustee, in token of its acceptance hereby created, has
hereunto set its hand.
"TRUSTEE"
RHYTHMS NETCONNECTIONS INC.
By:
---------------------------------
Title: CFO
------------------------------
"BENEFICIARY"
MCI WORLDCOM VENTURE FUND, INC.
By:
---------------------------------
Title: President
------------------------------
AGREED TO:
"COMPANY"
RHYTHMS NETCONNECTIONS INC.
By:
---------------------------------
Title:
------------------------------
[SIGNATURE PAGE FOR VOTING TRUST AGREEMENT]
10
Schedule A
BENEFICIARY
MCI WORLDCOM VENTURE FUND, INC.
0000 Xxxxxxxxxxxx Xxxxxx, X.X.
Xxxxxxxxxx, XX 00000
11
Exhibit A
VOTING TRUST CERTIFICATE
------------------------
12
RHYTHMS NETCONNECTIONS INC.
A Delaware Corporation
Voting Trust Certificate
Certificate
No. ________ 3,731,410 shares of Series C Preferred Stock
This certifies that MCI WorldCom Venture Fund, Inc. (or its
predecessor in interest) has deposited for transfer in trust to the Trustee
of the Rhythms NetConnections Inc. Voting Trust Three Million Seven Hundred
Thirty-One Thousand Four Hundred Ten (3,731,410) shares of Series C Preferred
Stock, par value $0.001 per share, of Rhythms NetConnections Inc., a Delaware
corporation, under a Voting Trust Agreement, dated as of ________, 1999 by
and between MCI WorldCom Venture Fund, Inc., a stockholder of Rhythms
NetConnections Inc., and Rhythms NetConnections Inc., as Trustee under said
Voting Trust Agreement. This certificate and the interest represented hereby
may be transferred only if permitted under the terms of said Voting Trust
Agreement and is transferable only on the books of the Trustee upon the
execution of said Voting Trust Agreement by such transferee and the
presentation and surrender of this certificate duly endorsed for transfer.
The holder of this certificate takes the same subject to all the terms and
conditions of said Voting Trust Agreement, is entitled to the rights and
benefits thereof and is subject to the obligations thereof. A copy of said
Voting Trust Agreement may be obtained from the undersigned Trustee.
IN WITNESS WHEREOF, the Trustee has caused this certificate to be
signed this ___ day of ________, 1999.
RHYTHMS NETCONNECTIONS INC., TRUSTEE
By:____________________________________
Title:_________________________________
13
EXHIBIT D
FORM OF WARRANT
D-1
THE TRANSFER OF THIS WARRANT IS SUBJECT TO
RESTRICTIONS CONTAINED HEREIN. THIS WARRANT
HAS BEEN ISSUED IN RELIANCE UPON THE
REPRESENTATION OF THE HOLDER THAT IT HAS BEEN
ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH
A VIEW TOWARD THE RESALE OR OTHER DISTRIBUTION
THEREOF. NEITHER THIS WARRANT NOR THE SHARES
ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS.
RHYTHMS NETCONNECTIONS INC.
Common Stock Purchase Warrant
To Subscribe for and Purchase March 3, 1999
600,000 Shares of Common Stock of
Rhythms NetConnections Inc.
THIS CERTIFIES that, for the purchase price of $8.04 per share, MCI
WorldCom Venture Fund, Inc. or its registered assigns (the "Holder") is entitled
to subscribe for and purchase from Rhythms NetConnections Inc., a Delaware
corporation (hereinafter called the "Company"), up to 600,000 shares (subject to
adjustment as hereinafter provided) of fully paid and non-assessable Common
Stock of the Company (the "Common Stock"), subject to the provisions and upon
the terms and conditions hereinafter set forth at the price of $8.04 per share
(such price as from time to time to be adjusted as provided herein is called the
"Warrant Price"), at or prior to 5:00 p.m. Pacific time on March 3, 2004 (the
"Exercise Period).
This Warrant and any Warrant subsequently issued upon exchange or
transfer hereof are hereinafter collectively called the "Warrant."
Section 1. EXERCISE OF WARRANT. The rights represented by this
Warrant may be exercised by the Holder, in whole or in part (but not as to
fractional shares) at any time or from time to time during the Exercise Period
by the completion of the purchase form attached hereto and by the surrender of
this Warrant (properly endorsed) at the office of the Company as it may
designate by notice in writing to the Holder hereof at the address of the Holder
appearing on the books of the Company, and by payment to the Company of the
Warrant Price in cash or by certified or official bank check, for each share
being purchased. (In addition, see Section 2 below for net issuance
provisions.) In the event of any exercise of the rights represented by this
Warrant, a certificate or certificates for the shares of Common Stock so
purchased, registered in the name of the Holder, or its nominee or other party
designated in the purchase form by the Holder hereof, shall be delivered to the
Holder within thirty (30) business days after the date on which the rights
represented by this Warrant shall have been so exercised; and, unless this
Warrant has expired or has been exercised in full, a new Warrant representing
the number of shares (except a remaining fractional share), if any, with
respect to which this Warrant shall not then have been exercised shall also
be issued to the Holder within such time. The person in whose name any
certificate for shares of Common Stock is issued upon exercise of this
Warrant shall for all purposes be deemed to have become the holder of record
of such shares on the date on which this Warrant was surrendered and payment
of the Warrant Price is made, except that, if the date of such surrender and
payment is a date on which the stock transfer books of the Company are
closed, such person shall be deemed to have become the holder of such shares
at the close of business on the next succeeding date on which the stock
transfer books are open. No fractional shares shall be issued upon exercise
of this Warrant and no payment or adjustment shal be made upon any exercise
on account of any cash dividends on the Common Stock issued upon such
exercise. If any fractional interest in a share of Common Stock would,
except for the provision of this Section 1, be delivered upon such exercise,
the Company, in lieu of delivery of a fractional share thereof, shall pay to
the Holder an amount in cash equal to the current market price of such
fractional share as determined in good faith by the Board of Directors of the
Company.
Section 2. NET ISSUANCE.
(a) RIGHT TO CONVERT. In addition to and without limiting the
rights of the Holder under the terms of this Warrant, if the fair market
value of a share of Common Stock is greater than the Warrant Price, in lieu
of exercising this Warrant for cash the Holder shall have the right to
convert this Warrant or any portion thereof (the "Conversion Right") into
shares of Common Stock equal to the value of this Warrant or the portion
thereof being canceled as provided in this Section 2 at any time or from time
to time during the Exercise Period. Upon exercise of the Conversion Right
with respect to a particular number of shares subject to the Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the Holder (without
payment by the Holder of any exercise price or any cash or other
consideration) that number of shares of fully paid and nonassessable Common
Stock computed using the following formula:
X = Y (A - B)
A
Where X = the number of shares of Common Stock to be delivered to the
holder
Y = the number of Converted Warrant Shares
A = the fair market value of one share of the Company's
Common Stock on the Conversion Date (as defined below)
B = the per share exercise price of the Warrant (as
adjusted to the Conversion Date)
The Conversion Right may only be exercised with respect to a whole number of
shares subject to the Warrant. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued
determined in accordance with the foregoing formula is other than a whole
number, the Company shall pay to the Holder an amount in cash equal to the
fair
2
market value of the resulting fractional share on the Conversion Date (as
defined below). Shares issued pursuant to the Conversion Right shall be
treated as if they were issued upon the exercise of the Warrant.
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by
the Holder by the surrender of the Warrant at the principal office of the
Company together with a written statement specifying that the Holder thereby
intends to exercise the Conversion Right and indicating the total number of
shares under the Warrant that the Holder is exercising through the Conversion
Right. Such conversion shall be effective upon receipt by the Company of the
Warrant together with the aforesaid written statement, or on such later date
as is specified therein (the "Conversion Date"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new
warrant evidencing the balance of the shares remaining subject to the
Warrant, shall be issued as of the Conversion Date and shall be delivered to
the Holder promptly following the Conversion Date.
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this
Section 2, fair market value of a share of Common Stock on the Conversion
Date shall mean:
(i) If traded on a stock exchange, the fair market value of
the Common Stock shall be deemed to be the average of the closing selling
prices of the Common Stock on the stock exchange determined by the Board to
be the primary market for the Common Stock over the ten (10) trading day
period (or such shorter period immediately following the closing of an
initial public offering) ending on the date prior to the Conversion Date, as
such prices are officially quoted in the composite tape of transactions on
such exchange;
(ii) If traded over-the-counter, the fair market value of the
Common Stock shall be deemed to be the average of the closing bid prices (or,
if such information is available, the closing selling prices) of the Common
Stock over the ten (10) trading day period (or such shorter period
immediately following the closing of an initial public offering) ending on
the date prior to the Conversion Date, as such prices are reported by the
National Association of Securities Dealers through its NASDAQ system, any
successor system or any exchange on which it is listed, whichever is
applicable; or
(iii) If there is no public market for the Common Stock, then
the fair market value shall be determined by mutual agreement of the holder
of the Warrant and the Company, and if the holder and the Company are unable
to so agree, by an investment banker of national reputation selected by the
Company and reasonably acceptable to the holder of the Warrant.
Section 3. STOCK SPLITS, CONSOLIDATION, MERGER AND SALE. In the
event that before the issuance of the shares of Common Stock into which this
Warrant may be exercised the outstanding shares of Common Stock shall be
split, combined or consolidated, by dividend, reclassification or otherwise,
into a greater or lesser number of shares of Common Stock or any other class
or classes of stock, as appropriate, the Warrant Price in effect immediately
prior to such combination or consolidation and the number of shares
purchasable under this Warrant shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately adjusted. If there
shall be effected any consolidation or merger of the Company
3
with another corporation, or a sale of all or substantially all of the
Company's assets to another corporation, and if the holders of Common Stock
shall be entitled pursuant to the terms of any such transaction to receive
stock, securities or assets with respect to or in exchange for Common Stock,
then, as a condition of such consolidation, merger or sale, lawful and
adequate provisions shall be made whereby the Holder of this Warrant shall
thereafter have the right to receive, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the exercise of such Warrant, such
shares of stock, securities or assets as may be issuable or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately
theretofore so receivable had such consolidation, merger or sale not taken
place, and in any such case appropriate provisions shall be made with respect
to the rights and interests of the Holder to the end that the provisions
hereof shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the
exercise of this Warrant.
(a) STOCK TO BE RESERVED. The Company will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose
of issue upon the exercise of this Warrant as herein provided, such number of
shares of Common Stock as shall then be issuable upon the exercise of this
Warrant.
(b) ISSUE TAX. The issuance of certificates for shares of Common
Stock upon exercise of this Warrant shall be made without charge to the
Holders of this Warrant for any issuance tax in respect thereof provided that
the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the Holder of this Warrant.
(c) CLOSING OF BOOKS. The Company will at no time close its
transfer books against the transfer of the shares of Common Stock issued or
issuable upon the exercise of this Warrant in any manner which interferes
with the timely exercise of this Warrant.
Section 4. NOTICES OF RECORD DATES. In the event of:
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution (other than cash
dividends out of earned surplus), or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or
any transfer of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other corporation, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will give notice to the Holder of
this Warrant specifying (i) the date on which any such record is to be taken
for the purpose of such dividend,
4
distribution or right and stating the amount and character of such dividend,
distribution or right, and (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any
is to be fixed, as of which the holders of record of Common Stock will be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding-up. Such notice shall be given at least ten (10) days and not
more than ninety (90) days prior to the date therein specified, and such
notice shall state that the action in question or the record date is subject
to the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act") or to a favorable vote of
shareholders, if either is required.
Section 5. NO SHAREHOLDER RIGHTS OR LIABILITIES. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
shareholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Common Stock,
and no mere enumeration hereon of the rights or privileges of the Holder
hereof, shall give rise to any liability of such Holder for the Warrant Price
or as a shareholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
Section 6. REPRESENTATIONS OF HOLDER. The Holder hereby represents
and acknowledges to the Company that:
(a) this Warrant, the Common Stock issuable upon exercise of this
Warrant and any securities issued with respect to any of them by way of a
stock dividend or stock split or in connection with a recapitalization,
merger, consolidation or other reorganization will be "restricted securities"
as such term is used in the rules and regulations under the Securities Act
and that such securities have not been and may not be registered under the
Securities Act or any state securities law, and that such securities must be
held indefinitely unless registration is effected or transfer can be made
pursuant to appropriate exemptions;
(b) the Holder has read, and fully understands, the terms of this
Warrant set forth on its face and the attachments hereto, including the
restrictions on transfer contained herein;
(c) the Holder is purchasing for investment for its own account
and not with a view to or for sale in connection with any distribution of
this Warrant or the Common Stock of the Company issuable upon exercise of
this Warrant and it has no intention of selling such securities in a public
distribution in violation of the federal securities laws or any applicable
state securities laws; provided that nothing contained herein will prevent
Holder from transferring such securities in compliance with the terms of this
Warrant and the applicable federal and state securities laws;
(d) the Holder is an "accredited investor" within the meaning of
paragraph (a) of Rule 501 of Regulation D promulgated by the Securities and
Exchange Commission and an "excluded purchaser" within the meaning of Section
25102(f) of the California Corporate Securities Law of 1968; and
5
(e) the Company may affix the following legend (in addition to any
other legend(s), if any, required by applicable state corporate and/or
securities laws) to certificates for shares of Common Stock (or other
securities) issued upon exercise of this Warrant ("Warrant Shares"):
"These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold,
offered for sale, pledged or hypothecated in the absence of
a registration statement in effect with respect to the
securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not
required or unless sold pursuant to Rule 144 of such Act."
Section 7. LIMITATIONS ON DISPOSITION.
(a) The Holder of this Warrant, by acceptance hereof, agrees to
comply in all respects with the provisions of this Section 7. Without in any
way limiting the representations set forth above, the Holder of this Warrant
agrees not to make any disposition of this Warrant or any Warrant Shares,
unless and until the transferee has agreed in writing for the benefit of the
Company to be bound by this Section 7 and the other provisions of this
Warrant as if such transferee were the original Holder hereof, provided and
to the extent such provisions are then applicable, and:
(i) There is then in effect a Registration Statement under
the Securities Act covering such proposed disposition and such disposition is
made in accordance with such Registration Statement; or
(ii) (A) the Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and the
Company has given its prior written consent, and (B) if reasonably requested
by the Company, the Holder shall have furnished the Company with an opinion
of counsel, reasonably satisfactory to the Company, that such disposition
will not require registration of the Warrant and/or the Warrant Shares under
the Act. It is agreed that the Company will not require opinions of counsel
for transactions made pursuant to Rule 144 except in unusual circumstances.
(b) Notwithstanding the provisions of paragraph (a) above, (i) no
such Registration Statement, prior consent or opinion of counsel shall be
necessary for a transfer (A) by a Holder which is a partnership to a partner
of such partnership or a retired partner of such partnership who retires
after the date hereof, or to the estate of any such partner or retired
partner or to the transfer by gift, will or intestate succession of any
partner to his spouse or to the siblings, lineal descendants or ancestors of
such partner or his spouse, or (B) to an "affiliate" of the Holder as that
term is defined in Rule 405 promulgated by the Securities and Exchange
Commission under the Securities Act, if the transferee agrees in writing to
be subject to the terms hereof to the same extent as if he were an original
Holder hereunder, and (ii) no transferee shall be required, as a condition to
any transfer of the Warrant or the Warrant Shares by the Holder, to agree to
be bound by this Section 7, if the transferee is acquiring the Warrant and/or
Warrant Shares pursuant to a Registration Statement under the Securities Act
or in a transaction made
6
pursuant to Rule 144. Each new certificate evidencing the Warrant and/or
Warrant Shares so transferred shall bear the appropriate restrictive legends
set forth in Section 6(f) above, except that such certificate shall not bear
such restrictive legend if, in the opinion of counsel for the Company, such
legend is not required in order to establish or assist in compliance with any
provisions of the Securities Act or any applicable state securities laws.
Section 8. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this
Warrant is lost, stolen, mutilated or destroyed, the Company may, on such
terms as to indemnity or otherwise as it may in its discretion reasonably
impose (which shall, in the case of a mutilated Warrant, include the
surrender thereof), issue a new Warrant of like denomination and tenor as the
Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall
constitute an original contractual obligation of the Company, whether or not
the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any
time enforceable by anyone.
Section 9. PRESENTMENT. Prior to due presentment of this Warrant
together with a completed assignment form attached hereto for registration of
transfer, the Company may deem and treat the Holder as the absolute owner of
the Warrant, notwithstanding any notation of ownership or other writing
thereon, for the purpose of any exercise thereof and for all other purposes,
and the Company shall not be affected by any notice to the contrary.
Section 10. NOTICE. Notice or demand pursuant to this Warrant shall
be sufficiently given or made, if sent by first-class mail, postage prepaid,
addressed, if to the Holder of this Warrant, to the Holder at its last known
address as it shall appear in the records of the Company, and if to the
Company, at 0000 Xxxxx Xxxxxx Xxxxxxx, Xxxxxxxxx, Xxxxxxxx 00000, Attention:
Secretary. The Company may alter the address to which communications are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 10 for the giving of notice.
Section 11. GOVERNING LAW. The validity, interpretation and
performance of this Warrant shall be governed by the laws of the State of
Delaware without regard to principles of conflicts of laws.
Section 12. SUCCESSORS, ASSIGNS. Subject to the restrictions on
transfer by Holder set forth in Section 7 hereof, all the terms and
provisions of the Warrant shall be binding upon and inure to the benefit of
and be enforceable by the respective successors and assigns of the parties
hereto.
Section 13. AMENDMENT. This Warrant may be modified, amended or
terminated by a writing signed by the Company and the Holder.
Section 14. SEVERABILITY. Should any part but not the whole of this
Warrant for any reason be declared invalid, such decision shall not affect
the validity of any remaining portion, which remaining portion shall remain
in force and effect as if this Warrant had been executed with the invalid
portion thereof eliminated, and it is hereby declared the intention of the
parties hereto that they would have executed the remaining portion of this
Warrant without including therein any such part which may, for any reason, be
hereafter declared invalid.
7
Section 15. "MARKET STAND-OFF" AGREEMENT. Holder hereby agrees
that, during the period of duration (such period not to exceed 180 days)
specified by the Company and an underwriter of Common Stock or other
securities of the Company, following the effective date of a registration
statement of the Company filed under the Securities Act of 1933, as amended,
it shall not, to the extent requested by the Company and such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including,
without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be
similarly bound) any securities of the Company held by it at any time during
such period except Common Stock included in such registration; PROVIDED,
HOWEVER, that:
(i) such agreement shall be applicable only to the first two
such registration statements of the Company which cover common stock (or
other securities) to be sold on its behalf to the public in an underwritten
offering; and
(ii) all officers and directors of the Company and all other
persons with registration rights enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Common Stock of the Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
Section 16. NO IMPAIRMENT. The Company will not, by any voluntary
action, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions of this
Warrant and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant
against impairment.
Section 17. NO RIGHT TO REDEEM. Except as explicitly provided
herein, this Warrant may not be called by the Company.
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8
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and delivered on and as of the day and year first above written by one
of its officers thereunto duly authorized.
RHYTHMS NETCONNECTIONS INC.,
a Delaware corporation
Dated: March 3, 1999
-----------------------------------
Xxxxxxxxx Xxxxx, President and
Chief Executive Officer
The undersigned Holder agrees and accepts this Warrant and
acknowledges that it has read and confirms each of the representations contained
in Section 6.
MCI WORLDCOM VENTURE FUND, INC.
By:
---------------------------------
Its: President
--------------------------------
Address: 0000 Xxxxxxxxxxxx Xxxxxx, X.X.
-----------------------------------
Xxxxxxxxxx, XX 00000
-----------------------------------
[SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT]
PURCHASE FORM
(To be executed by the Warrant Holder if he desires to exercise the Warrant in
whole or in part)
To: RHYTHMS NETCONNECTIONS INC.
The undersigned, whose Social Security or other identifying number is
_______________, hereby irrevocably elects the right of purchase represented by
the within Warrant for, and to purchase thereunder, ___________________________
shares of Common Stock provided for therein and tenders payment herewith to the
order of
RHYTHMS NETCONNECTIONS INC.
in the amount of
$____________
The undersigned requests that certificates for such shares be issued as follows:
Name:___________________________________________________________________________
Address:________________________________________________________________________
Deliver to:_____________________________________________________________________
Address:________________________________________________________________________
and, if said number of shares shall not be all the shares purchasable hereunder,
that a new Warrant for the balance remaining of the shares purchasable under the
within Warrant be registered in the name of, and delivered to, the undersigned
at the address stated below:
Address:__________________________________________________________________
__________________________________________________________________
Dated: ____________, 199__ Signature:__________________________________
(Signature must conform in all
respects to the name of the Warrant
Holder as specified on the face of
the Warrant, without alteration,
enlargement or any change
whatsoever)
ASSIGNMENT
(To be executed by the Warrant Holder if he desires to effect a transfer of the
Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________, whose Social Security or
other identification number is ________________________ [residing/located] at
____________________________ the attached Warrant, and appoints
_______________ residing at ____________________________ the undersigned's
attorney-in-fact to transfer said Warrant on the books of the Company, with
full power of substitution in the premises.
Dated: ______________, 199__.
In the presence of:
_____________________________________ _______________________________________
(Signature must conform in all respects
to the name of the Warrant Holder as
specified on the face of the Warrant,
without alteration, enlargement or any
change whatsoever).
