EXHIBIT 99.3
RHYTHMS NETCONNECTIONS INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board of Directors of the Corporation has adopted the Rhythms
NetConnections Inc. 1997 Stock Option/Stock Issuance Plan (the "Plan") for
the purpose of attracting and retaining the services of persons who
contribute to the growth and financial success of the Corporation.
B. Optionee is a person who the Plan Administrator believes has and
will contribute to the growth and financial success of the Corporation and
this Agreement is executed pursuant to and is intended to carry out the
purposes of the Plan.
AGREEMENT
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set
forth in this Agreement, the Corporation hereby grants to Optionee, as of the
grant date (the "Grant Date") specified in the accompanying Notice of Grant
of Stock Option (the "Grant Notice"), a stock option to purchase up to that
number of shares of the Corporation's Common Stock (the "Option Shares") as
is specified in the Grant Notice. The Option Shares shall be purchasable
from time to time during the option term at the option price per share (the
"Option Price") specified in the Grant Notice. Capitalized terms used herein
which are not otherwise defined shall have the meaning ascribed to such terms
in the Plan.
2. OPTION TERM. This option shall have a maximum term of ten (10)
years measured from the Grant Date and shall expire at the close of business
on the expiration date (the "Expiration Date") specified in the Grant Notice,
unless sooner terminated in accordance with Paragraph 5, 6 or 17.
3. LIMITED TRANSFERABILITY. This option shall be neither transferable
nor assignable by Optionee other than by will or by the laws of descent and
distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee.
4. DATES OF EXERCISE. This option may not be exercised in whole or in
part at any time prior to the time the Plan is approved by the Corporation's
shareholders in accordance with Paragraph 17. Provided such shareholder
approval is obtained, this option shall thereupon become exercisable for the
Option Shares in one or more installments as is specified in the Grant
Notice. As the option becomes exercisable in one or more installments, the
installments shall accumulate and the option shall remain exercisable for
such installments until the Expiration Date or the sooner termination of the
option term under Paragraph 5 or Paragraph 6 of this Agreement.
5. SPECIAL TERMINATION OF OPTION TERM. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be exercisable)
prior to the Expiration Date should any of the following provisions become
applicable:
(i) Except as otherwise provided in subparagraph (ii) or
(iii) below, should Optionee cease to remain in Service while this option
is outstanding, then the period for exercising this option shall be reduced
to a three (3)-month period commencing with the date of such cessation of
Service, but in no event shall this option be exercisable at any time after
the Expiration Date. Upon the expiration of such three (3)-month period or
(if earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding.
(ii) Should Optionee die while this option is outstanding,
then the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the law of descent and distribution shall have the
right to exercise this option. Such right shall lapse and this option
shall cease to be exercisable upon the EARLIER of (A) the expiration of the
twelve (12) month period measured from the date of Optionee's death or (B)
the Expiration Date. Upon the expiration of such twelve (12) month period
or (if earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding.
(iii) Should Optionee become permanently disabled and cease
by reason thereof to remain in Service while this option is outstanding,
then the Optionee shall have a period of twelve (12) months (commencing
with the date of such cessation of Service) during which to exercise this
option, but in no event shall this option be exercisable at any time after
the Expiration Date. Optionee shall be deemed to be permanently disabled
if Optionee is unable to engage in any substantial gainful activity for the
Corporation or the parent or subsidiary corporation retaining his/her
services by reason of any medically determinable physical or mental
impairment, which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than twelve
(12) months. Upon the expiration of such limited period of exercisability
or (if earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding.
(iv) During the limited period of exercisability
applicable under subparagraph (i), (ii) or (iii) above, this option may be
exercised for any or all of the Option Shares for which this option is, at
the time of the Optionee's cessation of Service, exercisable in accordance
with the exercise schedule specified in the Grant Notice and the provisions
of Paragraph 6 of this Agreement.
(v) For purposes of this Paragraph 5 and for all other
purposes under this Agreement:
A. The Optionee shall be deemed to remain in SERVICE for so long
as the Optionee continues to render periodic services to the Corporation or
any parent or subsidiary corporation, whether as an Employee, a non-employee
member of the board of directors, or an independent contractor or consultant.
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B. The Optionee shall be deemed to be an EMPLOYEE of the
Corporation and to continue in the Corporation's employ for so long as the
Optionee remains in the employ of the Corporation or one or more of its
parent or subsidiary corporations, subject to the control and direction of
the employer entity as to both the work to be performed and the manner and
method of performance.
C. A corporation shall be considered to be a SUBSIDIARY
corporation of the Corporation if it is a member of an unbroken chain of
corporations beginning with the Corporation, provided each such corporation
in the chain (other than the last corporation) owns, at the time of
determination, stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
D. A corporation shall be considered to be a PARENT corporation
of the Corporation if it is a member of an unbroken chain ending with the
Corporation, provided each such corporation in the chain (other than the
Corporation) owns, at the time of determination, stock possessing 50% or more
of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
6. EFFECT OF CORPORATE TRANSACTION.
A. Optionee shall automatically vest with respect to a portion of
the Option Shares in the event of a Corporate Transaction so that such
portion shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for vested shares of Common Stock,
provided that no Option Shares shall automatically vest in full if and to the
extent: (i) this option is, in connection with the Corporate Transaction,
either to be assumed by the successor corporation (or parent thereof) or to
be replaced with a comparable option to purchase shares of the capital stock
of the successor corporation (or parent thereof), or (ii) such option is to
be replaced with a cash incentive program of the successor corporation which
preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance
with the same vesting schedule applicable to those option shares. The
determination of option comparability under clause (i) above shall be made by
the Plan Administrator, and its determination shall be final, binding and
conclusive. The portion of the Option Shares which will automatically vest
hereunder shall be a number of shares equal to the number of unvested Option
Shares immediately prior to the Corporate Transaction multiplied by a
fraction, the NUMERATOR of which is the number of complete months of which
elapsed after the Vesting Commencement Date set forth in the Grant Notice and
the date of the Corporate Transaction, and the DENOMINATOR of which is the
number of months required under the Grant Notice for the rights of Optionee
to become fully vested.
B. To the extent not previously exercised, this Option shall
terminate and cease to be exercisable upon the consummation of a Corporate
Transaction unless it is expressly assumed by the successor corporation or
parent thereof.
C. Option Shares available under any options which are assumed or
replaced in the Corporate Transaction and do not otherwise accelerate at that
time, shall automatically vest in full in the event the Optionee's Service
should subsequently terminated by reason of an Involuntary Termination within
twenty-four (24) months following the effective date of such Corporate
Transaction. Any options so accelerated shall remain exercisable for
fully-vested
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shares until the EARLIER of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination.
D. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise make changes in
its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
7. EFFECT OF HOSTILE CHANGE IN CONTROL.
In the event of any Hostile Change in Control, Optionee shall
automatically vest in full with respect to all Option Shares so that each
such option shall, immediately prior to the effective date of the Hostile
Change in Control, be fully exercisable for any or all of Option Shares as
fully-vested shares of Common Stock.
8. ADJUSTMENT IN OPTION SHARES.
A. In the event any change is made to the Corporation's
outstanding Common Stock by reason of any stock split, stock dividend,
combination of shares, exchange of shares, or other change affecting the
outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments shall be made to (i) the total number of Option
Shares subject to this option, (ii) the number of Option Shares for which
this option is to be exercisable from and after each installment date
specified in the Grant Notice and (iii) the Option Price payable per share in
order to reflect such change and thereby preclude a dilution or enlargement
of benefits hereunder.
B. If this option is to be assumed in connection with a Corporate
Transaction described in Paragraph 6 or is otherwise to remain outstanding,
then this option shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply and pertain to the number and class of
securities which would have been issuable to the Optionee in the consummation
of such Corporate Transaction had the option been exercised immediately prior
to such Corporate Transaction, and appropriate adjustments shall also be made
to the Option Price payable per share, PROVIDED the aggregate Option Price
payable hereunder shall remain the same.
9. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not
have any of the rights of a shareholder with respect to the Option Shares
until such individual shall have exercised the option and paid the Option
Price.
10. MANNER OF EXERCISING OPTION.
A. In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or in the case of exercise after Optionee's death, the Optionee's
executor, administrator, heir or legatee, as the case may be) must take the
following actions:
(i) Execute and deliver to the Secretary of the
Corporation a stock purchase agreement (the "Purchase Agreement") in
substantially the form of Exhibit B to the Grant Notice.
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(ii) Pay the aggregate Option Price for the purchased
shares in one or more forms approved under the Plan.
(iii) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option, if other than Optionee,
have the right to exercise this option.
B. For purposes of this Agreement, the Exercise Date shall be the
date on which the executed Purchase Agreement shall have been delivered to
the Corporation, and the fair market value of a share of Common Stock on any
relevant date shall be determined in accordance with subparagraphs (i)
through (iii) below:
(i) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the Nasdaq
National Market System, the fair market value shall be the closing selling
price of one share of Common Stock on the date in question, as such price
is reported by the National Association of Securities Dealers through its
Nasdaq system or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation exists
shall be determinative of fair market value.
(ii) If the Common Stock is at the time listed or admitted
to trading on any stock exchange, then the fair market value shall be the
closing selling price per share of Common Stock on the date in question on
the stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no reported
sale of Common Stock on such exchange on the date in question, then the
fair market value shall be the closing selling price on the exchange on the
last preceding date for which such quotation exists.
(iii) If the Common Stock at the time is neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-
counter market, or if the Plan Administrator determines that the value
determined pursuant to subparagraphs (i) and (ii) above does not accurately
reflect the fair market value of the Common Stock, then such fair market
value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
C. As soon after the Exercise Date as practical, the Corporation
shall mail or deliver to Optionee or to the other person or persons
exercising this option a certificate or certificates representing the shares
so purchased and paid for, with the appropriate legends affixed thereto.
D. In no event may this option be exercised for any fractional
shares.
11. COMPLIANCE WITH LAWS AND REGULATIONS.
A. The exercise of this option and the issuance of Option Shares
upon such exercise shall be subject to compliance by the Corporation and the
Optionee with all applicable
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requirements of law relating thereto and with all applicable regulations of
any stock exchange on which shares of the Corporation's Common Stock may be
listed at the time of such exercise and issuance.
B. B. In connection with the exercise of this option, Optionee
shall execute and deliver to the Corporation such representations in writing
as may be requested by the Corporation in order for it to comply with the
applicable requirements of Federal and State securities laws.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, administrators, heirs, legal
representatives and assigns of Optionee and the successors and assigns of the
Corporation.
13. LIABILITY OF CORPORATION.
A. If the Option Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Common Stock which may without
shareholder approval be issued under the Plan, then this option shall be void
with respect to such excess shares, unless shareholder approval of an
amendment sufficiently increasing the number of shares of Common Stock
issuable under the Plan is obtained in accordance with the provisions of
Article IV, Section 3, of the Plan.
B. The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the
non-issuance or sale of the Common Stock as to which such approval shall not
have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.
14. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation in care of the Corporate Secretary at its
principal corporate offices. Any notice required to be given or delivered to
Optionee shall be in writing and addressed to Optionee at the address
indicated below Optionee's signature line on the Grant Notice. All notices
shall be deemed to have been given or delivered upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.
15. LOANS. The Plan Administrator may, in its absolute discretion and
without any obligation to do so, assist the Optionee in the exercise of this
option by (i) authorizing the extension of a loan to the Optionee from the
Corporation or (ii) permitting the Optionee to pay the option price for the
purchased Common Stock in installments over a period of years. The terms of
any such loan or installment method of payment (including the interest rate,
the requirements for collateral and the terms of repayment) shall be
established by the Plan Administrator in its sole discretion.
16. CONSTRUCTION. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms
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and provisions of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement
shall be conclusive and binding on all persons having an interest in this
option.
17. GOVERNING LAW. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
18. SHAREHOLDER APPROVAL. The grant of this option is subject to
approval of the Plan by the Corporation's shareholders within twelve (12)
months after the adoption of the Plan by the Board of Directors.
NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, THIS OPTION
MAY NOT BE EXERCISED IN WHOLE OR IN PART UNTIL SUCH SHAREHOLDER APPROVAL IS
OBTAINED. In the event that such shareholder approval is not obtained, then
this option shall thereupon terminate in its entirety and the Optionee shall
have no further rights to acquire any Option Shares hereunder.
19. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the
event this option is designated an incentive stock option in the Grant
Notice, the following terms and conditions shall also apply to the grant:
A. This option shall cease to qualify for favorable tax treatment
as an incentive stock option under the Federal tax laws if (and to the
extent) this option is exercised for one or more Option Shares: (i) more
than three (3) months after the date the Optionee ceases to be an Employee
for any reason other than death or permanent disability (as defined in
Paragraph 5) or (ii) more than one (1) year after the date the Optionee
ceases to be an Employee by reason of permanent disability.
B. Should this option be designated as immediately exercisable in
the Grant Notice, then this option shall not become exercisable in the
calendar year in which granted if (and to the extent) the aggregate fair
market value (determined at the Grant Date) of the Corporation's Common Stock
for which this option would otherwise first become exercisable in such
calendar year would, when added to the aggregate fair market value
(determined as of the respective date or dates of grant) of the Corporation's
Common Stock for which this option or one or more other incentive stock
options granted to the Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or its parent or subsidiary
corporations) first become exercisable during the same calendar year, exceed
One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the
exercisability of this option is deferred by reason of the foregoing
limitation, the deferred portion will first become exercisable in the first
calendar year or years thereafter in which the One Hundred Thousand Dollar
($100,000) limitation of this Paragraph 18.B would not be contravened.
C. Should this option be designated as exercisable in
installments in the Grant Notice, then no installment under this option
(whether annual or monthly) shall qualify for favorable tax treatment as an
incentive stock option under the Federal tax laws if (and to the extent) the
aggregate fair market value (determined at the Grant Date) of the
Corporation's Common Stock for which such installment first becomes
exercisable hereunder will, when added to the aggregate fair market value
(determined as of the respective date or dates of grant) of the Corporation's
Common Stock for which one or more other incentive stock options granted to
the
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Optionee prior to the Grant Date (whether under the Plan or any other option
plan of the Corporation or any parent or subsidiary corporation) first become
exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate.
20. WITHHOLDING. Optionee hereby agrees to make appropriate
arrangements with the Corporation or parent or subsidiary corporation
employing Optionee for the satisfaction of all Federal, State or local income
tax withholding requirements and Federal social security employee tax
requirements applicable to the exercise of this option.
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