<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1998
REGISTRATION NO. 333-51097
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
NOTE EXCHANGE OFFER
ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
COVAD COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 1731 77-0461529
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S.
OF INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION EMPLOYER IDENTIFICATION
CODE NUMBER) NUMBER)
</TABLE>
3560 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(408) 490-4500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CHARLES MCMINN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COVAD COMMUNICATIONS GROUP, INC.
3560 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(408) 490-4500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
BARRY E. TAYLOR, ESQ.
MEREDITH S. JACKSON, ESQ.
CECILIA M. DE LEON, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JUNE 16, 1998
PROSPECTUS
COVAD COMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE ITS
13 1/2% SENIOR DISCOUNT NOTES DUE MARCH 15, 2008, SERIES B
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SENIOR DISCOUNT NOTES DUE MARCH 15, 2008, SERIES A
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME ON , 1998, UNLESS EXTENDED.
-----------
Covad Communications Group, Inc. (the "Company") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (as the same
may be amended or supplemented from time to time, the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal" and together
with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal
amount at maturity of its 13 1/2% Senior Discount Notes due March 15, 2008,
Series B (the "New Notes") which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a registration
statement of which this Prospectus is a part, for each $1,000 principal amount
at maturity of its outstanding 13 1/2% Senior Discount Notes due March 15,
2008, Series A (the "Old Notes"), of which $260,000,000 principal amount at
maturity is outstanding as of the date hereof.
The Company will accept for exchange any and all validly tendered Old Notes
prior to 5:00 P.M., New York City time, on , 1998, unless extended (the
"Expiration Date"). Old Notes may be tendered only in integral multiples of
$1,000 principal amount at maturity. Tenders of Old Notes may be withdrawn at
any time prior to 5:00 P.M., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum amount of Old Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions. In the event the Company terminates the Exchange Offer
and does not accept for exchange any Old Notes, the Company will promptly
return the Old Notes to the holders thereof. The Company will not receive any
proceeds from the Exchange Offer. See "The Exchange Offer."
The terms of the New Notes will be identical in all material respects to
those of the Old Notes, except that the New Notes (i) will have been registered
under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes and (ii) will not be
entitled to certain registration or other rights under the Registration Rights
Agreement (as defined below), including the provision in the Registration
Rights Agreement for additional interest on the Old Notes of up to 2.0% per
annum upon failure by the Company to consummate the Exchange Offer. See
"Description of the Old Notes--Registration Rights; Additional Interest." The
New Notes will be entitled to the benefits of the indenture governing the Old
Notes. See "Description of the Old Notes" and "The Exchange Offer." The
definitions of certain terms used herein are set forth in "Description of the
Old Notes--Certain Definitions" or in Appendix A of this Prospectus.
(Continued on following page)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS
ON , 1998.
SEE "RISK FACTORS" ON PAGE 12 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS OFFERING.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1998
<PAGE>
(Continuation of cover page)
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement dated as of
March 11, 1998 (the "Registration Rights Agreement") by and among the Company
and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated (the "Initial
Purchasers"), a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Exchange Offer is intended
to satisfy the Company's obligations under the Registration Rights Agreement
to register the Old Notes under the Securities Act. Once the Exchange Offer is
consummated, the Company will have no further obligations to register any of
the Old Notes not tendered by the holders of the Old Notes (together with the
holders of the New Notes, the "Holders") for exchange. See "Risk Factors--
Consequences to Non-Tendering Holders of Old Notes."
The Old Notes were initially represented (i) in the case of Old Notes
initially purchased by "qualified institutional buyers" (as such term is
defined in Rule 144A under the Securities Act), by two global Old Notes in
fully registered form, all registered in the name of a nominee of The
Depository Trust Company ("DTC"), and (ii) in the case of Old Notes initially
purchased by persons other than U.S. persons in reliance upon Regulation S
under the Securities Act, by one global Regulation S Old Note in fully
registered form, all registered in the name of a nominee of DTC for the
accounts of Euroclear System ("Euroclear") and Cedel Bank, societe anonyme
("Cedel Bank"). The New Notes exchanged for the Old Notes represented by the
global Old Notes and global Regulation S Old Note will be represented (a) in
the case of "qualified institutional buyers", by two global New Notes in fully
registered form, registered in the name of the nominee of DTC, and (ii) one
global Regulation S New Note in fully registered form registered in the name
of the nominee of DTC for the accounts of Euroclear and Cedel Bank. The global
New Notes and global Regulation S New Note will be exchangeable for definitive
New Notes in registered form, in denominations of $1,000 principal amount at
maturity and integral multiples thereof. The New Notes in global form will
trade in The Depository Trust Company's Same-Day Funds Settlement System, and
secondary market trading activity in such New Notes will therefore settle in
immediately available funds. See "The Exchange Offer--Book-Entry Transfer;
Delivery and Form."
The New Notes will accrete in principal amount at the rate of 13.5% per
annum from the date of issuance thereof until March 15, 2003. Thereafter, the
New Notes will bear interest at a rate equal to 13.5% per annum, payable semi-
annually in arrears on March 15 and September 15 of each year, commencing
September 15, 2003. The Old Notes will continue to accrete in principal amount
at the rate of 13.5% per annum to, but not including, the date of issuance of
the New Notes. Such accretion will become a part of the Accreted Value (as
defined in "Description of the Old Notes--Certain Definitions") of the New
Notes. Any Old Notes not tendered or accepted for exchange will continue to
accrete in principal amount at the rate of 13.5%per annum in accordance with
its terms.
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after March 15, 2003, at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the date
of redemption. On or prior to March 15, 2001, up to 35% of the aggregate
principal amount at maturity of the New Notes will be redeemable at the option
of the Company with the net cash proceeds of one or more Public Equity
Offerings (as defined in "Description of the Old Notes--Certain Definitions")
or the sale of at least $35.0 million of Capital Stock (as defined in
"Description of the Old Notes--Certain Definitions") to one or more Strategic
Equity Investors (as defined in "Description of the Old Notes--Certain
Definitions"); provided, however, that New Notes representing $87.8 million of
initial aggregate Accreted Value of the Old Notes originally issued remain
outstanding immediately after such redemption. Upon the occurrence of a Change
of Control (as defined in "Description of the Old Notes--Certain
Definitions"), each Holder of the New Notes may require the Company to
repurchase all or a portion of such Holder's New Notes at 101% of the
aggregate Accreted Value thereof (if prior to March 15, 2003) or the principal
amount thereof (if on or after March 15, 2003), together with accrued and
unpaid interest if any, to the date of repurchase. See "Description of the Old
Notes" and "Description of the New Notes."
<PAGE>
(Continuation of cover page)
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Division of Corporation Finance of the Securities Exchange
Commission (the "SEC" or "Commission") as set forth in the Staff's Exxon
Capital Holdings Corp. SEC No-Action Letter (available April 13, 1989), Morgan
Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991), Shearman &
Sterling SEC No-Action Letter (available July 7, 1993), and other interpretive
letters addressed to third parties in other transactions. However, the Company
has not sought its own interpretive letter and there can be no assurance that
the Staff of the Division of Corporation Finance of the SEC would make a
similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff of the Division of Corporation Finance, and subject to the two
immediately following sentences, the Company believes that New Notes issued
pursuant to this Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a Holder thereof (other than a
Holder who is a broker-dealer) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
Holder's business and that such Holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New Notes. However, any
Holder of Old Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing New Notes,
or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule144A under the Securities Act ("Rule144A") or any other
available exemption under the Securities Act, (a) will not be able to rely on
the interpretations of the Staff of the Division of Corporation Finance of the
SEC set forth in the above-mentioned interpretive letters, (b) will not be
permitted or entitled to tender such Old Notes in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption from such requirements. See
"Risk Factors--Consequences to Non-Tendering Holders of Old Notes. In
addition, as described below, if any broker-dealer holds Old Notes acquired
for its own account as a result of market-making or other trading activities
(a "Participating Broker-Dealer") and exchanges such Old Notes for New Notes,
then such Participating Broker-Dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each Holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such Holder is
not a broker-dealer, such Holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such
New Notes. Each Participating Broker-Dealer that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it acquired
the Old Notes for its own account as a result of market-making activities or
other trading activities and must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of such New Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a Participating Broker-Dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the Staff of the Division of
Corporation Finance of the SEC in the interpretive letters referred to above,
the Company believes that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the New Notes received upon
exchange of such Old Notes (other than Old Notes which represent an unsold
allotment from the original sale of the Old Notes) with a prospectus meeting
the requirements of the Securities Act, which may be the prospectus prepared
for an exchange offer so long as it contains a description of the plan of
distribution with respect to the resale of such New Notes. Accordingly, this
Prospectus may be used by a Participating Broker-Dealer during the period
referred to below in connection with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired by such Participating Broker-
Dealer for its own account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the Registration Rights
Agreement, the Company has agreed that this Prospectus may be used by a
Participating Broker-Dealer in connection with resales of such New Notes for a
period ending 150 days after the effective date of the Registration Statement
(subject to extension under certain limited
<PAGE>
(Continuation of cover page)
circumstances described below) or, if earlier, when such Participating Broker-
Dealer is no longer required to deliver a prospectus in connection with
market-making or other trading activities. See "Plan of Distribution." Any
Participating Broker-Dealer who is an "affiliate" of the Company may not rely
on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any
material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made,
not misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend
the sale of New Notes pursuant to this Prospectus until the Company has
amended or supplemented this Prospectus to correct such misstatement or
omission and has furnished copies of the amended or supplemented Prospectus to
such Participating Broker-Dealer or the Company has given notice that the sale
of the New Notes may be resumed, as the case may be. If the Company gives such
notice to suspend the sale of the New Notes, it shall extend the 150-day
period referred to above during which Participating Broker-Dealers are
entitled to use this Prospectus in connection with the resale of New Notes by
the number of days during the period from and including the date of the giving
of such notice to and including the date when Participating Broker-Dealers
shall have received copies of the amended or supplemented Prospectus necessary
to permit resales of the New Notes or to and including the date on which the
Company has given notice that the sale of New Notes may be resumed, as the
case may be.
The New Notes will be senior obligations of the Company, will rank pari
passu (equally) in right of payment with all existing and future senior Debt
(as defined in "Description of the Old Notes--Certain Definitions") of the
Company and will rank senior in right of payment to all future subordinated
Debt of the Company. As of March 31, 1998, the Company had approximately
$133.2 million of long-term obligations (including current portion but net of
the debt discount (the "Debt Discount") associated with the warrants issued
with the issuance of the Old Notes (the "Old Note Issuance"). However, the
Company is a holding company and the New Notes will be effectively
subordinated to future Debt and other liabilities (including any subordinated
indebtedness and trade payables) of the Company's Subsidiaries (as defined in
"Available Information"). See "Risk Factors--Substantial Leverage", "-- No
Assurance of Ability to Service Indebtedness" and "--Holding Company
Structure; Restrictions on Access to Subsidiary Cash Flow." The Indenture
permits the Company and its Subsidiaries to incur substantial additional Debt,
including secured Debt, subject to certain limitations. The Company conducts
its operations primarily through its Subsidiaries. These Subsidiaries do not
guarantee the Old Notes and will not be required to guarantee the New Notes,
and the Company is permitted to make substantial investments in these
Subsidiaries.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture and the
Registration Rights Agreement (except for those rights which terminate upon
consummation of the Exchange Offer). Following consummation of the Exchange
Offer, the Holders of Old Notes will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to such Holders (other than to the Initial Purchasers under certain
limited circumstances) to provide for registration under the Securities Act of
the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered Old
Notes could be adversely affected. See "Summary-- Certain Consequences of a
Failure to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS
<PAGE>
(Continuation of cover page)
PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING
WHETHER TO TENDER THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Prior to this Exchange Offer, there has been no public market for the Old
Notes or New Notes. The Company does not intend to list the New Notes on a
national securities exchange or to seek approval for quotation through the
Nasdaq National Market. As the Old Notes were issued and the New Notes are
being issued to a limited number of institutions who typically hold similar
securities for investments, the Company does not expect that an active public
market for the New Notes will develop. In addition, resales by certain Holders
of any outstanding Old Notes and the New Notes of a substantial percentage of
the aggregate principal amount at maturity of such New Notes could constrain
the ability of any market maker to develop or maintain a market for the New
Notes. To the extent that a market for the New Notes should develop, the
market value of the New Notes will depend on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition, performance and prospects of the Company. Such factors might cause
the New Notes to trade at a discount from face value. See "Risk Factors--
Absence of Public Market for the New Notes; Restrictions on Transfer." The
Company has agreed to pay the expenses of the Exchange Offer.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with the
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES LAWS. ALL STATEMENTS REGARDING THE COMPANY'S AND ITS
SUBSIDIARIES' EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY AND ITS SUBSIDIARIES BELIEVE
THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO
HAVE BEEN CORRECT. ACTUAL RESULTS WILL DIFFER AND SUCH DIFFERENCES MAY BE
MATERIAL. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN
THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK
FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR PERSONS ACTING ON THEIR
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
This Prospectus includes "forward-looking" statements within the meaning of
the safe harbor provisions of Section 27A of the Securities Act and Section
21E of the Exchange Act. The safe harbor provisions are not applicable to any
"forward looking" statements made in connection with the initial issuance of
New Notes pursuant to this Prospectus, although such provisions are applicable
to such statements made in connection with resales of New Notes.
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company has agreed that, whether or not it is
required to do so by the rules and regulations of the SEC, for so long as any
of the Old Notes and New Notes remain outstanding, it will furnish to the
Holders of the Old Notes and New Notes and file with the SEC (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the SEC on Forms 10-Q and 10-K if the Company were required to
file such forms, including a "Management's Discussion and Analysis of Results
of Operations and Financial Condition" and, with respect to the annual
information only, a report thereon by the Company's independent auditors and
(ii) all reports that would be required to be filed with the SEC on Form 8-K
if the Company were required to file such reports, in each case, within the
time periods set forth in the rules and regulations of the SEC. In addition,
for so long as any of the
<PAGE>
(Continuation of cover page)
Old Notes and New Notes remain outstanding, the Company has agreed to make
available to the Holders of the Old Notes and New Notes, securities analysts,
prospective purchasers of the Old Notes and New Notes or beneficial owners of
the Old Notes and New Notes in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act.
Market data and certain industry forecasts used throughout this Prospectus
were obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. Similarly, internal surveys, industry forecasts and market
research, while believed to be reliable, have not been independently verified
by the Company.
Covad Communications Company, Inc. was incorporated in California on October
7, 1996 under the name Covad Communications Company, Inc. In July 1997, Covad
Communications Company became a wholly-owned subsidiary of Covad
Communications Group, Inc., a Delaware corporation. Unless the context
otherwise requires, "Covad" and the "Company" refer to Covad Communications
Group, Inc. and its subsidiaries (the "Subsidiaries"), including Covad
Communications Company.
The "Covad(TM)", "TeleSpeed SM", "The Speed to Work SM"and the Covad
crescent logo names and marks are among the trademarks of the Company. This
Prospectus contains other product names, trade names and trademarks of the
Company and of other organizations.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments thereto, the "Registration Statement") filed by
the Company with the SEC under the Securities Act. This Prospectus, which
forms a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain parts of which
have been omitted in accordance with the rules and regulations of the SEC.
Reference is hereby made to the Registration Statement and related exhibits
and schedules filed therewith for further information with respect to the
Company and the New Notes offered hereby. Statements contained herein
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed by the Company with
the SEC and each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits and schedules thereto
may be inspected and copied at the public reference facilities maintained by
the SEC: New York Regional Office, Seven World Trade Center, New York, New
York 10048, and Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661. The SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. Copies of the Registration Statement may be
obtained from the SEC's Internet address at http://www.sec.gov.
<PAGE>
PROSPECTUS SUMMARY
Unless the context requires otherwise, references to "Covad" or the "Company"
herein refer to Covad Communications Group, Inc. and its Subsidiaries. The
following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and financial statements appearing
elsewhere in this Prospectus. This Prospectus includes "forward-looking"
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act; provided, however, that the safe harbor provisions of
Section 27A and Section 21E are not applicable to any "forward looking"
statements made in connection with the initial issuance of New Notes pursuant
to this Prospectus, although such provisions are applicable to such statements
made in connection with resales of New Notes. Although the Company believes
that its plans, intentions and expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such plans, intentions
or expectations will be achieved. Actual results will differ from such plans,
intentions and expectations, and such differences may be material. Important
factors that could cause actual results to differ materially from the Company's
forward-looking statements are set forth in "Risk Factors" and elsewhere in
this Prospectus. The Company disclaims any obligation to update forward-looking
statements contained herein. All forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth herein. The New Notes offered
hereby involve a high degree of risk. See "Risk Factors." The definitions of
certain terms used herein are set forth in "Description of the Old Notes" or in
Appendix A of this Prospectus. Unless otherwise indicated, information in the
Prospectus reflects a two-for-one stock split effected by the Company in May
1998.
THE COMPANY
The Company is a packet-based Competitive Local Exchange Carrier ("CLEC")
which provides high-speed data communication services using Digital Subscriber
Line ("DSL") technology. Covad was formed to capitalize on the substantial
business opportunity created by the growing demand for high-speed data
communications, the commercial availability of low-cost DSL technology and the
passage of the Telecommunications Act of 1996 (the "1996 Act"). The Company's
services enhance remote access from homes to Local Area Networks ("LANs") of
large corporations, government entities and educational institutions
(collectively, "enterprises") and enable Internet Service Providers ("ISPs") to
offer high-speed Internet access to their end-users. The Company's services are
provided over standard copper telephone lines at speeds of up to 1.5 Megabits
per second ("Mbps"), approximately 50 times the speed available through a
standard 28.8 Kilobits per second ("Kbps") modem. The Company markets its
services directly to enterprises that are increasingly emphasizing remote LAN
("RLAN") access to improve employee productivity and reduce operating costs.
The Company also markets its services indirectly through ISPs that wish to sell
high-speed Internet access initially to small- and medium-sized businesses, and
subsequently to consumers, using the Company's DSL lines.
The Company was founded in October 1996 and launched its services in its
first market, the San Francisco Bay Area, in December 1997. Covad has entered
into arrangements with a number of enterprise customers which are making the
Company's services generally available to their employees and has arrangements
for pilot implementations with additional enterprise customers. The Company has
also entered into marketing arrangements with 23 ISP customers, including
Concentric Network Corporation and Verio Inc. Covad's services are currently
available for subscription to over one million homes and businesses in the San
Francisco Bay Area. The Company is aggressively expanding its geographical
coverage in the San Francisco Bay Area. The Company plans to offer its services
in other regions, initially including Boston, Los Angeles, New York, Seattle
and Washington, D.C.
The demand for high-speed data services is growing rapidly. Over the past ten
years, high-speed LANs have become increasingly important to enterprises in
order for employees to share information, send e-mail, search databases and
conduct business. The Company believes that a large majority of personal
computers used in
1
<PAGE>
enterprises are connected to LANs. Enterprises are now seeking to extend this
same high-speed connectivity to employees accessing the LAN from home to
improve employee productivity and reduce operating costs. High-speed
connectivity has also become important to small- and medium-sized businesses
due to the dramatic increase in Internet usage. High-speed Internet connections
are required for small- and medium-sized businesses to host Web sites and
access critical business information outside the company. The Company expects
the market size for both RLAN access and small- and medium-sized business
Internet access to continue to grow rapidly as businesses increase their use of
the Internet, intranets and privately managed networks. Industry analysts
estimate that the number of remote access lines in the U.S. will grow from
approximately ten million in 1996 to approximately 30 million in 2000, a
compound annual growth rate in excess of 30%.
Through its use of DSL technology, the Company can effectively leverage the
existing telephone network copper infrastructure to deploy service more quickly
and at lower costs than technologies such as cable modems and wireless data
networks that require large initial infrastructure investments before service
can be provided.
NEW EQUITY INVESTMENTS
The Company's investors include Intel, Warburg, Pincus Ventures, L.P.
("Warburg" or "WPV") and Crosspoint Venture Partners 1996 ("Crosspoint" and
together with Intel and Warburg, the "Investors"). On February 20, 1998, the
Company entered into a subscription agreement with the Investors, pursuant to
which Warburg and Crosspoint unconditionally agreed to invest $16.0 million of
additional equity capital in the Company at a date to be determined by the
Company but no later than March 11, 1999 (the "Equity Commitment"). The Company
agreed to either call the Equity Commitment or to complete an alternate equity
financing of at least $16.0 million by the end of March 11, 1999. Also,
pursuant to this subscription agreement, Intel invested $1.0 million of
additional equity capital (the "Stock Purchase") concurrently with the closing
of the Old Note Issuance. In April 1998, the parties amended the Subscription
Agreement to provide for the assignment by Warburg and Crosspoint of their
obligations to invest $100,000 of the $16.0 million Equity Commitment to a
director of the Company. As a result of this amendment, Warburg and
Crosspoint's obligations were reduced to an aggregate of $15.9 million. See
"Certain Relationships and Related Transactions."
FINANCING STRATEGY
The Company intends to use its current capital resources to expand its
operations to five additional regions in the next 18 months and to complete
additional deployment in the San Francisco Bay Area. The Company believes such
resources will be sufficient to fund the Company's aggregate capital
expenditures and working capital requirements, including operating losses,
associated with the rollout of its initial regions. While the Company believes
that such resources will be sufficient to finance its expansion into the
initial regions, it may need to secure additional financing to enter additional
regions or to meet higher-than-expected subscription rates for its services. If
demand for the Company's services is less than expected, the Company may
require additional financing at an earlier date, although the Company believes
it would be able to reduce certain costs that are, to a large extent, demand-
driven, or delay its entry into various of its targeted regions. There can be
no assurance that the Company will be able to implement its rollout strategy in
a timely fashion, if at all. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Liquidity and Capital
Resources."
2
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer............
$1,000 principal amount at maturity of the New
Notes in exchange for each $1,000 principal
amount at maturity of the Old Notes. As of June
16, 1998, $260,000,000 in aggregate principal
amount at maturity of Old Notes were
outstanding. The Company will issue the New
Notes to Holders on or promptly after the
Expiration Date.
Based on an interpretation by the Staff of the
SEC set forth in the Staff's Exxon Capital
Holdings Corp. SEC No-Action Letter (available
April 13, 1989), Morgan Stanley & Co., Inc. SEC
No-Action Letter (available June 5, 1991),
Shearman & Sterling SEC No-Action Letter
(available July 7, 1993), and other no-action
letters issued to third parties, the Company
believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by Holders thereof without
compliance with the registration and prospectus
delivery provisions of the Securities Act.
However, any Holder who is an "affiliate" of
the Company or who intends to participate in
the Exchange Offer for the purpose of
distributing the New Notes, or any broker-
dealer who purchased Old Notes from the Company
to resell pursuant to Rule 144A or any other
available exemption under the Securities Act
(i) cannot rely on the interpretation by the
Staff of the SEC set forth in the above
referenced no-action letters, (ii) cannot
tender its Old Notes in the Exchange Offer and
(iii) must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any sale or
transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from
such requirements. See "Risk Factors--
Consequences to Non-Tendering Holder of Old
Notes."
Each Participating Broker-Dealer that receives
New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act. This Prospectus may be used
by a Participating Broker-Dealer in connection
with resales of New Notes received in exchange
for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as
a result of market-making activities or other
trading activities and not acquired directly
from the Company. The Company has agreed that
for a period of 150 days after the effective
date of the Registration Statement, it will
make this Prospectus available to any
Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution."
3
<PAGE>
Expiration Date............... , 1998, unless the Exchange Offer is
extended, in which case the term "Expiration
Date" means the latest date and time to which
the Exchange Offer is extended.
Accretion of the New Notes
and the Old Notes............. No cash interest will accrue or be payable in
respect of the New Notes prior to March 15,
2003. Thereafter, interest will accrue at the
rate of 13.5% per annum, payable semiannually
in arrears on each March 15 and September 15,
commencing September 15, 2003. The Old Notes
accepted for exchange will continue to accrete
in principal amount at the rate of 13.5% per
annum to, but excluding, the issuance date of
the New Notes and will cease to accrete in
principal amount upon cancellation of the Old
Notes and issuance of the New Notes. Any Old
Notes not tendered or accepted for exchange
will continue to accrete in principal amount at
the rate of 13.5% per annum in accordance with
its terms. The Accreted Value of the New Notes
upon issuance will equal the Accreted Value of
the Old Notes accepted for exchange immediately
prior to issuance of the New Notes.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer......................... customary conditions. The conditions are
limited and relate in general to proceedings
which have been instituted or laws which have
been adopted that might impair the ability of
the Company to proceed with the Exchange Offer.
As of the date hereof, none of these events had
occurred, and the Company believes their
occurrence to be unlikely. If any such
conditions do exist prior to the Expiration
Date, the Company may (i) refuse to accept any
Old Notes and return all previously tendered
Old Notes, (ii) extend the Exchange Offer or
(iii) waive such conditions. See "The Exchange
Offer-Conditions."
Procedures for Tendering Old Each Holder of Old Notes wishing to accept the
Notes......................... Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with such Old Notes to be
exchanged and any other required documentation
to The Bank of New York, as Exchange Agent (the
"Exchange Agent"), at the address set forth
herein and therein or effect a tender of such
Old Notes pursuant to the procedures for book-
entry transfer as provided for herein. By
executing the Letter of Transmittal or
effecting a book-entry transfer, each Holder
will represent to the Company that, among other
things, the New Notes acquired pursuant to the
Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such New Notes, whether or not such
person is the Holder, that neither the Holder
nor any such other person has an arrangement or
understanding with any person to participate in
the distribution of such New Notes and that
neither the Holder nor any such person is an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. Each
Participating Broker-Dealer that receives New
Notes not acquired directly from the Company
must acknowledge
4
<PAGE>
that it will deliver a copy of this Prospectus
in connection with any resale of such New
Notes. See "The Exchange Offer-- Procedures for
Tendering" and "Plan of Distribution."
Special Procedures for Any beneficial owner whose Old Notes are
Beneficial Owners............. registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Old Notes in the
Exchange Offer should contact such registered
Holder promptly and instruct such registered
Holder to tender such Old Notes on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on such beneficial
owner's own behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Old Notes,
either make appropriate arrangements to
register ownership of the Old Notes in such
beneficial owner's name or obtain a properly
completed bond power from the registered
Holder. The transfer of registered ownership
may take considerable time and may not be able
to be completed prior to the Expiration Date.
See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery Holders of Old Notes who wish to tender their
Procedures.................... Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent, or cannot
complete the procedure for book-entry transfer,
prior to the Expiration Date must tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date by delivering a written notice
of such withdrawal to the Exchange Agent in
conformity with certain procedures set forth
under "The Exchange Offer--Withdrawal of
Tenders."
Acceptance of Old Notes and
Delivery of New Notes......... The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. Any Old Notes not accepted for
exchange will be returned without expense to
the tendering Holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain Tax Considerations....
The exchange pursuant to the Exchange Offer
should not be a taxable event for federal
income tax purposes. See "United States Federal
Income Tax Considerations."
Exchange Agent................ The Bank of New York.
5
<PAGE>
TERMS OF NEW NOTES
The Exchange Offer applies to up to $260,000,000 aggregate principal amount
at maturity of the Company's Old Notes. The New Notes will be obligations of
the Company evidencing the same Debt as the Old Notes and will be entitled to
the benefits of the same Indenture. See "Description of the New Notes." The
form and terms of the New Notes are the same as the form and terms of the Old
Notes in all material respects except that the New Notes have been registered
under the Securities Act and hence do not include certain rights to
registration thereunder and do not contain transfer restrictions or terms with
respect to additional interest payments applicable to the Old Notes. See
"Description of the New Notes."
New Notes Offered............. $260,000,000 aggregate principal amount at
maturity of 13 1/2% Senior Discount Notes due
2008, Series B.
Maturity...................... March 15, 2008.
Interest...................... The New Notes will be sold at a substantial
discount to their principal amount at maturity,
and will accrete in value through March 15,
2003 (the "Full Accretion Date") at a rate of
13.5% per annum, compounded semi-annually. Cash
interest will neither accrue nor be payable on
the New Notes prior to the Full Accretion Date.
Thereafter, the New Notes will bear interest at
the rate of 13.5% per annum, payable in cash
semi-annually in arrears on March 15 and
September 15, commencing September 15, 2003.
Ranking.......................
The New Notes will be senior obligations of the
Company, will rank pari passu in right of
payment with all existing and future senior
Debt of the Company and will rank senior in
right of payment to all future subordinated
Debt of the Company, but will be effectively
subordinated to any secured Debt of the Company
and future Debt and other liabilities
(including subordinated Debt and trade
payables) of the Company's Subsidiaries. The
Indenture permits the incurrence of substantial
additional Debt, including secured Debt, by the
Company and its Subsidiaries, subject to
certain restrictions. See "Risk Factors--
Holding Company Structure; Restrictions on
Access to Subsidiary Cash Flow." As of March
31, 1998, the Company had approximately $133.2
million of long-term obligations (including
current portion but net of the Debt Discount)
outstanding.
Sinking Fund.................. None.
Optional Redemption........... The New Notes may be redeemed at the option of
the Company, in whole or in part, at any time
on or after March 15, 2003, at a premium
declining to par on March 15, 2006, plus
accrued and unpaid interest through the
redemption date.
In addition, at any time prior to or on March
15, 2001, the Company may redeem up to 35% of
the aggregate principal amount at maturity of
the New Notes at a redemption price of 113.5%
of the Accreted Value to the date of
redemption, with the
6
<PAGE>
net cash proceeds of one or more Public Equity
Offerings or the sale of at least $35.0 million
of Capital Stock to one or more Strategic
Equity Investors; provided, however, that New
Notes representing at least $87.8 million of
initial aggregate Accreted Value of Old Notes
originally issued remain outstanding
immediately after the occurrence of such
redemption.
Change of Control.............
In the event of a Change of Control, the
Holders of the New Notes will have the right to
require the Company to purchase the New Notes
at a price equal to 101% of the aggregate
principal amount or Accreted Value thereof, as
applicable, plus accrued and unpaid interest to
the date of purchase. There can be no assurance
that the Company will have the financial
resources necessary to repurchase the New Notes
upon a Change of Control. See "Risk Factors--
Substantial Leverage" and "--Ability to Service
Indebtedness" and "Description of the Old
Notes--Events of Default and Remedies."
Covenants.....................
The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as
defined in "Description of the Old Notes--
Certain Definitions") to make certain
restricted payments, incur additional
indebtedness and issue Disqualified Stock (as
defined in "Description of the Old Notes--
Certain Definitions"), pay dividends or make
other distributions, repurchase equity
interests or subordinated indebtedness, engage
in sale or leaseback transactions, create
certain liens, enter into certain transactions
with affiliates, sell assets of the Company or
its Restricted Subsidiaries, change their lines
of business, issue or sell equity interests of
the Company's Restricted Subsidiaries or enter
into mergers and consolidations. In addition,
under certain circumstances, the Company will
be required to offer to purchase the New Notes
at a price equal to 100% of the principal
amount or Accreted Value thereof, as
applicable, plus accrued and unpaid interest to
the date of purchase, with the proceeds of
certain asset sales. See "Description of the
Old Notes--Certain Covenants" and "Description
of the New Notes."
Exchange Rights............... Holders of New Notes will not be entitled to
any exchange or registration rights with
respect to the New Notes. Holders of Old Notes
are entitled to certain exchange rights
pursuant to the Registration Rights Agreement.
Under the Registration Rights Agreement, the
Company is required to offer to exchange the
Old Notes for New Notes having substantially
identical terms which have been registered
under the Securities Act. This Exchange Offer
is intended to satisfy such obligation. Once
the Exchange Offer is consummated, the Company
will have no further obligations to register
any Old Notes not tendered by the Holders
thereof for exchange. See "Risk Factors--
Consequences to Non-Tendering of Old Notes."
7
<PAGE>
Form of New Notes............. The New Notes will be represented by one or
more permanent global Notes in definitive,
fully registered form, to be deposited with The
Bank of New York, as the Trustee (the
"Trustee") under the Indenture, as custodian
for, and registered in the name of, a nominee
of DTC. The New Notes sold in offshore
transactions in reliance on Regulation S under
the Securities Act will be represented by one
or more permanent global Notes in definitive,
fully registered form deposited with the
Trustee as custodian for, and registered in the
name of, a nominee of DTC for the accounts of
Morgan Guaranty Trust Company of New York,
Brussels office, as operator of Euroclear and
Cedel Bank. See "The Exchange Offer--Book-Entry
Transfers; Delivery and Form."
Use of Proceeds...............
The Company will not receive any proceeds from
the Exchange Offer.
8
<PAGE>
CERTAIN CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and therefore may not be offered, sold or otherwise transferred
except in compliance with the registration requirements of the Securities Act
and any other applicable securities laws, or pursuant to an exemption therefrom
or in a transaction not subject thereto, and in each case in compliance with
certain other conditions and restrictions, including the Company's and the
Trustee's right in certain cases to require the delivery of opinions of
counsel, certifications and other information prior to any such transfer. Old
Notes which remain outstanding after consummation of the Exchange Offer will
continue to bear a legend reflecting such restrictions on transfer. In
addition, upon consummation of the Exchange Offer, Holders of Old Notes which
remain outstanding will not be entitled to any rights to have such Old Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions applicable
solely to the Initial Purchasers). The Company currently does not intend to
register under the Securities Act any Old Notes which remain outstanding after
consummation of the Exchange Offer (subject to such limited exceptions, if
applicable).
To the extent that Old Notes are tendered and accepted in the Exchange Offer
any trading market for Old Notes which remain outstanding after the Exchange
Offer could be adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether Holders of the requisite percentage in outstanding
principal amount at maturity thereof have taken certain actions or exercised
certain rights under the Indenture. See "Description of the New Notes."
The Registration Rights Agreement provides that, if the Exchange Offer were
not consummated within the time period specified therein, additional interest
will accrue on the Old Notes at a rate of 0.50% per annum over the rate at
which interest is then accruing or, as applicable, principal is then accreting,
during the 90-day period immediately following the occurrence of any
registration default and shall increase by 0.25% per annum at the end of each
subsequent 90-day period until such Registration Default has been cured, but in
no event would such additional interest exceed 2.0% per annum. See "Description
of the Old Notes--Registration Rights; Additional Interest." Following
consummation of the Exchange Offer, neither the Old Notes nor the New Notes
will be entitled to any such additional interest.
9
<PAGE>
SUMMARY FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein. The consolidated
statement of operations data for the year ended December 31, 1997, and the
consolidated balance sheet data at December 31, 1997 are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements and
the related Notes thereto included herein. The consolidated statement of
operations data for the three months ended March 31, 1998, and the consolidated
balance sheet data at March 31, 1998 are derived from unaudited consolidated
financial statements included herein that include, in the opinion of
management, all adjustments, consisting of only normal, recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
consolidated results of operations for the three months ended March 31, 1998
are not necessarily indicative of future results. For the three months ended
March 31, 1997, the Company had no revenues and total expenses were not
significant.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31, 1998
1997 (UNAUDITED)
----------------- ---------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues................................... $ 26 $ 186
Operating expenses:
Network and product costs................ 54 203
Sales, marketing, general and
administrative.......................... 2,374 1,944
Depreciation and amortization............ 70 164
---------- ----------
Total operating expenses............... 2,498 2,311
---------- ----------
Loss from operations....................... (2,472) (2,125)
Interest income (expense):
Interest income.......................... 167 435
Interest expense......................... (12) (847)
---------- ----------
Net interest........................... 155 (412)
---------- ----------
Net loss................................... $ (2,317) $ (2,537)
========== ==========
Net loss per common share.................. $ (0.32) $ (0.33)
Weighted average shares used in computing
net loss per share........................ 7,344,276 7,575,803
Ratio of earnings to fixed charges (1)..... $ -- $ --
Deficiency of earnings to cover fixed
charges(1)................................ 2,317 2,537
OTHER DATA:
EBITDA(2).................................. (2,402) (1,961)
CASH FLOW DATA:
Provided by (used for) operating
activities................................ $ (1,895) $ 521
Provided by (used for) investing
activities................................ (2,494) (3,802)
Provided by (used for) financing
activities................................ 8,767 130,661
<CAPTION>
AS OF
AS OF MARCH 31, 1998
DECEMBER 31, 1997 (UNAUDITED)
----------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 4,378 $ 131,758
Net property and equipment................. 3,014 6,652
Total assets............................... 8,074 145,757
Long-term obligations, net, including
current portion........................... 783 133,240
Total stockholders' equity................. 6,498 9,630
</TABLE>
10
<PAGE>
- --------
(1) For purposes of determining the ratio of earnings to fixed charges, and the
deficiency of earnings to cover fixed charges, "earnings" included pre-tax
loss from operations adjusted for fixed charges. "Fixed charges" include
interest expense, capitalized interest, amortization of debt discount and
financing costs, and that portion of rent expense which the Company
believes to be representative of interest.
(2) EBITDA consists of net loss excluding net interest, depreciation and
amortization. EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. EBITDA is
presented to enhance an understanding of the Company's operating results
and should not be construed as an alternative to operating income, as
determined in accordance with generally accepted accounting principles, as
an indicator of the Company's operating performance or to cash flows from
operating activities, as determined in accordance with generally accepted
accounting principles, as a measure of liquidity. EBITDA as calculated by
the Company may be calculated differently than EBITDA for other companies.
See the Company's Consolidated Financial Statements and the related Notes
thereto contained elsewhere in this Prospectus.
11
<PAGE>
RISK FACTORS
An investment in the New Notes involves a high degree of risk. In addition
to the other information contained in this Prospectus, prospective investors
should carefully consider the following factors in evaluating an investment in
the New Notes offered hereby. No investor should participate in the Exchange
Offer unless such investor can afford a complete loss of the investment. In
addition, this Prospectus includes "forward-looking" statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act; provided, however, that the safe harbor provisions of Section 27A and
Section 21E are not applicable to any "forward looking" statements made in
connection with the initial issuance of New Notes pursuant to this Prospectus,
although such provisions are applicable to such statements made in connection
with resales of New Notes. Although the Company believes that its plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such plans, intentions or
expectations will be achieved. Actual results will differ from such plans,
intentions and expectations, and such differences may be material. Important
factors that could cause actual results to differ materially from the
Company's forward-looking statements are set forth below and elsewhere in this
Prospectus. All forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth herein. The Company disclaims any obligation
to update information contained in any forward-looking statement.
SUBSTANTIAL LEVERAGE
As a result of the Old Note Issuance, the Company is highly leveraged. At
March 31, 1998, the Company and its Subsidiaries had approximately $133.2
million of long-term obligations (including current portion but net of the
Debt Discount). In addition, the Indenture permits the Company and its
Subsidiaries to incur substantial additional indebtedness subject to certain
restrictions. See "Description of the Old Notes--Certain Covenants." The
Company plans to incur substantial additional indebtedness to finance the
continued development, commercial deployment and expansion of its network and
for funding operating losses. The degree to which the Company is leveraged
could have important consequences to the Holders of the New Notes, including,
but not limited to, the following: (i) the Company's ability to obtain
additional financing or refinancing in the future for working capital, capital
expenditures, service development and enhancement, acquisitions, general
corporate purposes or other purposes may be materially limited or impaired;
(ii) the Company's cash flow, if any, may be unavailable for the Company's
business as a substantial portion of the Company's cash flow must be dedicated
to the payment of principal and interest on its indebtedness, including the
New Notes; (iii) the terms of future permitted indebtedness may limit the
Company's ability to redeem the New Notes in the event of a Change of Control;
and (iv) the Company's high degree of leverage may make it more vulnerable to
economic downturns, may limit its ability to withstand competitive pressures
and may reduce its flexibility in responding to changing business and economic
conditions.
NO ASSURANCE OF ABILITY TO SERVICE INDEBTEDNESS
The Company expects that it will continue to generate substantial operating
losses and negative cash flow for at least the next several years. No
assurance can be given that the Company will be successful in developing and
maintaining a level of cash flow from operations sufficient to permit it to
pay the principal, premium, if any, and interest on its indebtedness,
including the New Notes. The ability of the Company to make scheduled payments
with respect to indebtedness (including the New Notes) will depend upon, among
other things: (i) the Company's ability to achieve significant and sustained
growth in cash flow; (ii) the rate of and successful commercial deployment of
its network; (iii) the market acceptance, customer demand, rate of utilization
and pricing for the Company's services; (iv) the future operating performance
of the Company and the extent to which the Company's TeleSpeed service is
subject to performance problems; (v) the Company's ability to successfully
complete development, upgrades and enhancements of its network and (vi) the
Company's ability to complete additional financings, as necessary. Each of
these factors is, to a large extent, subject to economic, financial,
competitive and other factors, many of which are beyond the Company's control.
If the Company is unable to generate sufficient cash flow to service its
indebtedness, including the New Notes, it may have to reduce or delay network
deployments, restructure or refinance its indebtedness or seek additional
equity capital.
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There can be no assurance that any of these strategies could be effected on
satisfactory terms, if at all, in light of the Company's high leverage, or
that any such strategy would yield sufficient proceeds to service and repay
the Company's indebtedness, including the New Notes. Any failure by the
Company to satisfy its obligations with respect to the New Notes at maturity
or prior thereto would constitute a default under the Indenture and could
cause a default under agreements governing other indebtedness of the Company.
In the event of such default, the holders of such indebtedness would have
enforcement rights, including the right to accelerate such debt and the right
to commence an involuntary bankruptcy proceeding against the Company. Absent
successful commercial introduction of its service on a broad scale, ongoing
technical development of the network to achieve scalability and reduced costs
and significant growth of its cash flow, the Company will not be able to
service or repay its indebtedness, including the New Notes.
LIMITED OPERATING HISTORY AND EARLY STAGE OF DEPLOYMENT
The Company was incorporated in October 1996, signed its first
interconnection agreement with an ILEC in April 1997, established its first
ILEC collocation facilities in July 1997 and introduced its service
commercially in December 1997. As a result of the Company's limited operating
history, the Company does not have historical financial data for any period
upon which an evaluation of the Company or its prospects can be based. In
addition, nearly all of the senior management team and other employees have
been working together at the Company for less than one year.
The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in new and rapidly
evolving markets. To address these risks, the Company must, among other
things, rapidly expand the geographic coverage of its services, attract and
retain customers, increase awareness of the Company's services, respond to
competitive developments, continue to attract, retain and motivate qualified
persons and continue to upgrade its technologies and commercialize its network
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks and failure to do so could
have a material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay its
indebtedness, including the New Notes.
FUTURE EXPECTED LOSSES
The Company has incurred net operating losses and experienced negative cash
flow each month since its inception. As of March 31, 1998, the Company had an
accumulated deficit of $4.9 million. In addition, the Company currently
intends to increase its capital expenditures and operating expenses in order
to expand its network to support additional expected end-users in existing and
future markets and to market and provide the Company's services to a growing
number of potential end-users. As a result, the Company expects to incur
substantial additional operating and net losses and substantial negative cash
flow for at least the next several years. The Company's business strategy is
unproven and, to be successful, the Company must, among other things, develop
and market services that are widely accepted by enterprises and ISPs at prices
that will yield a profit. The Company's TeleSpeed services are its only
planned services and have only recently been launched in the San Francisco Bay
Area. There can be no assurance that these services will achieve broad
customer or commercial acceptance. The Company believes its TeleSpeed services
have favorable performance to price ratios when compared to alternative
digital communications services. However, the prices the Company charges for
its services are in some cases higher than those charged by providers for some
competing services. There can be no assurance that sufficient numbers of end-
users will be willing to pay the prices charged by the Company for its
TeleSpeed services. Additionally, prices for digital communications services
have fallen historically, and prices in the industry in general, and for the
services the Company offers and plans to offer in particular, are expected to
continue to fall. Accordingly, it is difficult to predict whether the
Company's pricing model will prove to be viable, whether demand for the
Company's services will materialize at the prices it expects to charge or
whether current or future pricing levels will be sustainable. The failure to
achieve or sustain projected pricing levels or to achieve or sustain broad
market acceptance could result in a material adverse effect on the Company's
business, prospects, operating results, financial condition and its ability to
repay its indebtedness, including the New Notes. Because of the foregoing
factors, among others, the Company may not be able to forecast its revenues or
the rate
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at which it will add new customers or end-users with any degree of accuracy.
There can be no assurance that the Company will be able to increase its
customer base in accordance with its forecasts. There can be no assurance that
the Company will ever achieve favorable operating results or profitability, or
cash flow sufficient to service or repay its indebtedness, including the New
Notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Business Strategy."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors, many of which are
outside the Company's control. Factors that may affect the Company's operating
results include the timing of the respective ILECs' ability to provide and
construct the required CO collocation facilities, the rate at which customers
subscribe to the Company's TeleSpeed service, the prices the customers pay for
such services and end-user churn rates. The Company believes its financial
performance depends to a great extent on retaining customers and on levels of
customer churn, which can result from a variety of sources, including employee
turnover within enterprise customers and relocation of end-users of ISP
customers. Additionally, the Company does not currently have long-term
contracts with any of its customers, and there can be no assurance that Covad
will not experience substantial customer churn as a result of customers
discontinuing the use of service or switching to an alternative service
provider. Further factors that may add to volatility in the Company's
operating results include the amount and timing of capital expenditures and
other costs relating to the expansion of the Company's network, the
introduction of new services by the Company or its competitors, price
competition by competitors, technical difficulties or network downtime,
general economic conditions and economic conditions specific to the Company's
industry. There can be delays in the commencement and recognition of revenue
because the installation of telecommunication lines to implement certain
services has lead times that are controlled by third parties. In addition, the
Company plans to increase operating expenses to fund operations, sales,
marketing, general and administrative activities and infrastructure. To the
extent that these expenses are not accompanied by an increase in revenues, the
Company could experience a material adverse effect on its business, prospects,
operating results, financial condition and its ability to service and repay
its indebtedness, including the New Notes.
UNCERTAIN AVAILABILITY OF COLLOCATION SPACE AND DEPENDENCE ON ILECS TO PROVIDE
COLLOCATION SPACE AND COLLOCATION FACILITIES
The primary dependency of the Company in its initial years is the ability to
secure space from the various ILECs for physical collocation of the Company's
equipment in the ILECs' COs. Such physical collocation allows the Company to
own, install, operate, maintain and upgrade its own equipment at the ILECs'
COs. In approximately 15% of COs in the San Francisco Bay Area, the Company
has experienced rejections of its applications to obtain collocation space
from Pacific Bell. The Company has also experienced rejections in certain COs
in the Los Angeles region from both Pacific Bell and GTE, in Massachusetts and
other states from Bell Atlantic and, when it submits applications for
collocation space in its other target markets, expects it will face additional
rejections in COs, which may be a material number, in these and other regions
as it proceeds with its deployment. The Company cannot predict the extent of
these rejections or their impact on its ability to provide broad service
availability in its target markets. To the extent the Company's applications
for collocation space are rejected, the Company will encounter delays in, or
increased expenses associated with, the rollout of its service in its target
markets, which could result in a material adverse effect on its business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the New Notes.
Broad service availability is important for the Company's enterprise and ISP
customers which desire to provide RLAN access and Internet access on a
regional basis. The Company's inability to obtain physical collocation space
could have a material adverse impact on the Company's ability to secure and
retain customers. The availability of collocation space in high demand target
markets will also be affected to the extent that other CLECs are seeking or
have obtained collocation space to offer services. In such COs, the Company
has the option of virtual collocation (where the ILEC manages and operates the
Company's equipment), which the Company believes is an unattractive solution
due to restrictions on the Company's ability to maintain the quality of its
network. In addition, in some COs where the Company plans to collocate, the
Company believes space will become available at a later date.
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Currently, however, ILECs are not in all cases agreeing to maintain the
Company's position in the queue for CO collocation space where the Company is
seeking collocation; hence, the Company is unable to determine if or when it
will be able to obtain collocation space in these COs. The Company is engaged
in a variety of negotiations and is making a variety of legal arguments to
resolve situations where ILECs in initial target markets assert that certain
COs lack sufficient space for physical collocation by the Company. There can
be no assurances that the Company's legal disputes will be resolved
successfully or that it will achieve collocation arrangements in a sufficient
number of COs in one or more of its target markets within the Company's
desired time frame, if at all. Insofar as ILECs do not face similar space
limitations, the ILECs are less likely to confront collocation risks in
seeking to provide blanket DSL coverage in the Company's target markets.
Under the 1996 Act, and a December 31, 1997 ruling of the Federal District
Court for the Northern District of Texas (the "December 31, 1997 Ruling"), the
Regional Bell Operating Companies ("RBOCs"), formerly subject to antitrust
decree restrictions on interLATA (interexchange) long distance services, are
no longer barred from entry into this market. Moreover, the December 31, 1997
Ruling declares that the portions of the 1996 Act subjecting RBOCs to a prior
Federal Communications Commission ("FCC") approval process in order to provide
interLATA services are unconstitutional. Under the December 31, 1997 Ruling,
RBOCs are no longer compelled to prove to the FCC that, in the states where
they desire to provide interLATA services, they have entered into one or more
state utility commission-approved agreements with one or more facilities-based
competitors which provide business and residential local exchange service and
such agreement satisfies 14 specified interconnection requirements. As a
result of the December 31, 1997 Ruling, and to the extent such Ruling stands,
RBOCs will no longer have incentives to promote local facilities-based
competition and sign interconnection agreements as a quid pro quo for
obtaining approval to provide interLATA service. The December 31, 1997 Ruling
has been appealed to the U.S. Court of Appeals for the Fifth Circuit and it is
uncertain whether the December 31, 1997 Ruling will be upheld on appeal. On
February 11, 1998, the Federal District Court for the Northern District of
Texas stayed the effect of the December 31, 1997 Ruling pending appeal. The
outcome or the duration of this litigation may adversely affect the level of
cooperation the Company receives from the RBOCs.
The 1996 Act nevertheless continues to impose interconnection obligations on
ILECs and the obligation that ILECs provide CLECs, such as the Company, access
to its unbundled network elements ("UNEs"), and generally requires that
interconnection charges as well as charges for UNEs be cost-based and
nondiscriminatory. In particular, the Company depends on ILECs to provide
unbundled DSL-capable lines that connect each end-user to the Company's
equipment collocated in the COs. The nonrecurring and recurring monthly
charges for DSL-capable lines required by the Company vary greatly. These
rates are subject to the approval of the appropriate state regulatory
commission. The rate approval processes for DSL-capable lines typically
involve a lengthy review of the ILEC-proposed rates in each state. The
ultimate rates approved typically depend greatly on ILEC's initial rate
proposals, and such factors as the geographic deaveraging/averaging policy of
the state Public Utility Commission. These rate approval proceedings are time-
consuming and absorb scarce resources including legal personnel and cost
experts as well as participation by Company management. Consequently, the
Company is subject to the risk that the non-recurring and recurring charges
for DSL-capable lines will increase based on new rates proposed by the ILECs
and approved by state regulatory commissions from time to time. See
"Business--Network Architecture and Technology, " "--Government Regulation"
and "--Legal Proceedings."
DEPENDENCE ON ILECS TO PROVIDE TRANSMISSION FACILITIES AND TO ORDER AND
PROVISION COPPER LINES
The Company interconnects with and uses an ILEC's network to service its
customers, and accordingly, the Company is highly dependent upon the
technology and capabilities of the ILEC to meet certain telecommunications
needs of the Company's customers and to maintain its service standards. The
Company is also dependent to some extent on cooperation from the ILECs,
including the provision and repair of transmission facilities. This dependence
on the ILECs could cause the Company to encounter delays in establishing its
network. Any such delay could result in a material adverse impact on the
Company's relationships with its customers.
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In particular, the Company has not yet established a history of ordering and
obtaining the provisioning and repair of large volumes of DSL-capable lines
from any ILEC. It is uncertain whether the Company will be successful in doing
so or whether the ordering and provisioning processes achieved by the Company
will be satisfactory for the retention and growth of its end-user base and the
retention and growth of its customer base.
DEPENDENCE ON INTERCONNECTION AGREEMENTS WITH ILECS
The success of the Company's strategy is dependent upon the Company's
ability to enter into interconnection agreements in each of its target markets
with the respective ILECs on a timely basis. The Company's interconnection
agreements have a maximum term of three years, requiring the Company to
renegotiate agreements with the ILECs. There is no guarantee that existing or
new agreements will be extended or renegotiated on terms favorable to the
Company. Additionally, the Company's interconnection agreements are subject to
interpretation by both parties and there may arise differences in
interpretation that cannot be resolved on favorable terms to the Company.
Finally the interconnection agreements are subject to state commission, FCC
and judicial oversight. There can be no guarantee that these bodies will not
modify the terms or prices of the Company's interconnection agreements in ways
that adversely affect the Company's business. See "Business--Interconnection
Agreements with ILECs."
UNCERTAIN QUALITY AND AVAILABILITY OF THE ILEC COPPER LINES USED BY THE
COMPANY
The 1996 Act imposes obligations on ILECs, and generally requires that
interconnection charges and charges for UNEs and provisioning of
interconnection facilities and UNEs be cost-based and nondiscriminatory. The
Company's strategy requires the Company to interconnect with and use an ILEC's
copper telecommunications lines to service the Company's customers. As such,
the Company is dependent upon the technology and capabilities of the ILECs to
meet certain telecommunications needs of the Company's customers and maintain
its service standards. The Company is highly dependent on the quality and
availability of the ILECs' copper lines and the ILECs' maintenance of such
lines. There can be no assurance that the Company will be able to obtain the
services it requires from the ILECs and to do so at satisfactory rates, terms
and conditions to the Company, which would have a material adverse effect on
the Company's business, prospects, operating results, financial condition and
its ability to service and repay its indebtedness, including the New Notes.
COMPETITION
The Company expects that the markets for RLAN access and business and
consumer Internet transport services will become increasingly competitive in
the future. The Company's most immediate competitors are the ILECs, Cable
Modem Service Providers ("CMSPs"), National Long Distance Carriers ("IXCs"),
Fiber-Based CLECs ("FCLECs"), ISPs, On-Line Service Providers ("OSPs"),
Wireless and Satellite Data Service Providers ("WSDSPs") and other CLECs. Many
of these competitors are offering (or may soon offer) technologies and
services that will directly compete with some or all of the Company's high-
speed digital service offerings. Such technologies include ISDN, DSL, wireless
data and cable modems. Certain bases of competition in the Company's markets
include transmission speed, reliability of service, breadth of service
availability, price/performance, network security, ease of access and use,
content bundling, customer support, brand recognition, operating experience,
capital availability and exclusive contracts. The Company believes that it
compares unfavorably with its competitors with regard to, among other things,
brand recognition, operating experience, exclusive contracts and capital
availability. Many of the Company's competitors and potential competitors have
substantially greater resources than the Company and there can be no assurance
that the Company will be able to compete effectively in its target markets.
All of the largest ILECs which are present in the Company's target markets
are conducting technical and/or market trials or have entered into commercial
deployment of DSL-based data services. For example, US West, Inc. is offering
commercial DSL services in certain areas in Arizona, Colorado, Minnesota, Utah
and other states, Ameritech has announced such services in Michigan and Bell
Atlantic has announced such services in the Washington, D.C. metropolitan area
and in Pennsylvania. In addition, Pacific Bell has announced its intention to
offer commercial DSL services by September 1998. The Company recognizes that
the ILECs have the potential to quickly overcome many of the issues that the
Company believes have slowed wide deployment of DSL
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services by ILECs in the past; if and when they do so, the ILECs will
represent strong competition in all of the Company's target service areas. The
ILECs have an established brand name and reputation for high quality in their
service areas, possess sufficient capital to deploy DSL equipment rapidly,
have their own copper lines and can bundle digital data services with their
existing analog voice services to achieve economies of scale in serving
customers. The ILECs are in a position to offer service from COs where the
Company is unable to secure collocation space and offer service because of
space restrictions.
In addition to the ILECs, many of the Company's potential competitors have
longer operating histories, greater name recognition and significantly greater
financial, technical and marketing resources than the Company. As a result,
they may be able to develop and adopt new or emerging technologies and respond
to changes in customer requirements or devote greater resources to the
development, promotion and sale of their products and services more
effectively than the Company. It is also possible that such competitors may
form new alliances and rapidly acquire significant market share. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
developing high-speed digital services. Such intense competition could
materially and adversely affect the Company's business, prospects, operating
results, financial condition and its ability to service and repay
indebtedness, including the New Notes. Further, as a strategic response to
changes in the competitive environment, the Company may make certain pricing,
service or marketing decisions or enter into acquisitions or new ventures that
could result in a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the New Notes.
The telecommunications industry is subject to rapid and significant changes
in technology, and the effect of technological changes on the business of the
Company, such as continuing developments in DSL technology and alternative
technologies for providing high-speed communications data, cannot be
predicted. There can be no assurance that technological developments in the
telecommunications industry will not have a material adverse effect on the
competitive position of the Company. For a detailed description of the current
and potential competition of the Company, including competition from ILECs,
CMSPs, IXCs, FCLECs, ISPs, OSPs, WSDSPs, and other CLECs, see "Business--
Competition" and "--Government Regulation."
RISKS ASSOCIATED WITH ANTICIPATED GROWTH
Although the Company is currently in the early stage of deployment, rapid
growth by the Company could place a significant strain on its management,
operating and financial resources. The Company plans to substantially expand
its network in the future. There can be no assurance that the Company will be
able to add services at the rate or according to the schedule presently
planned by the Company. The development and expansion of the Company's
operations will depend upon, among other things, the Company's ability to
identify and assess markets, design an adequate Operating Support System
("OSS"), design and construct regional data centers ("RDCs"), obtain CO
collocation facilities, obtain the required government authorizations (which
allow the Company to obtain cost-based pricing from the ILECs in each of its
target regions) and enter into and renew interconnection agreements with the
respective ILECs on satisfactory terms and conditions. To grow at its desired
pace, the Company must, among other things, (i) market to and acquire
substantial customers and end-users; (ii) continue to implement and improve
its operational, financial and management information systems, including its
billing, accounts receivable and payable tracking, fixed assets and other
financial management systems; (iii) hire and train additional qualified
personnel; and (iv) continue to expand and upgrade its network infrastructure.
The Company expects the demands on its network infrastructure and technical
support resources to grow rapidly along with the Company's customer base, and
if the Company is successful in implementing its marketing strategy, it may
experience difficulties responding to demand for its services and technical
support in a timely manner and in accordance with its customers' expectations.
These demands are expected to require the addition of new management personnel
and the development of additional expertise by existing management personnel.
There can be no assurance that the Company's network, procedures or controls
will be adequate to support the Company's operations or that management will
be able to keep pace with such growth. If the Company is unable to manage
growth effectively, the Company's business, prospects, operating results,
financial condition and its ability to service and repay its indebtedness,
including the New Notes, will be materially adversely affected. See
"Management."
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SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS
The Company will require substantial additional funds for the continued
development, commercial deployment and expansion of its network. As of March
31, 1998, the Company had $131.8 million in cash and cash equivalents. From
inception until March 31, 1998, the Company incurred operating expenses of
approximately $4.8 million in the development of its business, development of
technology and operating support systems, conducting of sales and marketing
activities and establishment of its management team. In addition, the Company
has made and expects to continue to make significant capital outlays in order
to continue required development activities, commercially deploy its service
and fund operations until such time, if at all, as the Company begins to
generate positive EBITDA. The Company believes its current capital resources
will be sufficient to fund the Company's aggregate capital expenditures and
working capital requirements, including operating losses, associated with the
rollout of its initial regions. While the Company believes that its current
capital resources will be sufficient to finance its expansion into the initial
regions, it may need to secure additional financing to enter new regions or to
meet higher-than-expected subscription rates for its services. If demand for
the Company's services is less than expected, the Company may require
additional financing at an earlier date, although the Company believes it
would be able to reduce certain costs that are, to a large extent, demand-
driven, or delay its entry into various of its targeted regions. There can be
no assurance that the Company will be able to implement its rollout strategy
in a timely fashion, if at all. There can be no assurance that the Company's
current estimates of EBITDA, which will depend on numerous future factors and
conditions described elsewhere in these "Risk Factors," many of which are
outside of the Company's control, will be accurate, and it is likely that
actual results will vary materially from such estimates.
Other than the Equity Commitment, the Company has no present commitments or
arrangements assuring it of any future equity or debt financing, and there can
be no assurance that any such equity or debt financing will be available to
the Company on favorable terms or at all. In addition, the Indenture contains
certain covenants restricting the Company's ability to incur further
indebtedness, and future borrowing instruments such as credit facilities are
likely to contain similar or more restrictive covenants and could require the
Company to pledge assets as security for borrowings thereunder. In the event
that the Company is unable to obtain such additional capital or is required to
obtain it on unsatisfactory terms, the Company will be required to delay the
expansion of its business or take or forego actions that could materially
adversely affect the Company's business, prospects, operating results,
financial condition and its ability to service and repay its indebtedness,
including the New Notes. In the event that the Company is unable to generate
sufficient cash flow and is otherwise unable to obtain funds necessary to meet
required payments on its indebtedness, the Company could be in default under
the terms of the agreements governing its indebtedness, including the New
Notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON NEW AND UNCERTAIN MARKETS
The markets for high bandwidth RLAN and small- and medium-sized business
Internet access are in the early stages of development. Since these markets
are new and because current and future competitors are likely to introduce
competing services, it is difficult to predict the rate at which these markets
will grow, if at all, or whether new or increased competition will result in
market saturation. Because packet-based high-speed data communications
services using copper telephone lines is a relatively new and evolving market,
it is difficult to predict its future growth rate and size. Various providers
of high-speed data communications services are testing products from various
suppliers for various applications, and no industry standard has been broadly
adopted. Certain critical issues concerning commercial use of RLAN and
Internet access, including security, reliability, ease and cost of access and
quality of service remain unresolved and may impact the growth of such
services. ISPs represent a market for a portion of the Company's business. The
Company's ISP customers are expected to provide through their marketing
channels a portion of the Company's services to small- and medium-sized
businesses and residential Internet users. The Company plans to build
relationships with multiple ISP customers in order to gain access and provide
its services to as many ISP business and residential end-users as possible. If
the number of business and residential users of the Company's services,
provided through the ISP channel, is significantly lower than the Company's
forecast, or if the ISPs with which the Company has entered into such
arrangements are unsuccessful in competing in their own intensely competitive
markets, the Company's business,
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prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the New Notes, would be materially
adversely affected. If the markets for the services offered by the Company,
including Internet access, fail to grow, grow more slowly than anticipated or
become saturated with competitors, the Company's business, prospects,
operating results, financial condition and its ability to service and repay
its indebtedness, including the New Notes, could be materially adversely
affected. See "--Competition."
UNPROVEN NETWORK SCALABILITY AND SPEED
Due to the limited deployment of the Company's services, the ability of the
Company's DSL network to connect and manage a substantial number of online
end-users at high transmission speeds is still unknown, and the Company faces
risks related to its ability to scale its network up to its expected end-user
numbers while achieving superior performance. While peak digital data
transmission speeds across the Company's DSL network are 1.5 Mbps downstream,
the actual data transmission speeds over the Company's network could be
significantly slower and will depend on a variety of factors, including the
type of DSL technology deployed, the distance an end-user is located from a
CO, the configuration of the telecommunications line being used, the existence
of analog load coils, the number of bridged taps, the gauge of the copper
wires and the presence and severity of interfering transmissions on nearby
lines. As a result, there can be no assurance that the Company's network will
be able to achieve and maintain the highest possible digital transmission
speed. The Company's failure to achieve or maintain high-speed digital
transmissions would significantly reduce customer and end-user demand for its
services and have a material adverse effect on its business, prospects,
operating results, financial condition and its ability to service and repay
its indebtedness, including the New Notes. See "Business--Network
Architecture."
DIGITAL COMMUNICATIONS SIGNAL COMPATIBILITY AND POTENTIAL NETWORK INTERFERENCE
Certain technical laboratory tests and field experience indicate that the
DSL technology the Company and others are using may cause interference with
and be interfered with by other signals present in an ILEC's copper plant,
usually with lines in close proximity, while other laboratory tests indicate
that this equipment does not cause interference. Interference, if present,
could cause degradation of performance of the Company's services or render the
Company unable to offer its services on selected lines. The amount and extent
of such interference will depend on the condition of the ILEC's copper plant
and the number and distribution of DSL and other signals in such plant and
cannot now be ascertained. When interference occurs it is difficult to detect,
the procedures to resolve interference issues between CLECs and an ILEC are
still being developed and there is no assurance that these procedures will be
effective. Although the Company has agreed to interference resolution
procedures with certain ILECs, there can be no assurance that the Company will
successfully negotiate similar procedures with other ILECs in future
interconnection agreements or in renewals of existing interconnection
agreements, or that the ILECs will not unilaterally take action to resolve
interference issues to the detriment of the Company's services. Further, this
degradation of performance, if widespread, would have a material adverse
effect on the Company's reputation, brand image, service quality, and customer
satisfaction and retention. As such, network interference could have a
material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay its
indebtedness, including the New Notes.
RISK OF SYSTEM FAILURE
The Company's operations are dependent upon its ability to support its
highly complex network infrastructure and avoid damages from fires,
earthquakes, floods, power losses, telecommunications failures, network
software flaws, transmission cable cuts and similar events. The occurrence of
a natural disaster or other unanticipated problem at the Company's Network
Operations Center ("NOC") or any of the Company's RDCs could cause
interruptions in the services provided by the Company. Additionally, failure
of an ILEC or other service provider, such as other CLEC service providers, to
provide communications capacity required by the Company, as a result of a
natural disaster, operational disruption or any other reason, could cause
interruptions in the services provided by the Company. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, prospects, operating results,
financial condition and its ability to service and repay its indebtedness,
including the New Notes. See "Business--Network Architecture."
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SECURITY RISK IN THE NETWORK
Despite the implementation of security measures, the Company's network may
be vulnerable to unauthorized access, computer viruses and other disruptive
problems. Corporate networks and ISPs have in the past experienced, and may in
the future experience, interruptions in service as a result of accidental or
intentional actions of Internet users, current and former employees and
others. Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company's
customers and such customers' end-users, which might result in liability of
the Company to its customers and also might deter potential customers.
Although the Company intends to implement security measures that are standard
within the telecommunications industry, as well as newly Company-developed
security measures, the Company has not yet done so and there can be no
assurance that the Company will implement such measures in a timely manner or
to the degree that may be compatible with its various customers' expectations,
or that if and when implemented, such measures will not be circumvented.
Eliminating computer viruses and alleviating other security problems may
require interruptions, delays or cessation of service to the Company's
customers and such customers' end-users, which could have a material adverse
effect on the Company's business, prospects, operating results, financial
condition and its ability to service and repay its indebtedness, including the
New Notes. See "Business--Network Architecture."
DEPENDENCE UPON SUPPLIERS AND LIMITED SOURCES OF SUPPLY
The Company relies and will continue to rely on outside parties to
manufacture its network equipment, such as digital subscriber line access
multiplexers ("DSLAMs"), customer premise equipment ("CPE") modems, network
routing and switching hardware, network management software, systems
management software and database management software. As the Company signs
additional service contracts, the Company believes there may need to be a
significant ramp-up in the amount of manufacturing by third parties in order
for the Company to meet its contractual commitments. There can be no assurance
that these manufacturers will be able to meet the Company's manufacturing
needs in a satisfactory and timely manner or that the Company can obtain
additional manufacturers when and if needed. Although the Company has
identified alternative suppliers for each of these technologies and it is not
constrained to use the same DSLAM or CPE vendor in multiple regions, it could
take a significant period of time to establish relationships with alternative
suppliers for each of these technologies and substitute their technologies
into the Company's network. The Company's reliance on third-party
manufacturers involves a number of additional risks, including the absence of
guaranteed capacity and reduced control over delivery schedules, quality
assurance, production yields and costs. The loss of any of the Company's
relationships with these suppliers could have a material adverse effect on the
Company's business, prospects, operating results, financial condition and its
ability to service and repay its indebtedness, including the New Notes. See
"Business--Network Architecture."
RELIANCE ON KEY PERSONNEL
The Company's performance is dependent on the performance of its officers
and key employees, most of whom have worked together for only a short period
of time. Given the Company's early stage of deployment, the Company is
dependent on its ability to retain and motivate high quality personnel,
especially its management. The Company does not have "key person" life
insurance policies on any of its employees. There can be no assurance that key
personnel will continue to be employed by the Company or that the Company will
be able to attract and retain qualified personnel in the future. The Company's
future success also depends on its continuing ability to identify, hire, train
and retain other highly qualified technical, sales, marketing and managerial
personnel. Competition for such qualified personnel is intense, particularly
in software development, network engineering and product management. There can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical, sales, marketing and managerial personnel in
the future. The inability to attract and retain its officers and key employees
and the necessary technical, sales, marketing and managerial personnel could
have a material adverse effect upon the Company's business, prospects,
operating results, financial condition and its ability to service and repay
its indebtedness, including the New Notes. See "Business--Employees" and
"Management."
20
<PAGE>
UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON THE COMPANY'S SERVICES
Telecommunications providers pay a variety of surcharges and fees on their
gross revenues from interstate services and intrastate services. Interstate
surcharges include Federal Universal Service Fees, Common Carrier Regulatory
Fees and TRS Fund fees. In addition, state regulators impose similar
surcharges and fees on intrastate services. The division of the Company's
services between interstate services and intrastate services is a matter of
interpretation and may in the future be contested by the FCC or relevant state
commission authorities. A change in the characterization of the jurisdiction
of its services could cause the Company's payment obligations pursuant to the
relevant surcharges to increase. In addition, pursuant to periodic revisions
by state and federal regulators of the applicable surcharges, the Company may
be subject to increases in the surcharges and fees currently paid.
GOVERNMENT REGULATION AND CURRENT INDUSTRY LITIGATION
The services offered by the Company are subject to federal, state and local
government regulation. The 1996 Act, which became effective in February 1996,
introduced widespread changes in the regulation of the telecommunications
industry, including the digital access services segment in which the Company
operates. The 1996 Act eliminates many of the pre-existing legal barriers to
competition in the telecommunications services business and sets basic
criteria for relationships between telecommunications providers.
Among other things, the 1996 Act removes barriers to entry in the local
exchange telephone market by preempting state and local laws that restrict
competition by providing competitors interconnection, access to UNEs and
retail services at wholesale rates. The FCC's primary rules interpreting the
1996 Act, which were issued on August 8, 1996 (the "FCC Order"), have been
reviewed by the U.S. Court of Appeals for the Eighth Circuit, which has
overruled certain of the FCC's pricing and nondiscrimination regulations and
upheld the FCC's definition of UNEs and OSS rules. The Company has entered
into competitive interconnection agreements using the federal guidelines
established in the FCC's interconnection order, which agreements remain in
effect notwithstanding the overruling of certain of the FCC's regulations. The
Eighth Circuit's overruling of the FCC Order has been appealed to the U.S.
Supreme Court, which has agreed to decide the case. The U.S. Supreme Court's
ruling, expected in 1999, could have a material adverse effect on the
Company's business, prospects, operating results, financial condition and its
ability to service and repay its indebtedness, including the New Notes.
No assurance can be given that changes to current regulations or the
adoption of new regulations by the FCC or state regulatory authorities or
legislative initiatives or court decisions would not have a material adverse
effect on the Company's business, prospects, operating results, financial
condition and its ability to service and repay its indebtedness, including the
New Notes. See "Business--Government Regulations" and "--Legal Proceedings."
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON ACCESS TO SUBSIDIARY CASH FLOW
The Company is a holding company, conducting substantially all of its
operations through its Subsidiaries. As of March 31, 1998, the Company had
approximately $133.2 million of long-term obligations (including current
portion but net of the Debt Discount). The Indenture permits the Company and
its Subsidiaries to incur substantial additional indebtedness in the future.
See "Description of the Old Notes--Certain Covenants." In addition, the New
Notes will not be guaranteed by any of the Company's Subsidiaries, and,
consequently, the New Notes will be effectively subordinated in right of
payment to all indebtedness and other liabilities of the Company's
Subsidiaries, including subordinated indebtedness and trade payables.
In addition, in the event of any distribution or payment of the assets of
the Company in any foreclosure, dissolution, winding-up, liquidation or
reorganization, holders of any secured indebtedness will have a secured claim
to the assets of the Company that constitute their collateral, prior to the
satisfaction of any unsecured claim from such assets. The Indenture permits
the incurrence of indebtedness secured by assets of the Company and its
Subsidiaries. In the event of a bankruptcy, liquidation or reorganization of
the Company, Holders of the New Notes will be entitled to payment from the
remaining assets of the Company only after payment of, or provision for, all
secured indebtedness. In any of the foregoing events, there can be no
assurance that there would be sufficient assets to pay amounts due on the New
Notes.
Because the Company conducts a substantial portion of its operations through
subsidiaries, the Company's cash flow and its ability to service its
indebtedness, including the New Notes, will depend upon the cash flow of
21
<PAGE>
its Subsidiaries and payments of funds by those Subsidiaries to the Company in
the form of repayment of loans, dividends or otherwise. These Subsidiaries are
separate and distinct legal entities with no legal obligation, contingent or
otherwise, to pay any amounts due pursuant to the New Notes or to make any
funds available therefor whether in the form of loans, dividends or otherwise.
In addition, the Indenture permits these Subsidiaries to incur indebtedness or
become parties to financing arrangements, which may contain limitations on the
ability of such Subsidiaries to pay dividends or to make loans or advances to
the Company. In certain circumstances, such limitations are permitted under
the Indenture. Further, any holders of indebtedness (including subordinated
indebtedness and trade payables) of Subsidiaries of the Company would be
entitled to repayment of such indebtedness from the assets of the affected
Subsidiaries before such assets were made available for distribution to the
Company. See "Description of the Old Notes--Certain Covenants."
In the event that the Company is unable to generate sufficient cash flow or
is otherwise unable to obtain funds necessary to meet required payments of
principal, premium, if any, and interest on its indebtedness, including the
New Notes, the Company would be in default under the terms of the agreements
governing such indebtedness, including the Indenture. In the event of such
default, the holders of such indebtedness could elect to declare all of the
funds borrowed thereunder to be due and payable together with accrued and
unpaid interest. If such an acceleration were effected and the Company did not
have sufficient funds to pay the accelerated indebtedness, the holders could
initiate foreclosure or other enforcement action against the Company. In any
such proceeding, the holders of the Company's senior indebtedness would be
entitled to receive payment of their claims prior to any distributions to
Holders of the New Notes. In addition, any holders of secured indebtedness of
the Company and its Subsidiaries would have certain rights to repossess,
foreclose upon and sell the assets securing such indebtedness. Any such
circumstances would materially adversely affect the market value of the New
Notes and the Company's ability to pay principal, premium, if any, and
interest on the New Notes.
CONTROL BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The Company's executive officers and directors and the Investors together
beneficially own over 90% of the outstanding Common Stock (assuming conversion
of all outstanding Preferred Stock into Common Stock) of the Company. In
addition, these stockholders have agreed to vote their shares of Common Stock
and Preferred Stock at any election of directors so as to fix the number of
directors of the Company at seven and to elect as members of the Board (i)
three persons designated by the Investors, (ii) two persons who are senior
officers of the Company (currently only one member of the Board is a senior
officer of the Company), (iii) one person mutually designated by Warburg and
the Company and (iv) one other person. Accordingly, these stockholders will be
able to determine the composition of the Company's Board of Directors, will
retain the voting power to approve all matters requiring stockholder approval
and will continue to have significant influence over the affairs of the
Company. This concentration of ownership could have the effect of delaying or
preventing a change in control of the Company. See "Management," "Principal
Stockholders" and "Description of Capital Stock--Board Representation and
Voting Agreement."
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Old Notes. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer, including any Holder
which is an "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the Company which cannot tender its Old Notes in the Exchange Offer,
will continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of
securities, provided that an opinion of counsel is furnished to the Company
that such an exemption is available. These restrictions may limit the trading
market and price for the Old Notes.
ABSENCE OF A PUBLIC MARKET FOR THE NEW NOTES AND NO ASSURANCE OF ACTIVE
TRADING MARKET
The New Notes are being offered to the Holders of the Old Notes. Prior to
this Exchange Offer, there was no existing trading market for the Old Notes
and there were no existing New Notes. The Company does not
22
<PAGE>
intend to apply for listing of the New Notes on any securities exchange or on
the Nasdaq National Market. Although the New Notes will be eligible for
trading in the PORTAL Market, the New Notes may trade at a discount from their
initial offering price, depending upon prevailing interest rates, the market
for similar securities, the Company's performance and other factors. In
connection with the Old Note Issuance, the Company was advised by the Initial
Purchasers that they intended to make a market in the Old Notes following the
Old Note Issuance; however, the Initial Purchasers are not obligated to do so
and any such market-making activities may be discontinued at any time without
notice. Therefore, there can be no assurance that an active market for the New
Notes will develop, either prior to or after performance of the Company's
obligations under the Registration Rights Agreements. See "Description of the
Old Notes--Registration Rights; Additional Interest" and "Plan of
Distribution."
FRAUDULENT CONVEYANCE RISKS
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if the Company, at the time of
issuance of, or making any payment in respect of, the New Notes, (a)(i) was or
was rendered insolvent thereby, was engaged or about to engage in a business
or transaction for which its assets constituted unreasonably small capital, or
intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they matured and (ii) the Company received less than
reasonably equivalent value or fair consideration for such issuance or (b) the
Company issued the New Notes or made any payment thereunder with intent to
hinder, defraud or delay any of its creditors, the obligations of the Company
under some or all of the New Notes could be voided or held to be unenforceable
by a court, the obligations of the Company under the New Notes could be
subordinated to claims of other subordinated creditors, or the New Note
Holders could be required to return payments already received. In particular,
if the Company were to cause a Subsidiary to pay a dividend in order to enable
the Company to make payments in respect of the New Notes, and such transfer
were deemed a fraudulent transfer, the New Note Holders could be required to
return the payment. In any of the foregoing cases, there could be no assurance
that the Holders would ultimately recover the amounts owing under the New
Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in any such case. Generally, however, the Company would
be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at a fair valuation, if it had
unreasonably small capital to conduct its business, or if the present fair
salable value of its assets were less than the amount that would be required
to pay the probable liability on its existing debts, including contingent
liabilities, as they become absolute and matured. The Company believes that it
will not be insolvent at the time of or as a result of the Exchange Offer,
that it will not engage in a business or transaction for which its remaining
assets constitute unreasonably small capital and that it did not and does not
intend to incur or believe that it will incur debts beyond its ability to pay
such debts as they mature. There can be no assurance, however, that a court
passing on such questions would agree with the Company's analysis.
The Indenture provides that, under certain circumstances, Subsidiaries of
the Company will be required to guarantee the obligations of the Company under
the Indenture and the New Notes. In the event any Subsidiary enters into such
a guarantee, if bankruptcy or insolvency proceedings were initiated by or
against that Subsidiary within 90 days (or, possibly, one year) after that
Subsidiary issued a guarantee, or if that Subsidiary incurred obligations
under its guarantee in anticipation of insolvency, all or a portion of the
guarantee could be avoided as a preferential transfer under federal bankruptcy
or applicable state law. In addition, a court could require Holders of the New
Notes to return all payments made within any such 90-day (or, possibly, one
year) period as preferential transfers.
ORIGINAL ISSUE DISCOUNT
The New Notes will be treated as issued with original issue discount for
U.S. federal income tax purposes. Consequently, purchasers of the New Notes
generally will be required to include amounts in gross income for U.S. federal
income tax purposes in advance of receipt of the cash payments to which the
income is attributable. Furthermore, the New Notes will be subject to the high
yield discount obligation rules, which will defer and will, in part, eliminate
the Company's ability to deduct for U.S. federal income tax purposes the
original issue discount
23
<PAGE>
attributable to the New Notes. Accordingly, the Company's after-tax cash flow
might be less than if the original issue discount on the New Notes was
deductible when it accrued. See "Certain Federal Income Tax Considerations"
for a more detailed discussion of the U.S. federal income tax consequences for
the Company and the beneficial owners of the New Notes resulting from their
purchase, ownership and disposition of the New Notes.
If a bankruptcy case were commenced by or against the Company under the
Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), after the
issuance of the New Notes, the claim of a Holder with respect to the principal
amount thereof may be limited to an amount equal the sum of (i) the initial
offering price and (ii) that portion of the original issue discount that is
not deemed to constitute "unmatured interest" for purposes of the Bankruptcy
Code. Any original issue discount that was not amortized as of the date of any
such bankruptcy filing would constitute "unmatured interest."
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in Section 27A of
the Securities Act and Section 21E of the Exchange Act), which can be
identified by the use of forward-looking terminology such as "estimates,"
"projects," "anticipates," "expects," "intends," "believes," or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties; provided,
however, that the safe harbor provisions of Section 27A and Section 21E are
not applicable to any "forward looking" statements made in connection with the
initial issuance of New Notes pursuant to this Prospectus, although such
provisions are applicable to such statements made in connection with the
resales of New Notes. These forward-looking statements, such as the Company's
plans to expand its existing network or to commence service in new areas, the
market opportunity presented by the Company's target regions, and statements
regarding development of the Company's business, the estimate of market sizes
and addressable markets for the Company's services and products, the Company's
anticipated capital expenditures, the effect of regulatory reform and other
statements contained in this Prospectus regarding matters that are not
historical facts, are only estimates or predictions and cannot be relied upon.
No assurance can be given that future results will be achieved; actual events
or results may differ materially as a result of risks facing the Company or
actual results differing from the assumptions underlying such statements. Such
risks and assumptions include, but are not limited to, the Company's ability
to successfully market its services to current and new customers, generate
customer demand for its services in the particular regions where it plans to
market services, achieve acceptable pricing for its services, access regions
and negotiate suitable interconnection agreements with the ILECs, all in a
timely manner, at reasonable costs and on satisfactory terms and conditions,
as well as regulatory, legislative and judicial developments that could cause
actual results to vary materially from the future results indicated, expressed
or implied in such forward-looking statements. All written and oral forward-
looking statements made in connection with this Prospectus which are
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the "Risk Factors" and other cautionary
statements included in this Prospectus. The Company disclaims any obligation
to update information contained in any forward-looking statement.
YEAR 2000 ISSUES
The Company has determined that its systems do not require updating to
continue to function properly beyond 1999. The Company believes that adequate
resources have been allocated for this purpose and does not expect to incur
significant expenditures to address this issue. However, there can be no
assurance that the Company will identify all Year 2000 problems in its systems
in advance of their occurrence or that the Company will be able to
successfully remedy any problems that are discovered. The expenses of the
Company's efforts to address such problems, or the expenses or liabilities to
which the Company may become subject as a result of such problems, could have
a material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay
indebtedness, including the New Notes. In addition, the revenue stream and
financial stability of existing customers may be adversely impacted by Year
2000 problems, which could cause fluctuations in the Company's revenues and
operating profitability.
24
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered in the
Exchange Offer. In consideration for issuing the New Notes as contemplated in
this Prospectus, the Company will receive in exchange Old Notes in like
principal amount at maturity, the form and terms of which are the same in all
material respects as the form and terms of the New Notes except that the New
Notes (i) will have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer applicable to the Old
Notes and (ii) will not be entitled to certain registration or other rights
under the Registration Rights Agreement, including the provision in the
Registration Rights Agreement for additional interest of up to 2.0% per annum
upon failure by the Company to consummate the Exchange Offer. The Old Notes
surrendered in exchange for New Notes will be retired and canceled and cannot
be reissued. Accordingly, issuance of the New Notes will not result in any
increase in the indebtedness of the Company.
The net proceeds to the Company from the Old Note Issuance and the sale of
equity pursuant to the Equity Commitment and the Stock Purchase were
approximately $146.6 million, net of the Initial Purchasers' discount and
other estimated expenses payable by the Company incurred in connection with
the Old Note Issuance, the Equity Commitment and the Stock Purchase. The
Company expects to use the net proceeds from the Old Note Issuance to fund the
expenditures incurred in the continuing deployment of the Company's services
in the San Francisco Bay Area and the launch of the Company's services in
other regions, for expenses associated with continued development and sales
and marketing activities, to fund operating losses and for general corporate
purposes. The Company believes that these net proceeds will be sufficient to
fund the Company's aggregate capital expenditures and working capital
requirements, including operating losses, associated with the rollout of its
initial regions. The amounts actually expended by the Company for these
purposes will vary significantly depending upon a number of factors, including
future revenue growth, if any, capital expenditures and the amount of cash
generated by the Company's operations. Additionally, if the Company determines
it would be in its best interest, the Company may increase or decrease the
number, selection and timing of entry of its targeted regions. Accordingly,
the Company's management will retain broad discretion in the allocation of
such net proceeds. Although the Company may use a portion of the net proceeds
to pursue possible acquisitions of businesses, technologies or products
complementary to those of the Company in the future, there are no present
understandings, commitments or agreements with respect to any such
acquisitions. Pending use of such net proceeds for the above purposes, the
Company will be required to invest such funds in Cash Equivalents (as defined)
to the extent permitted by the Indenture. See "Risk Factors--Limited Operating
History and Early Stage of Deployment," "--Future Expected Losses," "--
Potential Fluctuations in Operating Results," "--Substantial Future Capital
Requirements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
intend to pay any dividends on its capital stock in the foreseeable future. In
addition, the terms of the Indenture restrict the Company's ability to pay
dividends on, or make distributions in respect of, its capital stock. See
"Description of the Old Notes--Certain Covenants."
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998. This table should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C>
Cash and cash equivalents........................... $131,758
========
LONG-TERM OBLIGATIONS:
Capital lease obligations (including current por-
tion)............................................ $ 722
13 1/2% Senior Discount Notes due 2008, net....... 132,518
--------
Total long-term obligations (including current
portion)....................................... 133,240
--------
STOCKHOLDERS' EQUITY(1):
Preferred Stock, $0.001 par value; 25,000,000
shares authorized, 12,140,098 issued and
outstanding(2)................................... 12
Common Stock, $0.001 par value; 50,000,000 shares
authorized; 7,576,136 shares issued and outstand-
ing(3)........................................... 8
Additional paid-in capital........................ 14,464
Accumulated deficit............................... (4,854)
--------
Total stockholders' equity...................... 9,630
--------
Total capitalization.......................... $142,870
========
</TABLE>
- --------
(1) The authorized shares reflect an amendment and restatement of the
Certificate of Incorporation, filed in May 1998, which gave effect to a
two-for-one stock split and an increase in the authorized shares of Common
Stock to 50,000,000 and an increase in the authorized shares of Preferred
Stock to 25,000,000.
(2) Does not include 3,842,762 shares of Series C Preferred Stock and warrants
to purchase an additional 3,350,000 shares of Series C Preferred Stock
which are issuable pursuant to the Equity Commitment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
(3) Excludes 3,396,000 shares of Common Stock reserved for issuance upon
exercise of outstanding options as of March 31, 1998, and 4,569,176 shares
reserved for issuance upon exercise of the outstanding warrants. See
"Description of Capital Stock."
26
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein. The consolidated
statement of operations data for the year ended December 31, 1997, and the
consolidated balance sheet data at December 31, 1997 are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements and
the related Notes thereto included herein. The consolidated statement of
operations data for the three months ended March 31, 1998, and the
consolidated balance sheet data at March 31, 1998 are derived from unaudited
consolidated financial statements that include, in the opinion of management,
all adjustments, consisting of only normal, recurring adjustments, necessary
for a fair presentation of the information set forth therein. The consolidated
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of future results. For the three months ended March 31,
1997, the Company had no revenues and total expenses were not significant.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, 1998
1997 (UNAUDITED)
------------------------ ------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS:
Revenues.............. $ 26 $ 186
Operating expenses:
Network and product
costs.............. 54 203
Sales, marketing,
general and
administrative..... 2,374 1,944
Depreciation and
amortization....... 70 164
------------------------ ------------------------
Total operating
expenses......... 2,498 2,311
------------------------ ------------------------
Loss from
operations......... (2,472) (2,125)
Interest income
(expense):
Interest income..... 167 435
Interest expense.... (12) (847)
------------------------ ------------------------
Net interest...... 155 (412)
------------------------ ------------------------
Net loss.............. $ (2,317) $ (2,537)
======================== ========================
Net loss per common
share................ $ (0.32) $ (0.33)
Weighted average
shares used in
computing net loss
per share............ 7,344,276 7,575,803
Ratio of earnings to
fixed charges(1)..... $ -- $ --
Deficiency of earnings
to cover fixed
charges(1)........... 2,317 2,537
OTHER DATA:
EBITDA(2)............. (2,402) (1,961)
CASH FLOW DATA:
Provided by (used for)
operating
activities........... $ (1,895) $ 521
Provided by (used for)
investing
activities........... (2,494) (3,802)
Provided by (used for)
financing
activities........... 8,767 130,661
<CAPTION>
AS OF
AS OF MARCH 31, 1998
DECEMBER 31, 1997 (UNAUDITED)
------------------------ ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents.......... $ 4,378 $131,758
Net property and
equipment............ 3,014 6,652
Total assets.......... 8,074 145,757
Long-term obligations,
net, including
current portion...... 783 133,240
Total stockholders'
equity............... 6,498 9,630
</TABLE>
27
<PAGE>
- --------
(1) For purposes of determining the ratio of earnings to fixed charges, and
the deficiency of earnings to cover fixed charges, "earnings" included
pre-tax loss from operations adjusted for fixed charges. "Fixed charges"
include interest expense, capitalized interest, amortization of debt
discount and financing costs, and that portion of rent expense which the
Company believes to be representative of interest.
(2) EBITDA consists of net loss excluding net interest, depreciation and
amortization. EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. EBITDA is
presented to enhance an understanding of the Company's operating results
and should not be construed as an alternative to operating income, as
determined in accordance with generally accepted accounting principles, as
an indicator of the Company's operating performance or to cash flows from
operating activities, as determined in accordance with generally accepted
accounting principles, as a measure of liquidity. EBITDA as calculated by
the Company may be calculated differently than EBITDA for other companies.
See the Company's Consolidated Financial Statements and the related Notes
thereto contained elsewhere in this Prospectus.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in the forward-looking statements as a result of
certain factors including, but not limited to, those discussed in "Risk
Factors," "Business" and elsewhere in this Prospectus. The Company disclaims
any obligation to update information contained in any forward-looking
statement.
OVERVIEW
The Company commenced the buildout of its network in the San Francisco Bay
Area in July 1997 and launched its services in this region in December 1997.
The Company plans to expand its operations to five additional geographic
regions during the next 18 months and to complete additional deployment in the
San Francisco Bay Area. The Company expects to deploy its network and
introduce its services in these initial regions by the end of the first
quarter of 1999. The Company expects that it will continue to generate
substantial operating losses and negative cash flow for at least the next
several years. The Company believes that its current capital resources will be
sufficient to fund the Company's aggregate capital expenditures and working
capital requirements, including operating losses, associated with the rollout
of its initial regions.
For each region, the Company has targeted three market segments: business
RLAN, business Internet and consumer Internet. Business RLAN services are sold
directly to enterprise customers and business Internet and consumer Internet
services are sold indirectly through ISPs. A key determinant of the Company's
revenues will be its service penetration into the addressable portion of these
market segments.
The Company derives revenue from (i) monthly recurring service charges for
connections from the end-user to the Company's facilities and for backhaul
services from the Company's facilities to the enterprise or ISP customer, (ii)
service activation, installation and other non-recurring charges and (iii) the
sale of CPE which the Company provides to its customers due to the general
unavailability of CPE through retail channels. The current prices for the
Company's services range from $90 per month for TeleSpeed 144 to $195 per
month for TeleSpeed 1.1 and TeleSpeed 1.5, before volume discounts. The
Company expects prices for the major components of both recurring and non-
recurring charges to decrease each year. The Company also expects to derive
revenues from the sale of CPE which the Company provides to its customers due
to the general unavailability of CPE through retail channels; the Company
believes these revenues will decline over time as CPE becomes more generally
available. The Company expects that the prices charged to customers for CPE
will decrease each year.
The Company's network and product costs include costs of recurring and
nonrecurring circuit fees charged to the Company by ILECs and other CLECs,
including installation, activation, monthly line costs, maintenance and repair
of circuits between the Company's DSLAMs and its RDCs, customer backhaul, and
subscriber lines. Other costs the Company incurs include those for materials
used by the Company in installation and the servicing of customers and end-
users, and the cost of CPE. As the Company's end-user base grows, the largest
element of network and product cost is expected to be the ILECs' charges for
the Company's leased copper lines.
The Company's financial performance will vary from region to region due to
factors such as the size of the addressable markets in a region, the number of
COs and the cost of necessary infrastructure to service a region, the timing
of market entry and the cost to access the ILEC's UNEs.
As the Company continues to develop its network within regions, positive
EBITDA from more developed regions is expected to be offset partially or
completely by negative EBITDA from less developed regions, costs associated
with entering new regions and corporate overhead. This trend is expected to
continue until the Company has a sufficiently large customer and end-user base
to absorb operating costs of new regions or the Company ceases entering new
regions.
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The development and expansion of the Company's business will require
significant expenditures. The principal capital expenditure incurred during
the buildout phase of any region involves the procurement, design and
construction of the Company's CO collocation cages, end-user DSL line cards,
and expenditures for other elements of the Company's network design, which
includes an RDC in each region and the construction of the NOC. The Company
expects to deploy its network and launch its services in its initial regions
by the end of the first quarter of 1999. The number of targeted COs in a
region varies from approximately 40 to 150. Following the buildout of its
collocation facilities, the major portion of the Company's capital
expenditures is the purchase of DSL line cards to support incremental
subscribers. Network expenditures will continue to increase with the number of
end-users. However, once an operating region is fully built out, a substantial
majority of the regional capital expenditures will be tied to incremental
customer and end-user growth. In addition to developing the Company's network,
the Company will use its capital for marketing its services, acquiring
enterprise and ISP customers, and funding its customer care and field service
operations.
The Company believes that it may take several months from the time a
customer is first contacted to the point at which it will be able to book and
invoice a customer for its services. In the case of enterprise customers, this
long sales cycle is partially due to the technical requirements that must be
satisfied prior to a customer's information technology manager allowing the
Company's service to be widely available to the customer's employees. In the
case of ISP customers, this sales cycle will depend on the time it takes the
ISP to market and sell the Company's services to its subscribers.
The Company has experienced operating losses and generated negative
operating cash flow since its inception and, as of March 31, 1998, had an
accumulated deficit of $4.9 million. The Company currently intends to increase
its capital expenditures as well as its sales and marketing expenditures in
order to expand its network to support additional subscribers in existing and
future markets. As a result, the Company expects to incur substantial
additional net losses for at least the next several years.
HISTORICAL RESULTS OF OPERATIONS
Since its inception on October 7, 1996, the Company has engaged principally
in the development of the technology and activities related to the
commencement of its business operations. Accordingly, the Company's historical
results of operations are not indicative of, and should not be relied upon as
an indicator of, the future performance of the Company.
The Company's operations prior to December 1997 were limited principally to
the development of the technology and activities related to the commencement
of its business operations. As a result, the Company's revenues and
expenditures prior to such period are not indicative of anticipated revenues
which may be attained or expenditures which may be incurred by the Company in
future periods. The Company did not have any revenue until the fourth quarter
of 1997. As a result, any comparison of the three month period ended March 31,
1998 with the three month period March 31, 1997 is not meaningful.
Revenues
The Company commercially introduced its services in December 1997. Revenues
were first recognized in October 1997 from its services. Revenues were
approximately $26,000 for fiscal 1997 and approximately $186,000 for the
quarter ended March 31, 1998. The Company plans to enter additional regions
and to significantly increase sales activity throughout 1998, and believes
this will result in significantly greater revenues. Revenues may fluctuate
based on factors including the success and timing of deployment, the Company's
success in obtaining and retaining customers and pricing of the Company's
services.
Network and Product Costs
Total Network and Product Costs were approximately $54,000 for fiscal 1997
and approximately $203,000 for the quarter ended March 31, 1998. These costs
consisted of monthly line costs between the Company's COs
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<PAGE>
and its San Francisco Bay Area RDC and customer and subscriber line
installation and monthly service costs charged to the Company by the ILECs. A
small portion of Network and Product Costs consists of the cost associated
with the CPE acquired for resale to the Company's customers. The Company
expects line costs to increase significantly during 1998 due to increased
sales activity and expected revenues as discussed above.
Sales, Marketing, General and Administrative Expenses
Total Sales, Marketing, General and Administrative expenses were
approximately $2.4 million for fiscal 1997 and consisted primarily of salaries
and related expenses for the development of the Company's business, technology
and software of $241,000, and expenses of $190,000 for the establishment of
its management team, of $231,000 for the development of corporate
identification, promotional and advertising materials and of $1,710,000 for
the commencement of its operations. These expenses were approximately $1.9
million for the quarter ended March 31, 1998 and consisted of salaries and
expenses for the continuing development of the Company's technology and
software of $131,000, of $212,000 for additional recruiting costs, of $122,000
for the further development of corporate identification, promotional and
advertising materials and of $1,479,000 for indirect costs related to
operations. Sales, Marketing, General and Administrative expenses are expected
to significantly increase as the Company expands its business.
Depreciation and Amortization
Depreciation and Amortization include: (i) depreciation of network
infrastructure equipment, (ii) depreciation of information systems, furniture
and fixtures, (iii) amortization of improvements to COs, RDC and NOC
facilities and corporate facilities, (iv) amortization of software and (v)
amortization of deferred financing fees. Depreciation and Amortization was
approximately $70,000 in fiscal 1997 and approximately $164,000 in the quarter
ended March 31, 1998 and consisted primarily of depreciation costs for CO and
RDC improvements and network equipment placed in service in late 1997, for
information systems, office equipment, furniture and fixtures placed in
service throughout 1997 and amortization of leasehold improvements at
corporate facilities. The Company expects Depreciation and Amortization
expense to increase significantly as the Company increases its capital
expenditures to expand its network.
Interest Income and Expense
Interest Income and Expense consists primarily of interest income on the
Company's cash balance and interest expense associated with the Company's
debt. For fiscal 1997, net interest was approximately $155,000, which was
primarily attributable to the interest income earned from the proceeds raised
in the Company's Series B Preferred Stock financing in July 1997. Interest
income for the quarter ended March 31, 1998, was approximately $435,000 and
consisted of interest earned from investing the proceeds from the issuance of
equity and debt securities until such proceeds are needed for operating
expenses and capital expenditures. Interest expense for the quarter ended
March 31, 1998, was approximately $847,000 and consisted primarily of interest
on the Company's debt, principally the Old Notes issued on March 11, 1998, and
capital lease obligations. The Company expects interest expense to increase
significantly as a result of the issuance of the Old Notes in March 1998.
Income Taxes
Income taxes will consist of federal, state and local taxes, when
applicable. The Company expects significant consolidated net losses for the
foreseeable future which should generate net operating loss ("NOL")
carryforwards. However, utilization of NOLs is subject to substantial annual
limitations. In addition, income taxes may be payable during this time due to
operating income in certain tax jurisdictions. Once the Company achieves
operating profits and the NOLs have been exhausted or have expired, the
Company may experience significant tax expense. The Company recognized no
provision for taxes as it operated at a loss throughout 1997 and through the
quarter ended March 31, 1998.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required substantial capital investment for
the procurement, design and construction of the Company's CO collocation
cages, the purchase of telecommunications equipment and the design and
development of the Company's networks. Capital expenditures were approximately
$3.8 million for the first three months of 1998. The Company expects it will
continue to have substantial capital requirements in connection with the
purchase of infrastructure equipment necessary for the development and
expansion of its network and the development of new markets.
Since inception, the Company has financed its operations primarily through
private placements of $9.9 million of equity securities, $831,000 of lease
financings and $129.6 million in net proceeds raised from the Old Note
Issuance. As of March 31, 1998, the Company had an accumulated deficit of $4.9
million, and cash and cash equivalents of $131.8 million. In addition, in
February 1998, the Company entered into a Series C Preferred Stock and Warrant
Subscription Agreement (the "Subscription Agreement") with certain of its
investors (the "Series C Investors") in connection with the Equity Commitment
pursuant to which the Series C Investors have unconditionally agreed to
purchase an aggregate of 3,842,762 shares of Series C Preferred Stock and
warrants to purchase an aggregate of 3,153,000 shares of Series C Preferred
Stock (the "Series C Warrants") for an aggregate purchase price of
$16.0 million at a date to be determined by the Company but no later than
March 11, 1999. The Company agreed to either call the Equity Commitment or to
complete an alternate equity financing of at least $16.0 million by March 11,
1999. Also, pursuant to this Subscription Agreement, Intel invested $1.0
million of additional equity capital concurrently with the closing of the Old
Note Issuance. In April, the parties amended the Subscription Agreement to
provide for the assignment by Warburg and Crosspoint of their obligations to
invest $100,000 of the $16.0 million Equity Commitment to a director of the
Company. As a result of this amendment, Warburg and Crosspoints's obligations
were reduced to an aggregate of $15.9 million. See "Certain Relationships and
Related Transactions" and Note 8 of "Notes to Consolidated Financial
Statements."
Net cash used in the Company's operating activities was approximately $1.9
million in fiscal 1997. The net cash used for operations during this period
was primarily due to net losses and increases in current assets, offset by
increases in accounts payable and accrued liabilities. Net cash provided by
operating activities was approximately $0.5 million for the quarter ended
March 31, 1998. The net cash provided by operations during this period was
primarily due to increases in accounts payable and accrued liabilities offset
by increases in current assets and net losses adjusted for non-cash items. Net
cash used by the Company for acquisitions of property and equipment was $2.3
million during fiscal 1997 and $3.8 million during the quarter ended March 31,
1998. Net cash provided by financing activities for fiscal 1997 was $8.8
million and related to the issuance of Common and Preferred Stock. Net cash
provided by financing activities for the quarter ended March 31, 1998 was
$130.7 million which related to the issuance of the Notes and Series C
Preferred Stock.
The Company believes that its available cash, including the Equity
Commitment will be sufficient to fund the Company's aggregate capital
expenditures and working capital requirements, including operating losses,
associated with the roll out of its services through at least the end of 1999.
While the Company believes that its available cash, together with the Equity
Commitment, will be sufficient to finance its expansion into its six initial
regions, it may need to secure additional financing to enter new regions or to
meet higher-than-expected subscription rates for its services. If demand for
the Company's services is less than expected, the Company may require
additional financing at an earlier date, although the Company believes it
would be able to reduce certain costs that are, to a large extent, demand-
driven, or delay its entry into various of its targeted regions. In addition,
depending on market conditions, the Company may determine to raise additional
capital. The Company may obtain additional funding through the sale of public
or private debt and/or equity securities or through securing a bank credit
facility. There can be no assurance as to the availability or the terms upon
which such financing might be available.
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The Company expects to experience substantial negative cash flow for at
least the next several years due to continued development, commercial
deployment and expansion of its networks. The Company's future cash
requirements for developing, deploying and enhancing its networks and
operating its business, as well as the Company's revenues, will depend on a
number of factors including (i) the number of regions entered, the timing of
entry and services offered; (ii) network development schedules and associated
costs due to such issues as the physical requirements of the CO collocation
process; (iii) the rate at which customers and subscribers purchase the
Company's services and the pricing of such services; (iv) the level of
marketing required to acquire and retain customers and to attain a competitive
position in the marketplace; and (v) the rate at which the Company invests in
engineering and development and intellectual property with respect to existing
and future technology. In addition, the Company may wish to selectively pursue
possible acquisitions of businesses, technologies or products complementary to
those of the Company in the future in order to expand its geographic presence
and achieve operating efficiencies. There can be no assurance that the Company
will have sufficient liquidity, or be able to obtain additional debt or equity
financing on favorable terms or at all, in order to finance such an
acquisition. However, no acquisitions are currently contemplated. See "Risk
Factors--Substantial Future Capital Requirements."
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<PAGE>
BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in the forward-looking statements as a result of
certain factors including, but not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus. The Company disclaims any
obligation to update information contained in any forward-looking statement.
Covad is a packet-based CLEC which provides high-speed data communication
services using DSL technology. The Company's services enhance remote access
from homes to enterprise LANs and enable ISPs to offer high-speed Internet
access to their end-users. The Company's services are provided over standard
copper telephone lines at speeds of up to 1.5 Mbps, approximately 50 times the
speed available through a standard 28.8 Kbps modem. The Company markets its
services directly to enterprises that are increasingly emphasizing RLAN access
to improve employee productivity and reduce operating costs. The Company also
markets its services indirectly through ISPs that wish to sell high-speed
Internet access initially to small- and medium-sized businesses, and
subsequently to consumers, using the Company's DSL lines.
The Company was founded in October 1996 and launched its services in its
first market, the San Francisco Bay Area, in December 1997. Covad has entered
into arrangements with a number of enterprise customers which are making the
Company's services generally available to their employees and has arrangements
for pilot implementations with additional enterprise customers. The Company
has also entered into marketing arrangements with 23 ISP customers, including
Concentric Network Corporation and Verio Inc. Covad's services are currently
available for subscription to over one million homes and businesses in the San
Francisco Bay Area. The Company is aggressively expanding its geographical
coverage in the San Francisco Bay Area. The Company plans to launch its
services in other regions, initially including Boston, Los Angeles, New York,
Seattle and Washington, D.C.
Through its use of DSL technology, the Company can effectively leverage the
existing telephone network copper infrastructure to deploy service more
quickly and at lower costs than technologies such as cable modems and wireless
data networks that require large initial infrastructure investments before
service can be provided.
INDUSTRY BACKGROUND
Market Demand for Increased Digital Communications Bandwidth
The demand for high-speed data services is growing rapidly. Over the past
ten years, high-speed LANs have become increasingly important to enterprises
in order for employees to share information, send e-mail, search databases and
conduct business. The Company believes that a large majority of personal
computers used in enterprises are connected to LANs. Enterprises are now
seeking to extend this same high-speed connectivity to employees accessing the
LAN from home to improve employee productivity and reduce operating costs.
High-speed connectivity has also become important to small- and medium-sized
businesses due to the dramatic increase in Internet usage. High-speed Internet
connections are required for small- and medium-sized businesses to host Web
sites and access critical business information. High-speed data connections
are also becoming important to consumers as more high bandwidth information
and applications become available on the Internet.
The Company expects the market size for both RLAN access and small- and
medium-sized business Internet access to continue to grow rapidly as
businesses increase their use of the Internet, intranets and privately managed
networks. Industry analysts estimate that the number of remote access lines in
the U.S. will grow from approximately ten million in 1996 to approximately 30
million in 2000, a compound annual growth rate in excess of 30%.
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RLAN access and business and consumer Internet access are creating
increasing demands for high-speed data services. However, the full potential
of Internet and LAN applications cannot be realized without removing the
performance bottlenecks of the existing public switched telephone network.
Increases in telecommunications bandwidth have significantly lagged
improvements in microprocessor performance over the last ten years. Since 1988
microprocessor performance has improved nearly 80-fold, while the fastest
consumer modem connection has improved from 9.6 Kbps to 56 Kbps, a factor of
six. According to industry analysts, there are nearly 40 million personal
computers in U.S. homes today, and most of them can only connect to the
Internet or their corporate LAN by low-speed analog lines. Higher speed
connections are available, including ISDN, Frame Relay and T1 lines, and this
segment has recently experienced dramatic growth in the U.S. However, these
alternatives are expensive and complex to order, install and maintain.
Emergence of DSL Technology
DSL technologies emerged in 1990 and are commercially available today to
address the performance bottlenecks of the public switched telephone network.
DSL equipment, when deployed at each end of standard copper telephone lines,
increases the data carrying capacity of these lines from analog modem speeds
of 56 Kbps and ISDN speeds of 128 Kbps to DSL speeds of 144 Kbps to 6 Mbps
depending on the length and condition of the copper line. Also, recent
advances in semiconductor technology and Digital Signal Processing ("DSP")
algorithms have made the deployment of DSL technology on a widespread basis
more economical, with equipment prices falling by up to 75% over the last two
years. The Company anticipates that equipment prices will continue to fall as
a result of continued advances in semiconductor technologies and increases in
equipment production volumes.
DSL technology is significantly less expensive to deploy on a broad scale
than existing alternative high-speed data communications technologies. ISDN
has required widespread and expensive upgrading of CO switches. Other
technologies, such as cable modems, wireless data and satellite data, require
the up-front development of an extensive infrastructure past every home or
business regardless of the number of subscribers. By contrast, DSL, which
leverages the existing installed copper plant, requires relatively less
initial investment and a subsequent variable investment in DSL electronics
directly related to the number of paying customers. This "success-based"
investment characteristic makes DSL technology more economical to deploy
rapidly over a wide area and allows the Company to become profitable at lower
subscription rates than alternative technologies.
In January 1998, a number of companies, including Intel, Compaq Computer
Corp., Microsoft Corp. and certain of the major ILECs, jointly announced the
formation of the Universal ADSL Working Group (UAWG). The goal of UAWG is to
publish a standard specification for a low-cost, consumer oriented ADSL
hardware and software solution. Since the Company is a purchaser of ADSL
equipment and a service provider, the Company has joined the UAWG and supports
its objectives. The Company believes that the efforts of the UAWG will lead to
lower cost and more standardized ADSL hardware and software products.
Impact of the Telecommunications Act of 1996
The 1996 Act was passed to promote competition by, among other things,
creating the legal framework for telephone companies other than the ILECs to
provide local analog and digital communications services. These companies,
referred to as CLECs, can gain access to the ILEC network and use these
facilities to provide voice and data services in competition with the ILECs.
The 1996 Act requires ILECs, among other things, to allow CLECs to lease
copper lines on a line by line basis, to collocate equipment, including DSL
equipment, in the ILECs' COs to connect to these lines, to lease access on the
ILECs' inter-CO fiber backbone to link the CLECs' equipment and to use the
ILECs' own OSS to place orders and monitor ILECs' performance. In essence, the
1996 Act eliminated a substantial barrier to entry for CLECs. In lieu of
having to construct a competing infrastructure, CLECs can leverage the
existing telephone infrastructure, which required a $200 billion investment by
ILECs and ILEC ratepayers.
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THE COVAD SOLUTION
Covad was formed to capitalize on the substantial business opportunity
created by the growing demand for high-speed data communications, the
commercial availability of low cost DSL technology and the passage of the 1996
Act. Key aspects of the Company's solution to provide high-speed data
communication services include: (i) an attractive value proposition that
provides high-speed connections at similar or lower prices than currently
available to customers; (ii) a widely available, always-connected, secure
network that facilitates deployment of Internet and intranet applications; and
(iii) a management team experienced in the data communications,
telecommunications and personal computer industries.
Attractive Value Proposition. The Company offers higher bandwidth data
connections than alternative services at similar or lower prices that do not
vary with usage. For the RLAN market, the Company's mid-range services are
three to six times the speed of ISDN and up to ten times the speed of analog
modems at monthly rates similar to or lower than those for heavily used ISDN
lines. For business Internet users, the Company's high-end services offer
comparable bandwidth to T1 and Frame Relay circuits at approximately 25% of
the cost. The Company believes that many of its enterprise customers can
justify deploying lines to their employees if productivity improves by only a
few hours per month based on increases in the number of hours worked and
decreases in commute time and time spent waiting for information.
Widely Available, Always-Connected, Secure Network. The Company's strategy
of providing blanket coverage is designed to ensure that the Company's
services are available to the vast majority of its customers' end-users in any
region it enters. The Company's network provides 24-hour, always-on
connectivity, unlike ISDN lines and analog modems which require customers to
connect to their LAN or the Internet for each use. Also, because the Company
uses dedicated connections from each end-user to the enterprise network or
ISP, its customers can obtain increased security which reduces the risk of
unauthorized access.
Experienced Management Team. The Company's management team includes
individuals with extensive experience in designing, marketing and financing
personal computer and networking equipment and services, including founders
Charles McMinn, President and Chief Executive Officer, Charles Haas, Vice
President of Sales and Marketing and Dhruv Khanna, Vice President, General
Counsel and Secretary (all of whom worked at Intel), Rex Cardinale, Vice
President of Engineering (former General Manager of the cc:Mail division of
Lotus Development Corporation), John Rugo, Vice President of Operations
(former Vice President of BBN Planet Corporation) and Timothy Laehy, Vice
President of Finance and Chief Financial Officer (former Vice President of
Corporate Finance and Treasurer of Leasing Solutions, Inc.).
BUSINESS STRATEGY
The Company's objective is to be the leading provider of high-speed data
communication services using DSL technology in each region that it enters. In
order to achieve this goal, the Company is implementing a business strategy
with the following key elements:
Secure CLEC Status and Sign Interconnection Agreements in the Top U.S.
Markets. To provide its services, the Company obtains CLEC status in each
state that it enters and signs interconnection agreements with the relevant
ILECs. To date, the Company has obtained CLEC regulatory approval in the
states of California, Illinois, Massachusetts, New York, Oregon, Virginia and
Washington and intends to obtain such approval in other states necessary to
cover the Company's initial target regions. In the aggregate, the Company's
initial target regions represent over 20% of the U.S. population.
Roll Out Service Rapidly in These Markets. The Company seeks to be the first
company to roll out service in each region that it enters in order to: (i)
secure CO collocation space prior to competitors; (ii) secure and retain
customers before significant competition arises; (iii) maintain advantages
over competitors through superior coverage and high customer satisfaction; and
(iv) build the largest volume and market share in order to allow the Company
to reduce the costs and prices of its services and, where it is first to
market, maintain its leadership position.
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Provide Pervasive Coverage. The Company is pursuing a blanket coverage
strategy of providing service in almost every CO in each region that it enters
since the typical enterprise desires to offer RLAN access to all employees
regardless of where they reside in the region. Blanket coverage is also
important to the Company's ISP customers which desire to market their Internet
access services on a region-wide basis.
Focus on Packet Data Services. Although the Company is authorized to provide
both data and voice services, it is presently focusing exclusively on packet
data services and does not currently plan to offer analog voice services. The
Company believes that it can provide a superior data service while avoiding
the significant investment that would be required to compete in the already
crowded analog voice market.
Sell Directly to Enterprises and ISPs that Can Provide a Large Number of
End-Users. The Company's direct sales force specifically targets large
enterprises that it estimates have over 100 existing ISDN or analog modem-
based RLAN users. The Company offers these customers higher performance and
always-on services at similar or lower prices than those of alternative
technologies. Additionally, the Company targets ISPs which can offer their
end-users similar cost and performance advantages for Internet access using
the Company's services.
Employ a "Success-Based" Investment Strategy. Because it uses DSL
technology, a significant portion of the Company's capital expenditures are
"success-based." The Company estimates that over 50% of capital expenditures
over the next several years will be for DSL equipment that is directly related
to the Company's end-user subscription rate.
Cooperate with ISPs and Other Industry Participants. The Company does not
provide Internet access directly to any of its customers. Instead, the Company
provides connections to ISPs which offer high-speed Internet access using the
Company's lines. In this way, the Company: (i) carries the traffic of multiple
ISPs in any region, increasing its volume and reducing its costs; (ii)
leverages its selling efforts through the sales and support staff of these
ISPs; (iii) offers ISPs a non-competitive transport alternative, since the
ILEC typically provides its own Internet access services in competition with
ISPs; and (iv) provides ISPs a high-speed service offering to compete with
cable-based Internet access.
Provide a Superior Product and Service Solution. The Company believes that
it can build a significant competitive position by providing a comprehensive
product and service solution to its customers. The Company undertakes to
provide all of the necessary product and service elements required to
establish and maintain data services in its target markets including: (i)
managing the ILEC's installation and testing of copper lines used for its
service; (ii) installing any in-building wiring required to initiate service;
(iii) selling, configuring and installing the DSL modem required at each end-
user site; (iv) providing 24x7 monitoring of each end-user line; and (v)
designing and provisioning an enterprise's overall RLAN network including
equipment selection, programming and troubleshooting.
COVAD'S PRODUCT AND SERVICE OFFERINGS
Covad offers four flat rate data services under the TeleSpeed brand to
connect its customers' end-users to Covad's RDCs. In addition, enterprises and
ISP customers purchase one of two backhaul services from the Company to
connect their facilities to Covad's RDC.
TeleSpeed Services
The Company's TeleSpeed services connect individual end-users on standard
telephone lines to Covad DSL equipment in their serving CO and from there to a
Covad RDC serving that metropolitan area. An ILEC's infrastructure consists of
numerous COs which are connected by a fiber optic backbone to a regional
office that routes local and long distance traffic. Each CO collects the
individual copper lines from customers' premises in the neighborhood.
The four TeleSpeed services are TeleSpeed 144, TeleSpeed 384, TeleSpeed 1.1,
and TeleSpeed 1.5. The chart below compares the pricing, performance and
markets for each of these services. The particular TeleSpeed
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service available to an end-user depends on the user's distance to the CO. The
Company estimates that approximately 70% of end-users are within 18,000 feet
of a CO and can be served by the Company's TeleSpeed 384 services. The Company
believes the remaining 30% can be served with TeleSpeed 144. The Company also
believes at least a majority of end-users will be able to obtain any of the
other TeleSpeed offerings. However, the specific number of potential users for
the higher speeds will vary by CO and by region and will be affected by line
quality.
<TABLE>
<CAPTION>
SPEED TO SPEED FROM PRICE* RANGE**
SERVICE END-USER END-USER ($ /MONTH) (FEET) MARKET
------- -------- ---------- ---------- ------- ------------------------------------
<S> <C> <C> <C> <C> <C>
TeleSpeed 144........... 144 Kbps 144 Kbps $ 90 35,000 ISDN replacement, non-standard lines
TeleSpeed 384........... 384 Kbps 384 Kbps $ 125 18,000 RLAN, business Internet
TeleSpeed 1.1........... 1.1 Mbps 1.1 Mbps $ 195 15,000 Business Internet
TeleSpeed 1.5........... 1.5 Mbps 384 Kbps $ 195 12,000 High-speed Web surfing
</TABLE>
- --------
* Current price list for the San Francisco Bay Area. Prices are lower for
high volume customers and may be different in other regions.
** Estimated maximum distance from the end-user to the CO.
TeleSpeed 144. Covad's TeleSpeed 144 service operates at up to 144 Kbps in
each direction, which is similar to the performance of an ISDN line. This
service, which can use existing ISDN equipment at the end-user site, is
targeted at the ISDN replacement market where its $90 per month flat rate can
compare favorably to ISDN services from the ILEC when per-minute usage charges
apply. It is also the service that Covad offers on non-standard lines that are
either too long to carry the Company's higher speed services or are served by
Digital Loop Carriers or similar equipment where a continuous copper
connection is not available from the end-user site to the CO.
TeleSpeed 384. This service provides three to six times the performance of
ISDN at similar price points to heavily-used ISDN lines. The Company expects
TeleSpeed 384 to be the main service deployed within the RLAN market.
TeleSpeed 1.1. This service provides over two-thirds the bandwidth of a T1
data circuit at less than one-quarter of the $800 monthly price typical for T1
service. The target market for the TeleSpeed 1.1 service is small businesses
needing T1-level access to the Internet but have previously been unable to
afford the price of such service. The service also competes favorably from a
price/performance standpoint with traditional fractional T1 and Frame Relay
services for these same customers.
TeleSpeed 1.5. TeleSpeed 1.5 is the Company's only asymmetric service, i.e.,
with different speeds to and from the end-user. This service is intended for
end-users who consume more bandwidth than they generate, and is especially
useful for accessing Web sites. The service also provides the highest
performance of any TeleSpeed service to stream video or other multimedia
content to end-user locations.
Backhaul Services
Covad provides two backhaul services from its RDC to an enterprise or ISP
customer site. These services include the aggregation of all individual end-
users in a metropolitan area and transmission of the packet information to the
customer on a single high-speed line. The services, prices and suggested
maximum aggregation of end-user traffic are as follows:
Covad DS1. Covad's DS1 backhaul service is intended for the small business
with up to 50 RLAN end-users. The service operates at 1.5 Mbps and implements
a Frame Relay protocol compatible with most low-end and mid-range routers. The
price is $975 per month.
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Covad DS3. The Company's DS3 backhaul service is targeted to large
enterprises and ISPs with up to 1,000 end-users. The service utilizes an ATM
protocol that efficiently handles the high data rates involved and operates at
up to 45 Mbps. The price is $4,000 per month.
Activation Services
In addition to monthly service charges, Covad has a one-time activation
charge of $325 for RLAN and ISP end-users. The Company also charges $2,500 for
DS1 and $7,500 for DS3 activation. Customers must also purchase a DSL modem,
currently $399 to $600, from a third party for each end-user of the TeleSpeed
144 service, or from the Company for $550 for higher speed TeleSpeed services.
Fees and charges are subject to change as equipment costs change.
CUSTOMER RELATIONSHIPS
The Company offers its services to enterprises as well as to ISPs. According
to the U.S. Census, there are over 134,000 businesses in the U.S. with over
100 employees, of which the Company estimates that 3,400 are in the San
Francisco Bay Area. Since commercial introduction of its service in December
1997, Covad has entered into arrangements for pilot implementation with a
number of enterprises and has also entered into marketing arrangements with 23
ISPs.
In the current early stage of its deployment, the Company's practice for
enterprise customers has been to enter into an arrangement for a negotiated
price to install the service on a pilot basis to a small number of end-users
for a period of typically 30 to 90 days. After a successful pilot, the service
would be expanded to a larger group of end-users and then rolled out on a
broader scale. The Company estimates that the market potential of its current
enterprise customers is in excess of 5,000 end-user lines if these enterprise
customers fully roll out the Company's services to the extent that they have
rolled out ISDN to date.
The Company's agreements with ISPs generally have terms of at least one year
and provide for cooperative advertising of the TeleSpeed brand. The agreements
are nonexclusive and do not require the ISP to have a minimum number of
TeleSpeed users.
SALES AND MARKETING
The Company markets its RLAN services through a direct sales force to large
enterprises. The Company intends to increase its sales force in 1998 to
support deployment into additional regions. The sales force deals directly
with the telecommunications manager responsible for remote access within an
enterprise. A typical target enterprise customer would have in excess of 100
RLAN users on ISDN or dial-up connections. The Company's largest enterprise
customers currently have thousands of such users.
For the business and consumer Internet access markets, the Company sells its
service to ISPs which combine the Company's lines with their Internet access
services and resell the combination to their existing and new end-users. The
Company uses dedicated ISP channel sales and marketing personnel to address
this market.
The Company is also pursuing several types of joint marketing arrangements.
For example, the Company intends to provide its ISP customers with market
development funds when they promote the TeleSpeed service. Certain of the
Company's equipment suppliers, including Cisco, have proposed to promote the
Company's services through seminars to corporate communications managers in
the San Francisco Bay Area.
SERVICE DEPLOYMENT AND OPERATIONS
Corporate communications managers and ISPs typically have had to assemble
their data communications connections using multiple service and equipment
suppliers. This leads to additional work, cost and coordination problems. With
its TeleSpeed service, the Company emphasizes a one-stop total service
solution for its
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customers. This service solution includes: customer installation, end-user
line installation, end-user premises wiring and modem configuration, ongoing
network monitoring, customer reporting and customer service and technical
support.
Customer Installation. The Company works with its enterprise and ISP
customers to establish all required connectivity and configuration of the
backhaul connection from the customer to Covad's RDC. The Company orders the
backhaul circuit for the customer, tests the installed circuit, assists the
customer in configuring the router or switch that terminates the backhaul
circuit and monitors this circuit from the NOC.
End-User Line Installation. The Company orders all end-user connections from
the ILECs, monitors the ILECs' performance, tests the installed lines and
monitors the end-user lines from the NOC.
End-User Premises Wiring and Modem Configuration. The Company maintains its
own installation crews and trucks to install any required inside wiring at
each end-user site. The Company's installation crews also configure and
install end-user modems with information specific to each enterprise and ISP.
Network Monitoring. The Company monitors its network from the NOC on a
continuous basis which often enables the correction of potential network
problems before a customer or end-user is affected. The Company is also
developing network capability to provide enterprise and ISP customers direct
monitoring access of their end-users for more efficient monitoring of their
own network performance.
Customer Reporting. The Company communicates regularly with its customers
about the status of their end-users. The Company also operates a toll-free
customer care help line. Additionally, the Company is developing tools to
allow individual enterprise communications managers and ISPs to monitor their
end-users directly on an ongoing basis.
Customer Service and Technical Support. The Company provides 24x7 service
and technical support to its enterprise communications manager and its ISP
customers. The communication manager and the ISP serve as the initial contact
for service and technical support with the Company providing the second level
of support. By avoiding the higher cost of providing direct end-user support,
the Company believes it can grow its customer base more rapidly with lower
customer support costs. The Company's model is consistent with current
enterprise and ISP service contracts.
NETWORK ARCHITECTURE AND TECHNOLOGY
The key design principles of the Covad network are to provide: (i) robust
network security required for enterprise intranet applications, (ii)
consistent and scalable performance and (iii) intelligent end-to-end network
management.
Robust Network Security. Modem access to enterprise networks presents
significant security risks since any telephone can be used to attempt to
access such a network simply by dialing the telephone number. As a result,
enterprises expend significant effort and resources to prevent unauthorized
access. Enterprises also typically limit remote access users to reading e-mail
or other non-sensitive applications. The Covad network is designed to provide
enhanced security to ensure secure availability of all internal applications
and information for remote locations. The Company's Permanent Virtual Circuit
network architecture connects individual end-users at fixed locations to a
single enterprise which reduces the possibility of unauthorized access and
allows the Company's customers to safely transmit sensitive information and
applications over the Company's TeleSpeed lines.
Consistent and Scalable Performance. The Company believes that eventually
public packet networks will evolve to replace the 35 million modems currently
connected to circuit switched networks that have been deployed in the U.S. As
such, the Company designed its network for scalability and consistent
performance to all users as the network grows. The Company has designed a
"star topology" network similar to the most popular LAN networking
architecture currently used in high performance enterprise networks. In this
model, new
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capacity is added automatically as each new user receives a new line. The
Company also uses ATM switches in its RDCs that implement packet switching
directly in silicon circuits rather than slower router-based designs that
implement switching in router software.
Intelligent End-to-End Network Management. Because the customers' and end-
users' lines are "always-on" they can also always be monitored. The Company
has visibility from the enterprise or ISP site across the network and into the
end-user's home or business. Because its network is centrally managed, the
Company can identify and dynamically enhance network quality, service and
performance and address network problems promptly.
The primary components of the Company's network are the NOC, RDCs, its high-
speed private metropolitan backbones, CO collocation spaces, including DSLAMs,
copper access lines and DSL modems.
NOC. The entire Covad network is managed from the NOC. The Company provides
end-to-end network management using advanced network management tools on a
24x7 basis which enhances its ability to address performance or connectivity
issues before they affect the end-user experience. From the NOC, the Company
can monitor the equipment and circuits in the RDC (including the ATM
switches), each CO (including the DSLAMs) and individual end-user lines
(including the DSL modems). Currently, the NOC is collocated with the
Company's San Francisco Bay Area RDC.
RDCs. The RDCs will act as service hubs for each metropolitan area the
Company enters. All traffic from each CO will be collected at an RDC and
switched by the Company's ATM switches located there. Each enterprise and ISP
also will be connected to the RDC so that the resultant traffic from each CO
can be sent to and from the enterprise or ISP on a single high-speed
connection. The Company plans to design the RDC for high availability
including battery backup power, redundant equipment and active network
monitoring.
Private Metropolitan Backbone. The Company expects to operate its own
private metropolitan backbone in each region that it enters. The backbone
network is expected to consist of a network of high-speed ATM communications
services that the Company leases to connect its RDCs to its equipment in
individual COs and to connect its RDCs to enterprises and ISPs. This backbone
network operates at a speed of 45 Mbps with portions of the network currently
targeted to be upgraded to 155 Mbps or more in 1998.
Collocation Spaces. Through its interconnection agreements with the ILECs,
the Company seeks to secure collocation space in every CO where it desires to
offer service. These collocation spaces are designed to offer the same high
reliability and availability standards as the ILEC's other CO collocation
space. The Company requires access to these collocation spaces for its
equipment and for persons employed by, or under contract with, the Company.
The Company places DSLAMs in its collocation spaces to provide the high-speed
DSL signals on each copper line to its end-users. The Company builds its
collocation spaces to handle thousands of end-user lines each.
Copper Access Lines. The Company leases the copper lines running to end-
users from the ILEC under terms specified in its interconnection agreements.
The Company leases lines that, in many cases, must be specially conditioned by
the ILEC to carry digital signals, usually at an additional charge relative to
that for voice grade copper lines.
DSL Modems and On-Site Connectivity. The Company buys its DSL modems from
its suppliers for resale to its enterprise or ISP customers for use by their
end-users. The Company configures and installs these modems along with any
required on-site wiring needed to connect the modem to the copper line leased
from the ILEC. Currently, the DSL modem and DSLAM equipment used must come
from the same vendor for all services, except the equipment used in the
Company's TeleSpeed 144 services, since there are not yet interoperability
standards for the equipment used in the Company's higher-speed services.
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The Company is also pursuing a program of ongoing network development. The
Company's service development and engineering efforts focus on the design and
development of new technologies and services to increase the speed,
efficiency, reliability and security of the Covad network and to facilitate
the development of network applications by third parties that will increase
the use of the Company's network.
COMPETITION
The Company expects that the markets for RLAN access and business and
consumer Internet transport services will become increasingly competitive in
the future. In addition to the ILECs, the Company's most immediate potential
competitors are CMSPs, IXCs, FCLECs, ISPs, OSPs, WSDSPs and other CLECs. Many
of these competitors are offering (or may soon offer) technologies and
services that will compete, at least in part, with some or all of the
Company's high-speed digital service offerings. Such technologies include
ISDN, DSL, wireless data and cable modems. Certain bases of competition in the
Company's markets include transmission speed, reliability of service, breadth
of service availability, price/performance, network security, ease of access
and use, content bundling, customer support, brand recognition, operating
experience, capital availability and exclusive contracts. The Company believes
that it compares unfavorably with its competitors with regard to, among other
things, brand recognition, operating experience, exclusive contracts, and
capital availability. Many of the Company's competitors and potential
competitors have substantially greater resources than the Company and there
can be no assurance that the Company will be able to compete effectively in
its target markets.
Incumbent Local Exchange Carriers. All of the large ILECs which are present
in the Company's target markets are conducting technical and/or market trials
or have entered into commercial deployment of DSL-based data services. For
example, US West, Inc. is offering commercial DSL services in certain areas in
Arizona, Colorado, Minnesota, Utah and other states. Ameritech has announced
such services in Michigan and Bell Atlantic has announced such services in the
Washington, D.C. metropolitan area and in Pennsylvania. In addition, Pacific
Bell has announced its intention to offer commercial/DSL services by September
1998. The Company recognizes that the ILECs have the potential to quickly
overcome many of the issues that the Company believes have slowed wide
deployment of DSL services by ILECs in the past; if and when they do so, the
ILECs will represent strong competition in all of the Company's target service
areas. The ILECs have an established brand name and reputation for high
quality in their service areas, possess sufficient capital to deploy DSL
equipment rapidly, have their own copper lines, and can bundle digital data
services with their existing analog voice services to achieve economies of
scale in serving customers. They are in a position to offer service from COs
where the Company is unable to secure collocation space and offer service
because of asserted space restrictions.
Cable Modem Service Providers. CMSPs such as @Home Network and MediaOne (and
their respective cable partners) are deploying high-speed Internet access
services over Hybrid Fiber Coaxial cable networks. Where deployed, these
networks provide similar and in some cases higher-speed Internet access and
RLAN access than the Company provides. They also offer these services at lower
price points than the Company's TeleSpeed services and target residential
consumers, as well as business customers. They achieve these lower price
points in part by sharing the bandwidth available on the cable network among
multiple end-users. This architecture is less well-suited to the Company's
target markets of business Internet access and RLAN access where guaranteed
bandwidth, symmetric upstream and downstream bandwidth and network security
issues are more important than in the consumer market. In addition, different
regions within a metropolitan area may be served by different CMSPs, making it
more difficult to offer the blanket coverage required by potential RLAN access
and business customers. Also, much of the current cable infrastructure in the
U.S. must be upgraded to support cable modems, a process which the Company
believes is significantly more expensive and time-consuming than the
deployment of DSL-based networks. As of January 1, 1998, approximately 10% of
U.S. households are passed by cable infrastructure that is capable of
supporting the use of cable modems. Nevertheless, actual or prospective CMSP
competition may have a significant negative effect on the ability of the
Company to secure customers and may create downward pressure on the prices the
Company can charge for its services.
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National Long Distance Carriers. Long distance inter-exchange carriers, such
as AT&T Corp., MCI Communications Corp. (planned to be acquired by WorldCom,
Inc.), Sprint Corp., WorldCom, Inc. and Qwest Communications have deployed
large-scale Internet access networks, ATM networks, sell connectivity to
businesses and residential customers, and have high brand recognition. They
also have interconnection agreements with many of the ILECs and a number of
collocation spaces from which they could begin to offer competitive DSL
services.
Fiber-Based CLECs. Companies such as Teleport Communications Group, Inc.
(TCG) (planned to be acquired by AT&T Corp.), Brooks Fiber Properties, Inc.
(acquired by WorldCom, Inc.) and MFS (acquired by WorldCom, Inc.) have
extensive fiber networks in many metropolitan areas primarily providing high-
speed digital and voice circuits to large corporations. They also have
interconnection agreements with the ILECs pursuant to which they have acquired
collocation space in many markets targeted by Covad. These companies could
modify their current business focus to include residential and small business
customers using DSL in combination with their current fiber networks.
Internet Service Providers. ISPs such as BBN (acquired by GTE Corporation),
UUNET Technologies, Inc. (acquired by WorldCom, Inc.), Earthlink Networks
Inc., Concentric Network Corporation, Mindspring Enterprises, Inc., Netcom On-
Line Communication Services, Inc. (acquired by ICG) and PSINet, Inc. provide
Internet access to residential and business customers, generally using the
existing public switched telephone network at ISDN speeds or below. Some ISPs
such as UUNET Technologies, Inc. in California and New York, HarvardNet Inc.
in Massachusetts, InterAccess in Illinois and Vitts Corporation in New
Hampshire have begun offering DSL-based services. To the extent the Company is
not able to recruit ISPs as customers for its service, ISPs could become DSL
service providers competitive with the Company.
Online Service Providers. OSPs include companies such as America Online
("AOL"), Compuserve (acquired by AOL), MSN (a subsidiary of Microsoft Corp.),
Prodigy, Inc., and WebTV (acquired by Microsoft Corp.) that provide, over the
Internet and on proprietary online services, content and applications ranging
from news and sports to consumer video conferencing. These services are
designed for broad consumer access over telecommunications-based transmission
media, which enable the provision of digital services to the significant
number of consumers who have personal computers with modems. In addition, they
provide Internet connectivity, ease-of-use and consistency of environment.
Many of these OSPs have developed their own access networks for modem
connections. If these OSPs were to extend their access networks to DSL, they
would be competitors of the Company.
Wireless and Satellite Data Service Providers. WSDSPs are developing
wireless and satellite-based Internet connectivity. The Company may face
competition from terrestrial wireless services, including two Gigahertz
("Ghz") and 28 Ghz wireless cable systems (Multi-channel Microwave
Distribution System ("MMDS") and Local Multi-channel Distribution System
("LMDS")), and 18 Ghz and 39 Ghz point-to-point microwave systems. For
example, the FCC is currently considering new rules to permit MMDS licensees
to use their systems to offer two-way services, including high-speed data,
rather than solely to provide one-way video services. The FCC also is
currently auctioning LMDS licenses in all markets for wireless cable systems,
which can be used for high-speed data services as well. In addition, companies
such as Teligent Inc., Advanced Radio Telecom Corp. and WinStar
Communications, Inc., hold point-to-point microwave licenses to provide fixed
wireless services such as voice, data and videoconferencing.
The Company also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Space and Communications Group (a subsidiary
of General Motors Corporation), Teledesic and others have filed applications
with the FCC for global satellite networks which can be used to provide
broadband voice and data services.
In January 1997, the FCC allocated 300 Mhz of spectrum in the 5 Ghz band for
unlicensed devices to provide short-range, high-speed wireless digital
communications. These frequencies must be shared with incumbent users without
causing interference. Although the allocation is designed to facilitate the
creation of new wireless LANs, it is too early to predict what kind of
equipment might ultimately be manufactured and for what purposes it might be
utilized.
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Other CLECs. Other companies such as Rhythms NetConnections and Northpoint
Communications have started offering and can enter the market and offer high-
speed data services using a business strategy similar to that of the Company.
The 1996 Act specifically grants any and all CLECs the right to negotiate
interconnection agreements with the ILEC. Further, the 1996 Act allows CLECs
to enter into interconnection agreements which are identical in all respects
to that of the Company. The Company has already had an interconnection
agreement copied in this manner.
As a first mover in selected markets that it enters, the Company seeks the
following strategic benefits: (i) securing and retaining customers before the
same high speed services are available from others, (ii) engendering end-user
loyalty through superior coverage and high customer satisfaction and (iii)
capturing the largest customer base and thereby achieving economies of scale
sufficient to drive down prices and develop a leadership position. The Company
may not be able to achieve these benefits if substantial competition from any
of the foregoing competitors exists or develops in the Company's markets.
INTERCONNECTION AGREEMENTS WITH ILECS
A critical aspect of the Company's business is its interconnection
agreements with the ILECs. These agreements cover a number of aspects
including: (i) the price the Company pays to lease access to the ILEC's copper
lines; (ii) the special conditioning the ILEC provides on certain of these
lines to enable the transmission of DSL signals; (iii) the price and terms for
collocation of Company equipment in the ILEC's COs; (iv) the price paid by the
Company and access the Company has to the ILEC's inter-CO transport facilities
that the Company uses to connect COs to its RDC; (v) the ability of the
Company to access conduits and other rights of way the ILEC has to construct
its own network facilities; (vi) the OSS and interfaces that the Company can
use to place orders and trouble reports and monitor the ILEC's response to
Company requests; (vii) the dispute resolution process the ILEC and the
Company use to resolve disagreements on the terms of the interconnection
contract; and (viii) the term of the interconnection agreement, its
transferability to successors, its liability limits and other general aspects
of the ILEC and Company relationship.
As of June 5, 1998, the Company had entered into five (5) interconnection
agreements with different major ILECs. The Company believes that the ILECs
have been willing to sign agreements with the Company to date for a variety of
reasons including: (i) the ILECs have a legal obligation to do so; (ii) the
Company is perceived as a start-up entity whose digital services are a small
part of the ILEC's total business; (iii) the Company is providing residential,
facilities-based competition to the ILEC, an element of competition that few
other CLECs are pursuing and an element of competition that can bolster the
arguments of the RBOC-ILECs to be permitted to enter the long distance voice
business; and (iv) the Company is not offering local analog voice services
that could capture revenue from the ILEC. Nevertheless, the ILECs do not in
many cases agree to the Company's requested provisions in interconnection
agreements and the Company has not consistently prevailed in obtaining all of
its desired provisions in such agreements either voluntarily or through the
interconnection arbitration process. There can be no guarantee that the
Company will be able to continue to sign favorable interconnection agreements
with subsequent ILECs. The Company is currently negotiating agreements with
several ILECs which are necessary before the Company can expand its services
into the metropolitan areas served by such ILECs. The ILECs are also
permitting CLECs to adopt previously signed interconnection agreements. In
certain instances, the Company has adopted the interconnection agreement of
another CLEC. Other CLECs have also adopted the same or modified versions of
the Company's interconnection agreements, and may continue to do so in the
future.
The Company's interconnection agreements have a maximum term of three years,
requiring the Company to renegotiate its existing agreements in the future.
Although the Company expects to renew its interconnection agreements and
believes the 1996 Act limits the ability of ILECs not to renew such
agreements, there can be no assurance that existing or new agreements will be
extended or renegotiated on terms favorable to the Company. Additionally, the
Company's interconnection agreements are subject to interpretation by both
parties and there may arise differences in interpretation that cannot be
resolved on favorable terms to the Company. Finally the interconnection
agreements are subject to state commission, FCC and judicial oversight. There
can be no assurance that these bodies will not modify the terms or prices of
the Company's interconnection agreements in
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ways that adversely affect the Company's business, prospects, operating
results, financial conditions and its ability to service and repay its
indebtedness, including the Notes.
GOVERNMENT REGULATION
Overview. The Company's services are subject to a variety of federal
regulations. With respect to certain activities and for certain purposes, the
Company has submitted its operations to the jurisdiction of state and local
authorities who may also assert more extensive jurisdiction over the
facilities and services of the Company. The FCC has jurisdiction over all
services and facilities of the Company to the extent that the Company provides
interstate and international services. To the extent the Company provides
identifiable intrastate services, the Company's services and facilities are
subject to state regulations. In addition, local municipal government
authorities also assert jurisdiction over the Company's facilities and
operations. The jurisdictional reach of the various federal, state and local
authorities is subject to ongoing controversy and judicial review, and the
Company cannot predict the outcome of such review.
Federal Regulation. The Company's provision of its services must comply with
the requirements of the Communications Act of 1934, as amended by the 1996
Act, as well as the FCC's regulations under the statute. The 1996 Act
eliminates many of the pre-existing legal barriers to competition in the
telecommunications and video programming communications businesses, preempts
many of the state barriers to local telecommunications service competition
that previously existed in state and local laws and regulations, and sets
basic standards for relationships between telecommunications providers. The
law delegates to the FCC and the states broad regulatory and administrative
authority to implement the 1996 Act.
Among other things, the 1996 Act removes barriers to entry in the local
telecommunications market by preempting state and local laws that are barriers
to competition and by requiring ILECs to provide nondiscriminatory access and
interconnection to potential competitors, such as cable operators, wireless
telecommunications providers, long distance companies and CLECs such as the
Company.
Regulations promulgated by the FCC under the 1996 Act specify in greater
detail the requirements of the 1996 Act imposed on the ILECs, among other
things, to open their networks to competition by providing competitors
interconnection, collocation space, access to UNEs, retail services at
wholesale rates and nondiscriminatory access to telephone poles, ducts,
conduits, and rights-of-way. As a result of these changes, companies such as
Covad are now able to interconnect with the ILECs in order to provide local
telephone exchange services and to use portions of the ILECs' existing network
to offer new and innovative services such as the Company is currently
offering. Numerous parties have appealed certain aspects of these regulations.
The appeals have been consolidated and have been reviewed by the U.S. Court of
Appeals for the Eighth Circuit, which has overruled certain of the FCC's
pricing and nondiscrimination regulations and upheld others. The Eighth
Circuit Court's ruling has been appealed to the U.S. Supreme Court which has
agreed to accept the case for review. Covad has entered into competitive
interconnection agreements using the federal guidelines established in the
FCC's interconnection order, which agreements may be modified to conform to
the Court of Appeals rulings and any subsequent rulings of the U.S. Supreme
Court.
The 1996 Act also allows the RBOCs to enter the long distance market within
their own local service regions. The timing of the various RBOCs' entry into
their respective in-region long distance service businesses is also extremely
uncertain. The timing of the various RBOCs' in-region long distance entry will
likely affect the level of cooperation the Company receives from the RBOCs.
In addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
ILEC tariff filings at the FCC have been subjected to increasingly less
regulatory review. However, precisely when and to what extent the ILECs will
secure pricing flexibility or other regulatory freedom for their services is
uncertain. For example, on January 26, 1998, Bell Atlantic Corporation filed a
petition at the FCC seeking to eliminate the application of certain
regulations that apply to its
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provision of services that are competitive with those of the Company. The
timing and the extent of regulatory freedom and pricing flexibility and
regulatory freedom granted to the ILECs will affect the competition the
Company faces from the ILECs' competitive services.
In addition, the 1996 Act provides the FCC with the authority to forbear
from regulating entities such as the Company who are classified as "non-
dominant" carriers. The FCC has exercised its forbearance authority. As a
result, the Company is not obligated to obtain prior certificate approval from
the FCC for its interstate services or file tariffs for such services. The
Company has determined not to file tariffs for its interstate services. The
Company provides its interstate services to its customers on the basis of
contracts rather than tariffs. The Company believes that it is unlikely that
the FCC will require the Company to file tariffs for its interstate services
in the future.
Changes in applicable federal law and regulations, in particular, changes in
its interconnection agreements with ILECs, the prospective entry of the RBOCs
into the in-region long distance business and grant of regulatory freedom and
pricing flexibility to the ILECs, could have a material adverse impact on the
Company's business.
State Regulation. To the extent the Company provides identifiable intrastate
services or has otherwise submitted itself to the jurisdiction of the relevant
state telecommunications regulatory commissions, the Company is subject to
such jurisdiction. In addition, certain states have required prior state
certification as a prerequisite for processing and deciding an arbitration
petition for interconnection under the 1996 Act. To date, the Company has
obtained certification from seven states and currently has four additional
applications pending. The Company has filed arbitration petitions in different
states for interconnection arrangements with the relevant ILECs. The Company
has filed tariffs in certain states for intrastate services as required by
state law or regulation. The Company is also subject to periodic financial and
other reporting requirements of these states with respect to its intrastate
services.
The different state commissions have various proceedings to determine the
rates, charges and terms and conditions for UNEs, as well as the discount for
wholesale services purchased by the Company from the relevant ILEC. The rates
set forth in the Company's interconnection agreements are interim rates and
will be prospectively, and, in some cases, retroactively, affected by the
permanent rates set by the various state commissions for such UNEs as
unbundled loops and interoffice transport. The state commission rate
determinations could have a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the Notes.
The applicability of the various state regulations on the Company's business
and compliance requirements will be affected to the extent to which the
Company's services are determined to be intrastate services. Jurisdictional
determinations of the Company's services as intrastate services could have a
material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay its
indebtedness, including the Notes.
Local Government Regulation. The Company in certain instances may be
required to obtain various permits and authorizations from municipalities in
which it operates its own facilities. Whether various actions of local
governments over the activities of telecommunications carriers such as the
Company, including requiring payment of franchise fees or other surcharges,
pose barriers to entry for CLECs which may be preempted by the FCC is the
subject of litigation. Although the Company relies primarily on the UNEs of
the ILECs, in certain instances the Company deploys its own facilities,
including fiber optic cables, and therefore may need to obtain certain
municipal permits or other authorizations. The actions of municipal
governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other
authorizations could have a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the Notes.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation affecting the telecommunications
industry. Other existing federal regulations are currently the subject
46
<PAGE>
of judicial proceedings, legislative hearings and administrative proposals,
which could change, in varying degrees, the manner in which communications
companies operate in the U.S. The ultimate outcome of these proceedings, and
the ultimate impact of the 1996 Act or any final regulations adopted pursuant
to the 1996 Act on the Company or its business cannot be determined at this
time but may well be adverse to the Company's interests. The Company cannot
predict the impact, if any, that future regulation or regulatory changes may
have on its business and there can be no assurance that such future regulation
or regulatory changes will not have a material adverse effect on the Company's
business, prospects, operating results, financial condition and its ability to
service and repay its indebtedness, including the Notes.
INTELLECTUAL PROPERTY
The Company regards its technology as proprietary and attempts to protect it
with copyrights, trademarks, trade secret laws, restrictions on disclosure and
other methods. There can be no assurance these methods will be sufficient to
protect the Company's technology. The Company also generally enters into
confidentiality or license agreements with its employees and consultants, and
generally controls access to and distribution of its documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products,
services or technology without authorization, or to develop similar technology
independently. Currently the Company holds no patents, but is filing patent
applications and intends to prepare additional applications and to seek patent
protection for its systems and services to the extent possible. There is no
assurance that the Company will obtain any issued patents or that any such
patents would protect the Company's intellectual property from competition
which could seek to design around or invalidate such patents. In addition,
effective patent, copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries, and the global nature of
the Internet makes it virtually impossible to control the ultimate destination
of the Company's proprietary information. There can be no assurance that the
steps taken by the Company will prevent misappropriation or infringement of
its technology. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the New Notes. In addition, certain of
the Company's information, including its CLEC status in individual states and
its interconnection agreements, are a matter of public record and can be
readily obtained by the Company's competitors and potential competitors,
possibly to the Company's detriment.
EMPLOYEES
As of April 30, 1998, the Company had 94 employees (excluding temporary
personnel and consultants), employed in engineering, sales, marketing,
customer support and related activities, and general and administrative
functions. None of the Company's employees is represented by a labor union,
and the Company considers its relations with its employees to be good. The
Company's ability to achieve its financial and operational objectives depends
in large part upon the continued service of its senior management and key
technical, sales, marketing and managerial personnel, and its continuing
ability to attract and retain highly qualified technical, sales, marketing and
managerial personnel. Competition for such qualified personnel is intense,
particularly in software development, network engineering and product
management.
BOARD OF ADVISORS
The Company maintains a Board of Advisors and conducts meetings of this
advisory group for two days each quarter. The Board of Advisors gives the
Company guidance on issues such as developments in communications equipment
technology, network design strategy, regulatory matters, the competitive
landscape, marketing of the Company's services, identification of potential
employees, financial strategy, and introductions to potential strategic
partners and alliances. The Board of Advisors serves in an advisory capacity
and does not have any managerial control over the Company. Below is a list of
the Company's Board of Advisors as of April 30, 1998 and their backgrounds.
47
<PAGE>
ROBERT BERGER is a founder of InterNex Information Services, an ISDN and
high bandwidth services-focused ISP in California.
DUNCAN DAVIDSON is a founder of the Company and is currently Senior Vice
President of InterTrust Technologies Corporation, a leading provider of trust
management systems for electronic commerce and digital rights management. He
previously served as Managing Partner of Regis McKenna's consulting company.
DAVE FARBER is a chaired telecommunications professor at the University of
Pennsylvania and currently serves as a member of President Clinton's Policy
Advisory Committee on Information Technology and the Next Generation Internet
(PACIT).
BILL LANE is the former Chief Financial Officer at Intuit Inc. and is a
board member of MetaCreations Corporation, Quarterdeck Corporation, Expert
Software Inc., Storm Technology Inc. and several private companies.
DANIEL LYNCH is a member of the Company's Board of Directors. For a
description of his professional background, see "Management--Directors and
Executive Officers."
FRANK MARSHALL is a member of the Company's Board of Directors. For a
description of his professional background, see "Management--Directors and
Executive Officers."
KIM MAXWELL is the former Chairperson of the ADSL Forum and founder of Racal
Vadic and Amati.
SHARON NELSON is the former Chairperson of the Washington State Public
Utilities Commission.
DAVID PISCITELLO is the President of Core Competence, Inc., program chairman
for U.S. (domestic) Networld and Interop Conferences, and co-producer of the
Internet Security Conference.
DAVID STROM is the president of David Strom, Inc. and was the founding
editor-in-chief of Network Computing Magazine.
FACILITIES
The Company is currently headquartered in facilities consisting of
approximately 18,000 square feet in Santa Clara, California, which the Company
occupies under a two-year lease with a one-year renewal option. In addition,
the Company's San Francisco RDC consists of approximately 2,000 square feet
and is located in San Jose, California, which the Company occupies under a
ten-year lease with two five-year renewal options. The Company considers its
San Francisco Bay Area RDC space to be adequate for the foreseeable future.
Currently, and until a permanent location is secured, the Company utilizes a
portion of the San Francisco Bay Area RDC space to operate its NOC. The
Company is in the process of acquiring additional headquarters space in 1998
as its business expands. The Company also leases collocation space in COs in
the San Francisco Bay Area and the Los Angeles Metropolitan Area under the
terms of its interconnection agreements with SBC Communications Inc. and GTE
California Incorporated (a subsidiary of GTE Corporation) and the collocation
tariff obligations imposed by the California Public Utilities Commission and
the FCC. While the terms of these leases are perpetual under the tariff, the
productive use of the Company's collocation facilities are subject to the
terms of its interconnection agreements which expire on or before June 5,
2000. The Company will increase its collocation space as it expands its
network in the San Francisco Bay Area and other regions.
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings that could
have a material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay its
indebtedness, including the New Notes. The Company is, however, subject to
state commission, FCC and court decisions as they relate to the interpretation
and implementation of the 1996 Act, the interpretation of
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CLEC interconnection agreements in general and the Company's interconnection
agreements in particular. In some cases, the Company may be deemed to be bound
by the results of ongoing proceedings of these bodies or the legal outcomes of
other contested interconnection agreements that are similar to the Company's
agreements. The results of any of these proceedings could have a material
adverse effect on the Company's business, prospects, operating results,
financial condition and its ability to service and repay its indebtedness,
including the New Notes. On May 8, 1998, the Company filed a complaint in
Federal Court against Pacific Bell seeking damages and equitable relief from
Pacific Bell regarding its collocation practices, failures to timely and
properly deliver transmission and local loop facilities, positions on local
loop spectral interference issues, as well as other practices. Failure to
resolve these controversies favorably could have a material adverse effect on
the Company's business, prospects, operating results, financial condition and
its ability to service and repay its indebtedness, including the New Notes.
49
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages, and positions of the directors and
executive officers of the Company. All directors hold office until their
successors are duly elected and qualified and all executive officers hold
office at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------------------------------------------------------------
<S> <C> <C>
Charles McMinn.......... 46 President, Chief Executive Officer and Director
Timothy Laehy........... 41 Chief Financial Officer, Treasurer and Vice President, Finance
Robert Hawk............. 56 Director
Henry Kressel........... 64 Director
Joseph Landy............ 37 Director
Daniel Lynch............ 56 Director
Frank Marshall.......... 51 Director
Rich Shapero............ 50 Director
Rex Cardinale........... 45 Vice President, Engineering
Charles Haas............ 38 Vice President, Sales and Marketing
Dhruv Khanna............ 38 Vice President, General Counsel and Secretary
Walter Pienkos.......... 51 Vice President, Administration
John Rugo............... 40 Vice President, Operations
</TABLE>
CHARLES MCMINN is a founder of the Company and has been its President, Chief
Executive Officer and a member of its Board of Directors since October 1996.
Mr. McMinn has over 20 years of experience in creating, financing, operating
and advising high technology companies. From July 1995 to October 1996, and
from August 1993 to June 1994, Mr. McMinn managed his own consulting firm,
Cefac Consulting, which focused on strategic development for information
technology and communications businesses. From June 1994 to November 1995, he
served as Principal, Strategy Discipline, at Gemini Consulting. From August
1992 to June 1993, he served as the first president and Chief Executive
Officer of Visioneer Communications, Inc. and from October 1985 to June 1992
was a general partner at the venture capital firm, InterWest Partners. Mr.
McMinn began his Silicon Valley career as the product manager for the 8086
microprocessor at Intel.
TIMOTHY LAEHY joined the Company in August 1997 as its Chief Financial
Officer, Treasurer and Vice President, Finance. Prior to joining the Company,
Mr. Laehy served as Vice President, Corporate Finance and Treasurer of Leasing
Solutions, Inc., a computer equipment leasing company from February 1991 to
August 1997. From 1990 through 1991, Mr. Laehy served as senior associate at
Recovery Equity Partners, a private venture capital investment fund. From 1985
through 1990, he served in various capacities at Guarantee Acceptance Capital
Corporation, an investment bank, Liberty Mutual Insurance Company and Union
Carbide Corporation.
ROBERT HAWK has served as a member of the Company's Board of Directors since
April 1998. Mr. Hawk is President of Hawk Communications and recently retired
as President and Chief Executive Officer of US West Multimedia Communications,
Inc., where he headed the cable, data and telephony communications business
from May 1996 to April 1997. He was president of the Carrier Division of US
West Communications, a regional telecommunications service provider, from
September 1990 to May 1996. Prior to that time, Mr. Hawk was Vice President of
Marketing and Strategic Planning for CXC Corporation. Prior to joining CXC
Corporation, Mr. Hawk was director of Advanced Systems Development for
AT&T/American Bell. He currently serves on the boards of Xylan Corporation,
PairGain Technologies, Inc., Premisys Communications, Concord Communications
and Radcom.
HENRY KRESSEL has served as a member of the Company's Board of Directors
since July 1997. Dr. Kressel has been with E.M. Warburg, Pincus & Co., LLC
since 1983 and is currently a managing director of the firm. He is also a
partner of Warburg, Pincus & Co., the general partner of Warburg, Pincus
Investors, L.P. Prior to that time, he served as Staff Vice President of the
RCA Corporation responsible for research and development of
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optoelectronics, semiconductors and related software and technologies. Dr.
Kressel serves as a director of Level One Communications, Inc., IA
Corporation, Zilog, Inc., TresCom International, Inc., NOVA Corporation, Inc.
and several privately held companies.
JOSEPH LANDY has served as a member of the Company's Board of Directors
since July 1997. Mr. Landy has been with E.M. Warburg, Pincus & Co., LLC since
1985 and is currently a managing director and a partner of the firm.
Throughout his career at Warburg, Mr. Landy has focused primarily on
investments in information technology and specialty semiconductors. Mr. Landy
is a director of four publicly traded companies including CN Biosciences,
Inc., Indus International, Inc., Level One Communications, Inc. and NOVA
Corporation, and of several privately held companies.
DANIEL LYNCH has served as a member of the Company's Board of Directors
since April 1997. Mr. Lynch is also a founder of CyberCash, Inc. and has
served as chairman of its board of directors since August 1994. From December
1990 to December 1995, he served as Chairman of the Board of Directors of
Softbank Forums, a provider of education and conference services for the
information technology industry . Mr. Lynch founded Interop Company in 1986,
which is now a division of ZD Comdex and Forums. Mr. Lynch is a member of the
Association for Computing Machinery and the Internet Society. He is also a
member of the Board of Trustees of the Santa Fe Institute, the Bionomics
Institute and CommerceNet. He previously served as Director of the Information
Processing Division for the Information Sciences Institute in Marina del Rey,
where he led the Arpanet team that made the transition from the original NCP
protocols to the current TCP/IP based protocols. He has served as a director
of Exodus Communications since January 1998. Mr. Lynch previously served as a
member of the board of directors at UUNET Technologies, Inc. from April 1994
until August 1996.
FRANK MARSHALL has served as a member of the Company's Board of Directors
since October 1997. Mr. Marshall currently serves on the board of directors of
PMC-Sierra Inc. and several private companies. Mr. Marshall also serves on the
technical advisory board of several high technology private companies. He is a
member of the technical advisory board of InterWest Partners and a Venture
Partner at Sequoia Capital. From 1992 to 1997, Mr. Marshall served as Vice
President of Engineering and Vice President and General Manager, Core Business
Unit of Cisco Systems Inc. From 1982 to 1992, he served as Senior Vice
President, Engineering at Convex Computer Corporation.
RICH SHAPERO has served as a member of the Company's Board of Directors
since July 1997. Mr. Shapero serves as a member of the board of directors of
Powerwave Corporation. Mr. Shapero has been a general partner of Crosspoint, a
venture capital investment firm, since April 1993. From January 1991 to June
1992, he served as Chief Operating Officer of Shiva Corporation, a computer
network company. Previously, he was a Vice President of Sun Microsystems,
Senior Director of Marketing at AST, and held marketing and sales positions at
Informatics General Corporation and UNIVAC's Communications Division.
REX CARDINALE has served as the Company's Vice President, Engineering since
June 1997. From February 1996 to March 1997, Mr. Cardinale served as Chief
Executive Officer and Vice President, Engineering at GlobalCenter Inc., an
Internet service provider for small businesses. From January 1994 to February
1996, Mr. Cardinale served as Vice President and General Manager, Internet
Services Division, at Global Village Communication. From June 1992 to
September 1993, Mr. Cardinale was Vice President and General Manager of the
cc:Mail division of Lotus Development Corporation. Prior to that time, he
served for five years as Vice President, Engineering for Ultra Network
Technologies, a provider of high-speed networking systems for supercomputers
and for ten years in various engineering management roles at Rolm Corporation.
CHARLES HAAS is a founder of the Company and has served as the Company's
Vice President, Sales and Marketing since May 1997. Mr. Haas has over fourteen
years of sales and business development experience with Intel where he held
various positions from July 1982 to April 1997. At Intel, Mr. Haas served as
manager of corporate business development, focusing on opportunities in the
broadband computer communications area, and played a principal role in the
development of the Company's Residential Broadband strategy for telephone and
satellite companies (DSL, Fiber-to-the-Curb and satellite modems).
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DHRUV KHANNA is a founder of the Company and has served as the Company's
Vice President, General Counsel and Secretary since October 1996. Between 1987
and 1993, Mr. Khanna was an associate at Morrison & Foerster where his clients
included Teleport Communications Group, McCaw Cellular Communications, Inc.
(now AT&T Wireless), and Southern Pacific Telecom (now Qwest). He was an in-
house counsel for Intel Corporation's communications products division and its
Senior Telecommunications Attorney between 1993 and 1996. Mr. Khanna has
extensive experience with regulatory matters and business transactions
involving the RBOCs and other telecommunications companies. While at Intel, he
helped shape the computer industry's positions on the Telecommunications Act
of 1996 and the FCC's rules implementing the 1996 Act.
WALTER S. PIENKOS has served as the Company's Vice President, Administration
since May 1998. Prior to joining the Company, Mr. Pienkos was the Vice
President of Administration and a founder of NetPower, a Windows NT
workstation and server manufacturer, from February 1993 to May 1998. From 1987
through 1992, he served as Vice President of Administration at MIPS Computer
Systems. Prior to that time, he spent 15 years at Hewlett Packard in a variety
of management positions, most recently as Hewlett Packard's Corporate
Personnel Manager.
JOHN RUGO has served as the Company's Vice President, Operations since June
1997. Mr. Rugo has more than fifteen years of experience deploying and
operating wide area data networks. From October 1996 to June 1997, he was the
director of marketing for Service Provider Systems at Cisco. From August 1984
to September 1996, Mr. Rugo held various positions at BBN Planet Corporation,
including Vice President, Business Development and Vice President and General
Manager, Western Region. From July 1993 to July 1994, he served as President
of BBN Technology Services, a provider of Internet-related services, where he
was responsible for strategic business direction, overall marketing and sales.
From December 1988 to June 1993, he served as NEARNet Executive Director of
BBN Systems & Technologies. While at BBN Systems & Technologies, he founded
BBN's Internet services business, establishing NEARNet as the premier regional
network in New England.
DIRECTOR COMPENSATION
Except for grants of stock options subject to vesting and restricted stock
subject to repurchase, directors of the Company generally do not receive
compensation for services provided as a director or committee members. The
Company does not pay additional amounts for committee participation or special
assignment of the Board of Directors, except for reimbursement of their
expenses in attending Board and committee meetings.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and the four most highly compensated
executive officers whose aggregate cash compensation exceeded $100,000 during
the fiscal year ended December 31, 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
---------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
NAME(1) SALARY BONUS OPTIONS/SARS COMPENSATION(2)
------- ---------- ----- --------------------- ---------------
<S> <C> <C> <C> <C>
Charles McMinn,
President and Chief
Executive Officer(3).. $87,500.00 -- -- $203.00
</TABLE>
- --------
(1) Since no executive officer earned more than $100,000 in total annual
salary and bonus during fiscal year 1997, only the compensation
information of the Chief Executive Officer is listed above.
(2) The dollar amount in this column represents premium payments made by the
Company with respect to life insurance policies.
(3) Based on an annual salary of $150,000 for fiscal year 1997.
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OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted by the Company to the Company's Named
Executive Officer during fiscal year 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
There were no exercises of stock options by the Company's Named Executive
Officer during the year ended December 31, 1997.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company has entered into written employment agreements with Dhruv Khanna
and Rex Cardinale and one other employee (the "Employees") whereby the Company
has agreed to hire each Employee for a two-year term. Pursuant to the
employment agreements, Messrs. Khanna and Cardinale receive compensation in
the form of annual base salaries of $120,000 and $140,000, respectively and
bonuses to be determined by the Board of Directors or the Compensation
Committee. The employment commencement date for both Messrs. Khanna and
Cardinale was July 15, 1997. During the two-year term, the Employee can only
be terminated for cause (as defined in the agreement), at which time the
Employee is only eligible for benefits in accordance with the Company's
established policies. After the two-year term, either the Employee or the
Company may terminate the employment relationship with or without cause. If
the Company terminates the Employee's employment relationship without cause,
the Company must continue to pay to the Employee such salary and benefits as
he received immediately before termination for a period of six months after
the date of termination. Under the employment agreements, the Employees agree,
during the terms of their employment with the Company, not to (i) open or
operate a business which is then in competition with the Company, (ii) act as
an employee, agent, advisor or consultant of any then existing competitor of
the Company, or (iii) take any action to divert business from the Company or
influence any existing customer of the Company to cease doing business with
the Company or to alter its then existing business relationship with the
Company.
With respect to all options granted under the Company's 1997 Stock Plan, in
the event of a merger of the Company with or into another corporation
resulting in a change of control involving a shift in 50% or more of the
voting power of the Company, or the sale of all or substantially all of the
assets of the Company, the options will fully vest and become exercisable one
year after the change of control or earlier in the event the individual is
constructively terminated or terminated without cause or in the event the
successor corporation refuses to assume the options. See "--1997 Stock Plan."
The Company has also entered into restricted stock purchase agreements with
certain officers and directors of the Company. The Common Stock issued
pursuant to the restricted stock purchase agreements are subject to a
repurchase right on the part of the Company that is subject to vesting. The
agreements include similar provisions to the stock options, providing for
accelerated vesting in the event of a change of control. See "Certain
Relationships and Related Transactions--Issuance of Common Stock."
BOARD COMMITTEES
In April 1998, the Board established an Audit Committee and a Compensation
Committee. The Audit Committee consists of Messrs. Landy and Lynch, both of
whom are outside directors of the Company. The Audit Committee recommends
engagement of the Company's independent auditors and approves the services
performed by such auditors and reviews and evaluates the Company's accounting
policies and its systems of internal accounting controls. The Compensation
Committee consists of Messrs. Kressel and Shapero, both of whom are outside
directors of the Company. The Compensation Committee administers the Company's
stock and stock option plans and makes recommendations to the Board of
Directors in connection with matters of compensation, including the
compensation of the Company's executive officers.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company, except Mr. McMinn, serves as a member
of the Board of Directors or compensation committee of any entity that has one
or more executive officers serving as a member of the Company's Board of
Directors.
1997 STOCK PLAN
As of April 30, 1998, the Company had reserved 5,513,500 shares of Common
Stock for issuance pursuant to its 1997 Stock Plan (the "1997 Stock Plan"),
which has been approved by the Company's Board of Directors and stockholders
and amended in January 1998 and in April 1998. The 1997 Stock Plan provides
for the granting to employees (including officers and directors) of qualified
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees (including
officers and directors) and consultants of nonqualified stock options. The
1997 Stock Plan also provides for the granting of restricted stock. As of
April 30, 1998, options to purchase an aggregate of 3,668,800 shares were
outstanding, 1,836,700 shares remained available for future grants and 8,000
options were exercised.
The 1997 Stock Plan is administered by the Board of Directors or a committee
appointed by the Board of Directors. Options granted generally vest at a rate
of 12.5% of the shares subject to the option on the vesting commencement date
and 1/48th of the shares subject to the option at the end of each one-month
period thereafter and generally expire eight years from the date of grant.
Nonstatutory stock options granted to members of the Company's Board of
Advisors generally vest at a rate of 25% of the shares subject to the option
on the vesting commencement date and 1/4th of the shares subject to the option
at the end of each calendar quarter thereafter; provided, that the optionee
continues to serve on the Board of Advisors and attends its quarterly
meetings.
Common Stock issuable upon exercise of the options are subject to a right of
first refusal on the part of the Company upon certain transfers to third
parties. This right of first refusal terminates upon an initial public
offering of the Company's Common Stock.
All stock options and restricted stock grants to officers, employees,
directors and consultants provide that in the event of a merger of the Company
with or into another corporation resulting in a change of control involving a
shift in 50% or more of the voting power of the Company, or the sale of all or
substantially all of the assets of the Company, the options will fully vest
and become exercisable one year after the change of control or earlier in the
event the individual is constructively terminated or terminated without cause
or in the event that the successor corporation refuses to assume or substitute
the options.
The exercise price of incentive stock options granted under the 1997 Stock
Plan must be at least equal to the fair market value of the Company's Common
Stock on the date of grant. The exercise price of options to an optionee who
owns more than 10% of the Company's outstanding voting securities must equal
at least 110% of the fair value of the Common Stock on the date of grant.
MANAGEMENT BONUS PLAN
The Company has adopted a bonus plan for its officers whereby each of its
officers will be paid three dollars ($3.00) for every end-user served by Covad
Communications Company, a wholly-owned subsidiary of the Company ("Covad
California") as of June 30, 1998, if Covad California serves up to 10,000 end-
users and four dollars ($4.00) for every end-user served by Covad California
in excess of 10,000 up to 50,000 end-users. Any bonus for end-users in excess
of 50,000 will be determined by the Board of Directors. Payments to corporate
officers under the bonus plan will only be owed and paid for end-users that
are "paying end-users" (i.e., end-users for whom Covad California receives
payment that is booked as revenue to Covad California by July 1, 1998
consistent with generally accepted accounting principles).
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LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law, and the Company's Bylaws
provide that the Company shall indemnify its directors and officers and may
indemnify its other employees and agents to the fullest extent permitted by
law. The Company has also entered into agreements to indemnify its directors
and executive officers, in addition to the indemnification provided for in the
Company's Bylaws. The Company believes that these provisions and agreements
are necessary to attract and retain qualified directors and executive
officers. At present, there is no pending litigation or proceeding involving
any director, officer, employee or agent of the Company where indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been
informed that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE EQUITY COMMITMENT
On February 20, 1998, the Company entered into a Series C Preferred Stock
and Warrant Subscription Agreement (the "Subscription Agreement") with the
Investors pursuant to which Warburg and Crosspoint unconditionally agreed to
purchase an aggregate of 3,842,762 shares of Series C Preferred Stock and
warrants to purchase an aggregate of 3,153,000 shares of Series C Preferred
Stock (the "Series C Warrants") for an aggregate purchase price of $16.0
million at a date to be determined by the Company but no later than March 11,
1999. The Company either has agreed to call the Equity Commitment or to
complete an alternate equity financing of at least $16.0 million by March 11,
1999. A proposed alternate equity financing providing for a price per share
greater than or equal to $4.165 and securities that are pari passu (equal)
with, or more favorable to the Company than, the Series C Preferred Stock as
set forth in the Company's Amended Certificate of Incorporation (as currently
in effect) requires approval by the disinterested directors of the Company. A
proposed alternate equity financing providing for a price per share of less
than $4.165 or securities whose terms are less favorable to the Company than
the Series C Preferred Stock requires unanimous approval by the Company's
entire Board of Directors. In consideration of this commitment, the Company
issued to Warburg and Crosspoint warrants to purchase an aggregate of
1,129,432 shares of the Company's Common Stock at a purchase price of $0.005
per share (the "Common Warrants"). For a description of the terms of the
Series C Preferred Stock, see "Description of Capital Stock--Preferred Stock."
On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement between the Company, Warburg, Crosspoint
and Mr. Hawk (the "Assignment and Assumption Agreement") whereby Warburg and
Crosspoint assigned to Mr. Hawk their obligation to purchase 24,010 shares of
Series C Preferred Stock and 19,706 Series C Warrants for an aggregate
purchase price of $100,001.65. On the same date, Mr. Hawk purchased 24,010
shares of Series C Preferred Stock. As a result of this amendment, the
aggregate obligation of Warburg and Crosspoint to purchase Series C Preferred
Stock and Series C Warrants was reduced from 3,842,762 shares to 3,818,752
shares and from 3,153,000 shares to 3,133,294 shares, respectively, for an
aggregate purchase price of $15.9 million, reduced from $16.0 million. On the
same date, the Stockholder Rights Agreement was amended to add Mr. Hawk as a
party.
The Series C Warrants issuable in connection with the closing of the Equity
Commitment will have five-year terms, have purchase prices of $4.165 per share
of Series C Preferred Stock (subject to adjustment in certain events), are
immediately exercisable and contain a net exercise provision. The Common
Warrants issued upon the signing of the Subscription Agreement have five-year
terms (but must be exercised prior to the closing of an initial public
offering of equity securities by the Company), have purchase prices of $0.005
per share, are immediately exercisable and contain net exercise provisions.
On March 11, 1998 the Company amended the Stockholder Rights Agreement
among it and certain of its stockholders, including all of the holders of the
outstanding Preferred Stock, to extend the rights held by the Investors to the
Common Warrants, the Series C Preferred Stock and the Series C Warrants issued
or issuable to the Investors pursuant to the Subscription Agreement. For a
description of the rights set forth in the Stockholder Rights Agreement, see
"Description of Capital Stock--Registration Rights," "--Preemptive Rights,
Rights of First Refusal and Co-Sale Right" and "--Board Representation and
Voting Agreement."
THE STOCK PURCHASE
Pursuant to the Stock Purchase, Intel purchased 240,096 shares of Series C
Preferred Stock and Series C Warrants to purchase an aggregate of 197,000
shares of Series C Preferred Stock for an aggregate purchase price of
$1,000,000 concurrently with the closing of the Old Note Issuance; provided,
that the Company does not have any obligation to issue such Series C Warrants
to Intel until such time as Warburg and Crosspoint fund their respective
commitments under the Equity Commitment. In connection with its agreement to
purchase such Series C Preferred Stock and Series C Warrants, the Company
issued to Intel Common Warrants to purchase an aggregate of 70,568 shares of
Common Stock at a purchase price of $0.005 per share.
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<PAGE>
TRANSACTIONS IN CONNECTION WITH THE FORMATION OF THE DELAWARE HOLDING COMPANY
The Company originally was incorporated in California as Covad California in
October 1996. In July 1997, the Company was incorporated as part of the
Company's strategy to operate through a holding company structure and to
conduct substantially all of its operations through subsidiaries. To effect
the holding company structure, in July 1997 the Company entered into an
Exchange Agreement with the existing holders of the Common Stock and Series A
Preferred Stock of Covad California to acquire all of such stock in exchange
for a like number of shares of Common Stock and Preferred Stock in the
Company, so that after giving effect to the exchange Covad California became a
wholly-owned Subsidiary of the Company. In addition, the Company entered into
an Assumption Agreement pursuant to which the Company assumed certain
outstanding obligations of Covad California, including a $500,000 demand note
issued to Warburg and certain commitments to issue stock options to two
consultants of the Company. The Company committed to issue options to purchase
Common Stock to one consultant in amounts to be determined by his achievement
of certain subscriber levels (to a maximum of 200,000 options if the
consultant obtains 50,000 subscribers) for the calendar year ended December
31, 1998. Any options for subscribers obtained in excess of 50,000 must be
determined by the Board of Directors if the situation occurs. The Company also
offered to issue 11,000 options to purchase Common Stock to a professional
search firm in the event the search firm was able to identify a Chief
Financial Officer of the Company. Since the search firm was ultimately
unsuccessful, no options were issued.
In connection with the Exchange Agreement, Messrs. McMinn, Khanna and Haas,
officers of the Company, each exchanged 2,000,000 shares of Common Stock of
Covad California, originally purchased for $0.00625 per share, for a like
number of shares of Common Stock of the Company pursuant to restricted stock
purchase agreements. In addition, Mr. Lynch, a director of the Company,
exchanged 96,000 shares of Common Stock of Covad California, originally
purchased for $0.05 per share, for a like number of shares of Common Stock of
the Company pursuant to a restricted stock purchase agreement. The Common
Stock issued to Messrs. McMinn, Khanna, Haas and Lynch are generally subject
to vesting over a period of four (4) years. This vesting is subject to
acceleration upon a change of control (involving a merger, sale of all or
substantially all of the assets of the Company or a shift in 50% or more of
the voting power of the Company). Specifically, the Company's repurchase
rights lapse in their entirety one year after the change of control or earlier
in the event the individual is constructively terminated or terminated without
cause, or in the event the successor corporation refuses to assume the
agreements.
ISSUANCE OF COMMON STOCK
On July 16, 1997, the Company issued 750,000 shares of Common Stock to Mr.
Cardinale, an officer of the Company, for a purchase price of $0.05 per share.
On August 30, 1997, the Company issued 230,000 shares of Common Stock to Mr.
Laehy, an officer of the Company, for $0.075 per share. On October 14, 1997,
the Company issued 96,000 shares of Common Stock to Mr. Marshall, a director
of the Company, for a purchase price of $0.075 per share. On April 24, 1998,
the Company issued 64,000 shares of Common Stock to Mr. Hawk, a director of
the Company, for a purchase price of $1.00 per share. The shares of Common
Stock issued to Messrs. Cardinale, Laehy, Marshall and Hawk were issued
pursuant to restricted stock purchase agreements which contain vesting and
change of control provisions similar to those contained in the above-described
restricted stock purchase agreements of Messrs. McMinn, Khanna, Haas and
Lynch.
ISSUANCE OF SERIES A PREFERRED STOCK
On June 30, 1997 Covad California issued 100,000 shares of Series A
Preferred Stock, to each of Messrs. McMinn, Khanna and Haas and 200,000 shares
of Series A Preferred Stock to Mr. Lynch for a purchase price of $0.50 per
share. In July 1997, these shares were exchanged for a like number of shares
of Series A Preferred Stock of the Company pursuant to the Exchange Agreement.
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ISSUANCE OF SERIES B PREFERRED STOCK
In July 1997, the Company sold an aggregate of 11,333,334 shares of Series B
Preferred, of which 8,000,000 shares were sold to Warburg, 2,000,000 shares
were sold to Crosspoint and 1,333,334 shares were sold to Intel. The purchase
price of the Series B Preferred was $0.75 per share. A portion of the purchase
price of the Series B Preferred was paid by cancellation of a $500,000 demand
note issued to Warburg in June 1997. Messrs. Kressel and Landy, each of whom
currently serve as members of the Company's Board of Directors, are affiliated
with Warburg. Mr. Shapero, who currently serves on the Company's Board of
Directors, is affiliated with Crosspoint. See "Management--Directors and
Executive Officers."
On February 12, 1998, the Company sold an additional 66,668 shares of Series
B Preferred at a purchase price of $1.50 per share to Mr. Marshall, a director
of the Company. For a description of the rights and preferences of the Series
B Preferred, see "Description of Capital Stock--Preferred Stock."
EQUIPMENT LEASE FINANCING
The Company has obtained equipment lease financing through a sale lease-back
transaction with Charter Financial, Inc. ("Charter Financial") whereby the
Company is obligated to make aggregate payments of $860,000. Through March 31,
1998, total lease payments to Charter Financial, including principal and
interest payments, were approximately $115,000 Warburg, a principal
stockholder of the Company, owns a majority of the capital stock of Charter
Financial. The Company believes that the terms of the lease financing with
Charter Financial were completed at rates similar to those available from
alternative providers.
VENDOR RELATIONSHIP
Crosspoint, a principal stockholder of the Company, owns approximately 12%
of the capital stock of Diamond Lane, a vendor of the Company. The Company's
payments to Diamond Lane through March 31, 1998 totaled approximately
$142,000. The Company believes that the terms of its transactions with Diamond
Lane were completed at rates similar to those available from alternative
vendors.
REGISTRATION RIGHTS
Certain holders of Common Stock and Common Stock issuable upon conversion of
the Preferred Stock are entitled to registration rights. See "Description of
Capital Stock--Registration Rights."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
officers. See "Management--Employment Agreements and Change in Control
Arrangements."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding ownership of
the Company's Common and Preferred Stock as of April 30, 1998 by (i) each
Named Executive Officer, (ii) each director of the Company, (iii) all
executive officers and directors as a group, and (iv) all persons who directly
own 5% or more of the Company's Common Stock on an as-converted basis.
<TABLE>
<CAPTION>
SHARES OF TOTAL EQUITY
COMMON SHARES OF ASSUMING OWNERSHIP
BENEFICIAL OWNER STOCK PREFERRED STOCK CONVERSION PERCENTAGE(1)
---------------- --------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Charles McMinn........... 2,000,000 100,000 2,100,000 10.60%
Robert Hawk(2)........... 64,000 24,010 88,010 *
Henry Kressel(3)......... 903,546 8,000,000 8,903,456 42.99%
Joseph Landy(3).......... 903,546 8,000,000 8,903,456 42.99%
Daniel Lynch(4) ......... 102,000 200,000 302,000 1.52%
Frank Marshall(4)........ 102,000 66,668 168,668 *
Rich Shapero(5).......... 22,886 2,000,000 2,225,886 11.11%
All executive officers
and directors as a
group(6)................ 8,469,099 10,590,678 19,059,777 90.59%
Warburg, Pincus Ventures,
L.P.(7)................. 903,546 8,000,000 8,903,546 42.99%
Crosspoint Venture
Partners, L.P.(8)....... 225,886 2,000,000 2,225,886 11.11%
Intel Corporation(9)..... 70,568 1,573,430 1,643,998 8.27%
</TABLE>
- --------
* Less than 1% of the outstanding voting stock.
(1) Based on 7,642,136 shares of Common Stock and 12,164,108 shares of
Preferred Stock outstanding as of April 30, 1998. Beneficial ownership is
determined in accordance with the rules of the Commission. In computing
the aggregate number of shares beneficially owned by the individual
stockholders and groups of stockholders described above and the percentage
ownership of such individuals and groups, shares of Common Stock subject
to options or warrants that are currently exercisable or exercisable
within 60 days of April 30, 1998 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of the other stockholders or groups of stockholders.
Except as otherwise indicated, the address of each of the persons in this
table is as follows: c/o Covad Communications Group, Inc., 3560 Bassett
Street, Santa Clara, CA 95054.
(2) Excludes 19,706 shares subject to warrants to purchase Series C Preferred
Stock that the Company will have the right to sell to Mr. Hawk pursuant to
the Equity Commitment.
(3) All of the shares indicated are owned of record by WPV and are included
because of Mr. Kressel's and Mr. Landy's affiliation with WPV. Mr. Kressel
and Mr. Landy disclaim beneficial ownership of these shares within the
meaning of Rule 13d-3 under the Exchange Act. The address of Mr. Kressel
and Mr. Landy is c/o E.M. Warburg, Pincus & Co., LLC, 466 Lexington
Avenue, New York, NY 10017-3147.
(4) Includes 6,000 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998.
(5) All of the shares indicated are owned of record by Crosspoint and are
included because of Mr. Shapero's affiliation with Crosspoint. Mr. Shapero
disclaims beneficial ownership of these shares within the meaning of Rule
13d-3 under the Exchange Act. The address of Mr. Shapero is c/o Crosspoint
Venture Partners, The Pioneer Hotel Building, 2925 Woodside Road,
Woodside, CA 94062.
(6) Includes 103,667 shares of Common Stock subject to options exercisable
within 60 days of April 30, 1998. Also includes 1,129,432 shares of Common
Stock subject to immediately exercisable warrants.
(7) The sole general partner of WPV is Warburg, Pincus & Co., a New York
general partnership ("WP"). E.M. Warburg, Pincus & Co., LLC, a New York
limited liability company ("EMW LLC"), manages WPV. The members of EMW LLC
are substantially the same as the partners of WP. Lionel I. Pincus is the
managing partner of WP and the managing member of EMW LLC and may be
deemed to control both WP and EMW LLC. WP has a 15% interest in the
profits of WPV as a general partner and also owns approximately 1.3% of
the limited partnership interests in WPV. Mr. Kressel and Mr. Landy,
directors of the Company, Managing Directors and members of EMW LLC and
partners of WP and as such may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares beneficially owned by WPV. See Note 2
above. Includes 903,546 shares
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<PAGE>
of Common Stock subject to immediately exercisable warrants issued to WPV
in connection with the Equity Commitment. Excludes 3,055,002 shares of
Series C Preferred Stock and 2,506,636 shares subject to warrants to
purchase Series C Preferred Stock that the Company will have the right to
sell to WPV pursuant to the Equity Commitment. See "Certain Relationships
and Related Transactions--The Equity Commitment." The address of WPV is c/o
E.M. Warburg, Pincus & Co., LLC, 466 Lexington Avenue, New York, NY 10017-
3147.
(8) Mr. Shapero, a director of the Company, is affiliated with Crosspoint and
as such may be deemed to have an indirect pecuniary interest (within the
meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion
of the shares beneficially owned by Crosspoint. See Note 4 above. Includes
225,886 shares of Common Stock subject to immediately exercisable warrants
issued to Crosspoint in connection with the Equity Commitment. Excludes
763,750 shares of Series C Preferred Stock and 626,658 shares subject to
warrants to purchase Series C Preferred Stock that the Company will have
the right to sell to Crosspoint pursuant to the Equity Commitment. See
"Certain Relationships and Related Transactions--The Equity Commitment."
The address of Crosspoint is The Pioneer Hotel Building, 2925 Woodside
Road, Woodside, CA 94062.
(9) Includes 70,568 shares of Common Stock subject to immediately exercisable
warrants issued to Intel pursuant to the Equity Commitment. Excludes
197,000 shares subject to warrants to purchase Series C Preferred Stock
that the Company will be obligated to issue to Intel pursuant to the
Equity Commitment. See "Certain Relationships and Related Transactions--
The Stock Purchase." The address of Intel is 2200 Mission College
Boulevard, Mail Stop SC4-210, Santa Clara, CA 95052-8199.
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<PAGE>
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Old Notes were sold by the Company to the Initial Purchasers, who
subsequently resold the Old Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and non-U.S. persons pursuant
to offers and rates that occurred outside the U. S. pursuant to Regulation S.
In connection with the issuance of the Old Notes, the Company agreed to use
its reasonable best efforts to cause to become effective within the time
period specified in the Registration Rights Agreement, a registration
statement with respect to the Exchange Offer (the "Exchange Offer Registration
Statement"). However, if (i) the Company is not required to file the Exchange
Offer Registration Statement or permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or SEC policy or
(ii) any Holder of Old Notes notifies the Company prior to the 20th day
following consummation of the Exchange Offer that (a) it is prohibited by law
or SEC policy from participating in the Exchange Offer or (b) that it may not
resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not appropriate or available for such resales
or (c) that it is a broker-dealer and owns Old Notes acquired directly from
the Company or an affiliate of the Company, the Company will file with the SEC
a shelf registration statement (the "Shelf Registration Statement") to cover
resales of the Old Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement. Once the Exchange Offer is
consummated, the Company will have no further obligation to register any of
the Old Notes not tendered by the Holders for exchange. See "Risk Factors--
Consequences to Non-Tendering Holders of Old Notes." A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Based on an interpretation by the Staff of the SEC set forth in the Staff's
Exxon Capital Holdings Corp. SEC No-Action Letter (available April 13, 1989),
Morgan Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991),
Shearman & Sterling SEC No-Action Letter (available July 7, 1993), and other
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by Holders thereof without
compliance with the registration and prospectus delivery provisions of the
Securities Act. However, any Holder who is an "affiliate" of the Company or
who intends to participate in the Exchange Offer for the purpose of
distributing the New Notes (i) cannot rely on the interpretation by the staff
of the SEC set forth in the above referenced no-action letters, (ii) cannot
tender its Old Notes in the Exchange Offer, and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements. See "Risk
Factors--Consequences to Non-Tendering Holders of Old Notes."
In addition, each Participating Broker-Dealer that receives New Notes for
its own account in exchange for Old Notes not acquired directly from the
Company must acknowledge that it will deliver a prospectus in connection with
any resale of such New Notes. See "Plan of Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other transfer of New Notes.
TERMS OF THE EXCHANGE OFFER
General. Upon the terms and subject to the conditions of the Exchange Offer
set forth in this Prospectus and the Letter of Transmittal, the Company will
accept any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue
$1,000 principal amount at maturity of New Notes in exchange for each $1,000
principal amount at maturity of outstanding Old
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<PAGE>
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer; provided, that Old Notes may be
tendered only in integral multiples of $1,000 principal amount at maturity.
As of June 16, 1998, there was $260,000,000 of aggregate principal amount at
maturity of the Old Notes outstanding and 18 registered Holders of Old Notes.
This Prospectus, together with the Letter of Transmittal, is being sent to
such registered Holder(s) as of , 1998.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as depositary. The New Notes will be issued and
transferable in book-entry form through DTC. See "--Book-Entry Transfer;
Delivery and Form."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering Holder thereof or the appropriate
book-entry transfer will be made, in each case, as promptly as practicable
after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay the expenses, other
than certain applicable taxes, of the Exchange Offer. See "--Fees and
Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD
NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL
POSITION AND REQUIREMENTS.
Expiration Date; Extensions; Amendments. The term "Expiration Date" shall
mean , 1998, unless the Company in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent and the record Holders of Old Notes of any extension by oral (followed
by written) notice, each prior to 9:00 a.m., New York City time, on the
business day following the previously scheduled Expiration Date. Such notice
may state that the Company is extending the Exchange Offer for a specified
period of time or on a daily basis until 5:00 p.m., New York City time, on the
date on which a specified percentage of Old Notes are tendered.
The Company reserves the right to delay accepting any Old Notes, to extend
the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange
Offer and not accept Old Notes not previously accepted if any of the
conditions set forth herein under "--Conditions" shall have occurred and shall
not have been waived by the Company by giving oral or written notice of such
delay, extension, amendment or termination to the Exchange Agent as promptly
as practicable. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose
such amendment in a manner reasonably calculated to inform the Holders of such
amendment and the Company will extend the Exchange
62
<PAGE>
Offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to Holders of the
Old Notes, if the Exchange Offer would otherwise expire during such five to
ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
ACCRETION OF THE NEW NOTES AND THE OLD NOTES; INTEREST
The Old Notes will continue to accrete in principal amount through (but not
including) the date of issuance of the New Notes. Any Old Notes not tendered
or accepted for exchange will continue to accrete in principal amount at the
rate of 13.5% per annum in accordance with its terms. From and after the date
of issuance of the New Notes, the New Notes shall accrete in principal amount
at the rate of 13.5% per annum, but no cash interest will accrue or be payable
in respect of the New Notes prior to March 15, 2003. Thereafter, the New Notes
will bear interest at a rate equal to 13.5% per annum. Interest on the New
Notes will be payable semi-annually in arrears on March 15 and September 15 of
each year, commencing on September 15, 2003.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder of certificated Old Notes must
complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by Instruction 3 of the
Letter of Transmittal, and mail or otherwise deliver such Letter of
Transmittal or such facsimile, together with the Old Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. If delivery of the Old Notes is to be made
through book-entry transfer into the Exchange Agent's account at DTC, tenders
of the Old Notes must be effected in accordance with DTC's Automated Tender
Offer Program ("ATOP") procedures. See "--Book-Entry Transfer; Delivery and
Form."
The tender by a Holder of Old Notes will constitute an agreement between
such Holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders of Old Notes may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect the
above transactions for such Holders.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY.
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "Holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
Any beneficial Holder whose Old Notes are registered in the name of its
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered Holder promptly and instruct such
registered Holder to tender on its behalf. If such beneficial Holder wishes to
tender on its own behalf, such beneficial Holder must, prior to completing and
executing the Letter of Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
Holder's
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<PAGE>
name or obtain a properly completed bond power from the registered Holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent
in the U.S. (an "Eligible Institution") unless the Old Notes tendered pursuant
thereto are tendered (i) by a registered Holder who has not completed the box
entitled "Special Payment Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers signed as the name of the registered
Holder or Holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons shall so indicate when signing and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of Old
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
Holders of Old Notes, unless otherwise provided in the Letter of Transmittal,
as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth under "--Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of such Holder's business, that such Holder
has no arrangement with any person to participate in the distribution of such
New Notes, and that such Holder is not an "affiliate," as defined under Rule
405 of the Securities Act, of the Company. If the Holder is a Participating
Broker-Dealer that will receive New Notes for its own account in exchange for
Old Notes that were not acquired directly from the Company, such Holder by
tendering will acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
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BOOK-ENTRY TRANSFER; DELIVERY AND FORM
The Old Notes were initially represented (i) in the case of Old Notes
initially purchased by "qualified institutional buyers" (as such term is
defined in Rule 144A under the Securities Act), by two global Old Notes in
fully registered form, all registered in the name of a nominee of the DTC, and
(ii) in the case of Old Notes initially purchased by persons other than U.S.
persons in reliance upon Regulation S under the Securities Act, by one global
Regulation S Old Note in fully registered form, all registered in the name of
a nominee of DTC for the accounts of Euroclear and Cedel Bank. The New Notes
exchanged for the Old Notes represented by the global Old Notes and global
Regulation S Old Note will be represented (a) in the case of "qualified
institutional buyers", by one global New Note in fully registered form,
registered in the name of the nominee of DTC, and (b) in the case of persons
outside of the U. S., by one global Regulation S New Note in fully registered
form, registered in the name of the nominee of DTC for the accounts of
Euroclear and Cedel Bank. The global New Note and global Regulation S New Note
will be exchangeable for definitive New Notes in registered form, in
denominations of $1,000 principal amount at maturity and integral multiples
thereof. The New Notes in global form will trade in The Depository Trust
Company's Same-Day Funds Settlement System, and secondary market trading
activity in such New Notes will therefore settle in immediately available
funds.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish an account with respect to the
Old Notes at DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with DTC's ATOP procedures for such
book-entry transfers. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at DTC, the
exchange for Old Notes so tendered will only be made after timely confirmation
(a "Book-Entry Confirmation") of such book-entry transfer of the Old Notes
into the Exchange Agent's account, and timely receipt by the Exchange Agent of
a Book-Entry Confirmation with a message, transmitted by DTC and received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which
states that DTC has received express acknowledgment from a participant
tendering Old Notes that such participant has received and agrees to be bound
by the terms of the Letter of Transmittal, and that such agreement may be
enforced against such participant.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount at
maturity of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Old Notes to be
tendered in proper form for transfer and any other documents required by
the Letter of Transmittal, or a Book-Entry Confirmation, as the case may
be, will be delivered by the Eligible Institution to the Exchange Agent;
and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer and all other documents required by
the Letter of Transmittal, or a Book-Entry Confirmation, as the case may
be, are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
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WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at
its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number
or numbers and principal amount at maturity of such Old Notes), (iii) be
signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes into the name of the person withdrawing the tender,
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered. Any
Old Notes which have been tendered but which are not accepted for exchange
will be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures, described above under "--Procedures for Tendering" at
any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for, any Old Notes
not theretofore accepted for exchange, and may terminate or amend the Exchange
Offer as provided herein before the acceptance of such Old Notes, if any of
the following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder,
violates applicable law or any applicable interpretation of the SEC;
(b) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might impair the ability of the
Company to proceed with the Exchange Offer;
(c) any law, statute, rule or regulation is adopted or enacted which, in
the sole judgment of the Company, might materially impair the ability of
the Company to proceed with the Exchange Offer;
(d) a banking moratorium is declared by U.S. federal or California or New
York state authorities which, in the Company's judgment, would reasonably
be expected to impair the ability of the Company to proceed with the
Exchange Offer;
(e) trading on the New York Stock Exchange or generally in the U.S. over-
the-counter market is suspended by order of the SEC or any other
governmental authority which, in the Company's judgment, would reasonably
be expected to impair the ability of the Company to proceed with the
Exchange Offer; or
(f) a stop order is issued by the SEC or any state securities authority
suspending the effectiveness of the Registration Statement or proceedings
are initiated or, to the knowledge of the Company, threatened for that
purpose.
If any such conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of Holders to withdraw
such Old Notes (see""--Withdrawal of Tenders") or (iii) waive certain of such
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn or revoked. If such waiver constitutes
a material change to the Exchange Offer, the Company will promptly disclose
such waiver in a manner reasonably calculated to inform Holders of Old Notes
of such waiver.
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The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Letters of Transmittal and Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail: By Overnight Courier:
Attention: Attention:
Reorganization Section Reorganization Section
The Bank of New York The Bank of New York
101 Barclay Street, Floor 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Ground Floor
New York, New York 10286
By Hand: By Facsimile:
Attention: (212) 815-
Reorganization Section Attention:
The Bank of New York Reorganization Section
101 Barclay Street
Corporate Trust Services Window Confirm by telephone:
Ground Floor (212) 815-
New York, New York 10286
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by
them in forwarding copies of this Prospectus and related documents to the
beneficial owners of the Old Notes, and in handling or forwarding tenders for
exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, are estimated in the aggregate to be approximately
$ and include fees and expenses of the Exchange Agent and the Trustee under
the Indenture and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts at maturity not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered
Holder of the Old Notes tendered, or if tendered Old Notes are registered in
the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered Holder or any other
persons) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exception therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering Holder.
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ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value as reflected in the Company's accounting records on the
date of the Exchange Offer. Accordingly, no gain or loss for accounting
purposes will be recognized upon consummation of the Exchange Offer. The
issuance costs incurred in connection with the Exchange Offer will be
capitalized and amortized over the term of the New Notes.
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DESCRIPTION OF THE OLD NOTES
GENERAL
The Old Notes were issued pursuant to the Indenture between the Company and
The Bank of New York, as trustee, in a private transaction that was not
subject to the registration requirements of the Securities Act. The terms of
the Old Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Old Notes are subject to all such terms, and
Holders of Old Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of the material provisions of
the Indenture and the Registration Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to such agreements,
including the definitions therein of certain terms used below. Copies of such
agreements have been filed as exhibits to the Registration Statement of which
this Prospectus is a part and are available from the SEC or as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." For
purposes of this summary, the term "Company" refers only to Covad
Communications Group, Inc. and not to any of its Subsidiaries and the term
"Notes" refers only to the Old Notes.
The Old Notes are senior obligations of the Company, rank pari passu in
right of payment with all existing and future Debt of the Company and senior
in right of payment to any future subordinated Debt of the Company but are
effectively subordinated to any secured Debt of the Company and future Debt
and other liabilities (including subordinated Debt and trade payables) of the
Company's Subsidiaries. The Indenture permits the incurrence of substantial
additional Debt, including secured Debt by the Company and its Subsidiaries,
subject to certain restrictions. See "Risk Factors--Holding Company Structure;
Restrictions on Access to Subsidiary Cash Flow." As of March 31, 1998, the
total amount of long-term obligations (including current portion but net of
the Debt Discount) of the Company was approximately $133.2 million.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Old Notes. See "Risk
Factors--Holding Company Structure; Restrictions on Access to Subsidiary Cash
Flow."
As of the date of the Indenture, the Company had two Subsidiaries, both of
which had been designated as Restricted Subsidiaries. Under certain
circumstances, the Company will be able to designate Subsidiaries of the
Company, including Subsidiaries that it creates or acquires in the future, to
be Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants set forth in the Indenture. See "--Certain
Covenants--Restricted Payments."
PRINCIPAL, MATURITY AND INTEREST
The Notes were limited in initial aggregate Accreted Value to $185.0
million, of which approximately $135.1 million of Notes were issued in the Old
Note Issuance and $50.0 million of Notes will be available for issuance in the
future, subject to the covenant described under "--Certain Covenants--
Incurrence of Debt." The Notes will mature on March 15, 2008. The Notes were
offered at a substantial discount from their principal amount at maturity, to
generate gross proceeds of approximately $135.1 million. See "Certain United
States Income Tax Considerations--The New Notes--Original Issue Discount."
Until the Full Accretion Date, no interest will accrue or be payable on the
Notes, but the Accreted Value will accrete (representing the amortization of
original issue discount) between the date of issuance and the Full Accretion
Date, on a semi-annual bond equivalent basis using a 360-day year comprised of
twelve 30-day months such that the Accreted Value shall be equal to the full
principal amount at maturity of the Notes on the Full Accretion Date.
Beginning on the Full Accretion Date, interest on the Notes will accrue at the
rate of 13.5% per annum and will be payable in cash semi-annually in arrears
on March 15 and September 15, commencing on September 15, 2003, to Holders of
record on the immediately preceding March 1 and September 1. Interest on the
Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from the Full Accretion Date. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any,
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and interest on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or,
at the option of the Company, payment of interest may be made by check mailed
to the Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; provided that all payments of principal,
premium, if any, and interest with respect to Notes of Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York, New York will be the office of the applicable
Trustee maintained for such purpose. The Notes were issued in denominations of
$1,000 principal amount at maturity and integral multiples thereof.
OPTIONAL REDEMPTION
Except as noted below, the Notes will not be redeemable at the Company's
option prior to March 15, 2003. Thereafter, the Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days notice, at the redemption prices
(expressed as percentages of principal amount at maturity) set forth below,
plus accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on March 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.............................................................. 106.75%
2004.............................................................. 104.50%
2005.............................................................. 102.25%
2006 and thereafter............................................... 100.00%
</TABLE>
In addition, at any time on or prior to March 15, 2001, the Company, at its
option, may use the net cash proceeds (but only to the extent such proceeds
consist of cash or Cash Equivalents) of one or more Public Equity Offerings or
the sale of at least $35.0 million of Capital Stock (other than Disqualified
Stock) to one or more Strategic Equity Investors in a single transaction or a
series of related transactions to redeem up to an aggregate of 35% of the
Accreted Value of Notes originally issued under the Indenture at a redemption
price of 113.5% of the Accreted Value, plus accrued and unpaid interest, if
any, to the date of redemption; provided that Notes representing at least
$87.8 million of the aggregate initial Accreted Value of the Notes remain
outstanding immediately after the occurrence of such redemption. In order to
effect the foregoing redemption, the Company must mail a notice of redemption
no later than 30 days after the related Public Equity Offering and must
consummate such redemption within 60 days of the closing of such Public Equity
Offering. Neither the Equity Commitment nor the Stock Purchase shall
constitute an investment or any part of any investment by a Strategic Equity
Investor.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 principal amount at maturity or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder
of Notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
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MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, Indenture requires the Company
to make an offer to each Holder of Notes to repurchase all or any part (equal
to $1,000 principal amount at maturity or an integral multiple thereof) of
such Holder's Notes pursuant to the offer described below (the "Change of
Control Offer") at an offer price in cash (the "Change of Control Payment")
equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon to the date of purchase (or if such Change of Control
Offer is prior to the Full Accretion Date, 101% of the Accreted Value thereof
on the date of repurchase, plus accrued and unpaid, thereon to the date of
repurchase). Within ten days following any Change of Control, the Company will
mail a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the applicable
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii)deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount or Accreted Value, as applicable, of Notes or
portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each Holder of Notes so tendered the Change of Control
Payment for such Notes, and the Trustee will promptly authenticate and mail
(or cause to be transferred by book-entry) to each Holder a new Note equal in
principal amount at maturity to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount at maturity of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 85% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of any combination of cash or Cash Equivalents;
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provided that the amount of (a) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or such
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any guarantee thereof) that
are assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Company or such Restricted Subsidiary
from further liability and (b) any securities, notes or other obligations
received by the Company or such Restricted Subsidiary from such transferee
that are contemporaneously (subject to ordinary settlement periods) converted
by the Company or such Restricted Subsidiary into cash (to the extent of the
cash received), shall be deemed to be cash for purposes of this provision.
The Company and its Restricted Subsidiaries will be permitted to consummate
an Asset Sale without complying with clause (ii) of the immediately proceeding
paragraph if (i) the Company or the applicable Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets or other property sold, issued or
otherwise disposed of and (ii) at least 85% of the consideration for such
Asset Sale constitutes any combination of cash, Cash Equivalents and
Productive Assets; provided that any cash consideration, any non-cash
consideration not constituting Productive Assets received by the Company or
any of its Restricted Subsidiaries in connection with such Asset Sale that is
converted into or sold or otherwise disposed of for cash or Cash Equivalents
at any time within 270 days after such Asset Sale and any Productive Assets
constituting cash or Cash Equivalents received by the Company or any of its
Restricted Subsidiaries in connection with such Asset Sale shall constitute
Net Cash Proceeds subject to the provisions set forth above.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company (or such Restricted Subsidiary, as the case may be) may, subject
to the provisions of the Indenture described under "--Certain Covenants--
Restricted Payments," apply such Net Proceeds to (i) permanently reduce the
amounts permitted to be borrowed by the Company or such Restricted Subsidiary
under the terms of any of its Debt that is not subordinated Debt or (ii) the
purchase of Telecommunications Related Assets or Voting Stock of any Person
engaged in the Telecommunications Business in the U.S. (provided that such
Person concurrently becomes a Restricted Subsidiary of the Company). Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce revolving credit borrowings or otherwise invest such Net Proceeds in
any manner that is not prohibited by the Indenture. Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be
required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
repurchase the maximum principal amount of Notes that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount of the Notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase (or, if such Asset Sale
Offer is to be consummated prior to the Full Accretion Date, 100% of the
Accreted Value of the Notes, plus accrued and unpaid interest thereon, if any,
to the date of purchase), in accordance with the procedures set forth in the
Indenture. To the extent that any Excess Proceeds remain after consummation of
an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate Accreted Value or
principal amount, as the case may be, of Notes tendered pursuant to such Asset
Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable to the repurchase of Notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue thereof.
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CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) or to the direct
or indirect holders of the Company's or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or to the Company or a Restricted Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent
of the Company (other than any such Equity Interests owned by the Company or
any Restricted Subsidiary of the Company); (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value, any Debt that is subordinated to the Notes, except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable two-quarter Measurement Period, have
been permitted to incur at least $1.00 of additional Debt pursuant to the
Debt to Annualized Cash Flow Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of Debt and
Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Closing Date (excluding Restricted Payments
permitted by clauses (ii), (iii) and (iv) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the Closing Date as a contribution to its common equity capital or from the
issue or sale of Equity Interests of the Company (other than Disqualified
Stock and other than $16.0 million of net proceeds received by the Company
pursuant to the Equity Capital Investment) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company), plus (iii) to the extent that any Restricted Investment that
was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment.
The foregoing provisions will not prohibit: (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Debt or Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of, other Equity Interests of
the Company (other than any Disqualified Stock); provided that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c)(ii) of
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the preceding paragraph; (iii) the defeasance, redemption, repurchase or other
acquisition of subordinated Debt with the net cash proceeds from an incurrence
of Permitted Refinancing Debt; (iv) the payment of any dividend by a
Restricted Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; and (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Restricted Subsidiary of the Company held by any member of the Company's
or any of its Restricted Subsidiaries' management; provided, that (A) the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $250,000 in any twelve-month period and (B)
no Default or Event of Default shall have occurred and be continuing
immediately after such transaction.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
by the Board of Directors whose resolution with respect thereto shall be
delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $5.0 million. Not later
than the date of making any Restricted Payment, the Company shall deliver to
the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash
or Cash Equivalents) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in
an amount equal to the fair market value of such Investments at the time of
such designation. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
"Restricted Payments" covenant.
If, at any time, any Unrestricted Subsidiary would fail to meet the
requirements of the definition of an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Debt of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Debt is not
permitted to be incurred as of such date under the covenant described under
the caption "--Incurrence of Debt and Issuance of Disqualified Stock," the
Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Debt by a Restricted
Subsidiary of the Company of any outstanding Debt of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Debt is
permitted under the covenant described under the caption "Incurrence of Debt
and Issuance of Disqualified Stock", calculated on a pro forma basis as if
such designation had occurred at the beginning of the two-quarter Measurement
Period, and (ii) no Default or Event of Default would be in existence
following such designation.
Incurrence of Debt and Issuance of Disqualified Stock
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any Debt
(including Acquired Debt) and that
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the Company will not issue any Disqualified Stock; provided, however, that the
Company may incur Debt (including Acquired Debt) or issue shares of
Disqualified Stock if the Company's Debt to Annualized Cash Flow Ratio is no
greater than (a) 5.5 to 1.0, if such incurrence or issuance is on or prior to
March 15, 2001, and (b) 5.0 to 1.0, if such incurrence or issuance is after
March 15, 2001.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Debt (collectively, "Permitted
Debt"), each such item to be given independent effect:
(i) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt under Credit Facilities in an aggregate principal
amount (with letters of credit being deemed to have a principal amount
equal to the maximum reimbursement obligations of the Company and/or any of
its Restricted Subsidiaries thereunder) not to exceed $25.0 million at any
one time outstanding, less the aggregate amount of all Net Proceeds of
Asset Sales applied to permanently reduce the commitments with respect to
such Debt pursuant to the covenant described above under the caption "--
Asset Sales;"
(ii) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Vendor Debt, provided that the aggregate amount of such
Vendor Debt incurred does not exceed 80% of the total cost of the
Telecommunications Related Assets financed therewith;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Debt;
(iv) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt in an aggregate principal amount not to exceed $5.0
million at any one time outstanding;
(v) the incurrence by the Company of Debt (other than secured Acquired
Debt) in an aggregate principal amount not to exceed 2.0 times the sum of
the net cash proceeds received by the Company after the date of the
Indenture in connection with any issuance and sale of Equity Interests
(other than Disqualified Stock and other than $16.0 million of net proceeds
received by the Company pursuant to the Equity Capital Investment), plus
the fair market value of Equity Interests (other than Disqualified Stock)
issued after consummation of a Public Equity Offering in connection with an
acquisition of a Telecommunications Business or Telecommunications Related
Assets; provided that such Debt does not mature prior to the Stated
Maturity of the Notes or has an Average Life to Stated Maturity at least
equal to the Notes;
(vi) the incurrence by the Company of Debt represented by, and accreting
or accruing in respect of, the $260.0 million in principal amount at
maturity of Notes originally issued under the Indenture;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to refund, refinance or replace Debt (other than intercompany
Debt) that was permitted by the Indenture to be incurred under the first
paragraph hereof or clauses (iii) or (vi) of this paragraph;
(viii) the incurrence by the Company or any of its Wholly Owned
Restricted Subsidiaries of intercompany Debt; provided, however, that (a)
any subsequent issuance or transfer of Equity Interests that results in any
such Debt being held by a Person other than the Company or a Wholly Owned
Restricted Subsidiary of the Company and (b) any sale or other transfer of
any such Debt to a Person that is not either the Company or a Wholly Owned
Restricted Subsidiary of the Company shall be deemed, in each case, to
constitute an incurrence of such Debt by the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(viii);
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Debt that is
permitted by the terms of this Indenture to be outstanding; and
(x) the incurrence by the Company or any of its Restricted Subsidiaries
of Purchase Money Debt, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of development, construction,
maintenance, enhancement or improvement of Productive Assets; provided,
however, that the aggregate principal amount of Purchase Money Debt shall
not exceed $25.0 million at any one time
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outstanding, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the commitments with respect to such Debt
pursuant to the covenant described above under the caption "--Asset Sales."
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (x) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall,
in its sole discretion, classify such item of Debt in any manner that complies
with this covenant. Accrual of interest and accretion or amortization of
original issue discount will not be deemed to be an incurrence of Debt for
purposes of this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or
any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii)
transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing Debt
as in effect on the Closing Date, (b) the Indenture and the Notes, (c)
applicable law, (d) any instrument governing Debt or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Debt was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Debt, such Debt was permitted by the
terms of the Indenture to be incurred, (e) customary non-assignment provisions
in contracts entered into in the ordinary course of business, (f) customary
restrictions on encumbrance, transfer or disposition of financed assets
pursuant to agreements governing Purchase Money Debt and Vendor Debt permitted
by the Indenture on the property so acquired, (g) any agreement for the sale
of a Restricted Subsidiary that restricts distributions by that Restricted
Subsidiary pending its sale, (h)Permitted Refinancing Debt, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Debt are no more restrictive, taken as a whole, than those contained in the
agreements governing the Debt being refinanced, (i) secured Debt otherwise
permitted to be incurred pursuant to the provisions of the covenant described
above under the caption "--Liens" that limits the right of the debtor to
dispose of the assets securing such Debt, (j) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business
and (k) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business. The
Indenture will provide that the Company or any of its Restricted Subsidiaries
will not create any Subsidiary after the date of the Indenture that is not
either an Unrestricted Subsidiary or a Wholly Owned Restricted Subsidiary.
Merger, Consolidation, or Sale of Assets
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries may consolidate or merge with or into (whether or not the Company
or such Restricted Subsidiary is the surviving corporation), or
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sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity, unless (i) the Company
or such Restricted Subsidiary is the surviving corporation or the entity or
the Person formed by or surviving any such consolidation or merger (if other
than the Company or such Restricted Subsidiary) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company or such Restricted Subsidiary) or the entity or Person to which
such sale, assignment, transfer, lease, conveyance or other disposition shall
have been made assumes all the obligations of the Company under the Notes and
the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (a) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (b) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at
the beginning of the applicable two-quarter Measurement Period, be permitted
to incur at least $1.00 of additional Debt pursuant to the Debt to Annualized
Cash Flow Ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of Debt and Issuance of
Disqualified Stock" or any other Person which (x) assumes or guarantees the
obligations of the Company under the Notes, the Indenture and the Registration
Rights Agreement pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, (y) would, as a result of the applicable
transaction, properly classify the Company or such Restricted Subsidiary as a
consolidated subsidiary in accordance with GAAP and (C) would, if the
conditions set forth in clauses (a) and (b) above were tested substituting
such Person for the Company, satisfy such conditions.
The restriction on merger, consolidation or sale of assets prohibits the
Company or any of its Restricted Subsidiaries from, among other things,
selling, assigning, transferring, leasing, conveying or otherwise disposing of
all or substantially all of their properties or assets in one or more related
transactions to another corporation, Person or entity unless certain
requirements are met. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of the
Company or any of its Restricted Subsidiaries to sell less than all of their
assets to another corporation, Person or entity without complying with these
requirement is uncertain.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers
to the Trustee (a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(i) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and (b) with respect to
any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $5.0 million, an opinion as to
the fairness to the Holders of such Affiliate Transaction from a financial
point of view issued by an accounting, appraisal or investment banking firm of
national standing. Notwithstanding the foregoing, the following items shall
not be deemed to be Affiliate Transactions: (i) any employment agreement and
related arrangement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course
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of business; (ii) transactions between or among the Company and/or its
Restricted Subsidiaries; (iii) payment of reasonable directors fees to Persons
who are not otherwise Affiliates of the Company; and (iv) Restricted Payments
that are permitted by the provisions of the Indenture described above under
the caption "--Restricted Payments."
Limitations on Issuances of Guarantees of Debt
The Indenture provides that the Company will not permit any Subsidiary,
directly or indirectly, to guarantee, assume or in any other manner become
liable with respect to any Pari Passu Debt or Subordinated Debt of the Company
unless such Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a guarantee of the Notes on the same
terms as the guarantee of such Debt except that (i) such guarantee need not be
secured unless required pursuant to "--Liens" and (ii) if such Debt is by its
terms expressly subordinated to the Notes, any such assumption, guarantee or
other liability of such Subsidiary with respect to such Debt shall be
subordinated to such Subsidiary's guarantee of the Notes at least to the same
extent as such Debt is subordinated to the Notes; provided, that this
paragraph shall not apply to any guarantee or assumption of liability of Debt
permitted under the Indenture described in clauses (i), (vi), (vii), (viii)
and (ix) of the second paragraph under "--Incurrence of Debt and Issuance of
Disqualified Stock."
Notwithstanding the foregoing, any guarantee by a Subsidiary of the Notes
shall provide by its terms that it (and all Liens securing the same) shall be
automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's Capital Stock in, or all or substantially all of the assets of,
such Subsidiary, which transaction is in compliance with the terms of the
Indenture and such Subsidiary is released from its guarantees of other Debt of
the Company or any of its Subsidiaries.
Issuances and Sales of Equity Interests in Wholly Owned Restricted
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any of its Wholly Owned Restricted Subsidiaries to, transfer, convey, sell,
lease or otherwise dispose of any Equity Interests in any Wholly Owned
Restricted Subsidiary of the Company to any Person (other than the Company or
another Wholly Owned Restricted Subsidiary, unless (a) such transfer,
conveyance, sale, lease or other disposition is of all of the Equity Interests
in such Wholly Owned Restricted Subsidiary and (b) the Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in
accordance with the covenant described above under the caption "--Repurchase
at the Option of Holders--Asset Sales," and (ii) will not permit any Wholly
Owned Restricted Subsidiary of the Company to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company or
another Wholly Owned Restricted Subsidiary.
Business Activities
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, engage in any business other than the
Telecommunications Business.
Limitations on Sale and Leaseback Transactions
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, enter into, assume, guarantee or otherwise become
liable with respect to any Sale and Leaseback Transactions; provided, that the
Company or any Restricted Subsidiary of the Company may enter into any such
transaction if (i) the Company or such Restricted Subsidiary would be
permitted under the covenants described above under "--Incurrence of Debt and
Issuance of Disqualified Stock" and "--Liens" to incur secured Debt in an
amount equal to the Attributable Debt with respect to such transaction, (ii)
the consideration received by the Company or such Restricted Subsidiary from
such transaction is at least equal to the Fair Market Value of the property
being transferred and (iii) the Net Proceeds received by the Company or such
Restricted Subsidiary from such transaction are applied in accordance with the
covenant described above under the caption "--Asset Sales."
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Payments for Consent
The Indenture provides that neither the Company nor any of its Affiliates
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered
to be paid or agreed to be paid to all Holders of the Notes that consent,
waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes and file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its
Restricted Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of the Company) and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports, in each case within the time periods specified in the
Commissions rules and regulations. In addition, for so long as any Notes are
outstanding, the Company will furnish to the Holders of the Notes, securities
analysts and prospective investors or beneficial owners of the Notes, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following will constitute an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes (including any Additional Interest); (ii) default in payment when due of
the principal of or premium, if any, on the Notes; (iii) failure by the
Company or any of its Restricted Subsidiaries to comply with the provisions
described under the captions "--Change of Control," "--Asset Sales," "--
Restricted Payments," "--Incurrence of Debt and Issuance of Disqualified
Stock" or "--Merger, Consolidation, or Sale of Assets;" (iv) failure by the
Company or any of its Restricted Subsidiaries for 30 days after notice to
comply with any of its other agreements in the Indenture or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Debt for money
borrowed by the Company or any of its Restricted Subsidiaries (or the payment
of which is guaranteed by the Company or any of its Restricted Subsidiaries),
whether such Debt or guarantee now exists or is created after the Closing
Date, which default (a) is caused by a failure to pay principal of or premium,
if any, or interest on such Debt prior to the expiration of the grace period
provided in such Debt on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Debt prior to its express maturity and, in
each case, the principal amount of any such Debt, together with the principal
amount of any other such Debt under which there has been a Payment Default or
the maturity of which has been so accelerated, aggregates $5.0 million or
more; (vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; (vii) the failure by the
Company for any reason to consummate by March 11, 1999 the Equity Capital
Investment or the repudiation by any of the Investors of their respective
obligations under the Equity Commitment; and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Restricted
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount at maturity of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of
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bankruptcy or insolvency with respect to the Company, any Significant
Subsidiary or any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
March 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to such date, then the premium
specified in the Indenture shall also become immediately due and payable to
the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders
of all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations under the Notes discharged ("Legal Defeasance") except for (i) the
rights of Holders of outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due from the trust referred to below, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
the Company's obligations in connection therewith, and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Notes on the stated maturity or on the applicable redemption date,
as the case may be, and the Company must specify whether the Notes are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee
confirming that (a) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (b) since the date of the
Indenture, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
the Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the Holders
of the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that (assuming that no Holder of any Notes would be
considered an insider of the Company under applicable bankruptcy or insolvency
law) after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors rights generally; (vii) the Company must
deliver to the Trustee an Officers' Certificate stating that the deposit was
not made by the Company with the intent of preferring the Holders of Notes
over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or Event
of Default or compliance with any provision of the Indenture or the Notes may
be waived with the consent of the Holders of a majority in aggregate principal
amount at maturity of the then outstanding Notes (including, without
limitation, consents obtained in connection with a purchase of, or tender
offer or exchange offer for, Notes).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders;" (iii) reduce the
rate of or change the time for payment of interest on any Note; (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Notes (except a rescission of acceleration of the Notes by
the Holders of at least a majority in aggregate principal amount at maturity
of the Notes and a waiver of the payment default that resulted from such
acceleration); (v) make any Note payable in money other than that stated in
the Notes; (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or premium, interest on the Notes; (vii) waive a redemption
payment with respect to any Note (other than a payment required by one of the
covenants described above under the caption "--Repurchase at the Option of
Holders"); or (viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements
of the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act or otherwise to comply with applicable
law.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured or waived), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Covad
Communications Group, Inc., 3560 Bassett Street, Santa Clara, California
34054, Attention: General Counsel.
REGISTRATION RIGHTS; ADDITIONAL INTEREST
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to a registered offer
to exchange the Old Notes for New Notes of the Company having terms
substantially identical in all material respects to the Old Notes (except that
the New Notes will not contain terms with respect to transfer restrictions,
registration rights or payment of additional interest. Upon the effectiveness
of the Exchange Offer
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Registration Statement, the Company will offer to the Holders of Transfer
Restricted Securities (as defined below) who are able to make certain
representations the opportunity to exchange their Transfer Restricted
Securities for New Notes pursuant to the Exchange Offer. If (i) the Company is
not required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Company prior to the 20th day following consummation
of the Exchange Offer that (a) it is prohibited by law or Commission policy
from participating in the Exchange Offer or (b) that it may not resell the New
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (c) that it is a
broker-dealer and owns Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of the Notes by the Holders thereof
who satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. The Company will use its
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Note until (i) the date
on which such Note has been exchanged by a person other than a broker-dealer
for an Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date
on which such Exchange Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on
which such Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iv) the
date on which such Note is distributed to the public pursuant to Rule 144
under the Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Closing Date, (ii) the Company will use its best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to
issue, on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission,
Exchange Notes in exchange for all Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company will use its best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
and to cause the Shelf Registration to be declared effective by the Commission
on or prior to 120 days after such obligation arises. If (a) the Company fails
to file any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
Registration Statements is not declared effective by the Commission on or
prior to the date specified for such effectiveness (the "Effectiveness Target
Date"), (c) the Company fails to consummate the Exchange Offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement, or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then interest ("Additional Interest") will accrue on
the Notes and the Exchange Notes (in addition to the stated interest on the
Notes and the Exchange Notes) from and including the date on which any such
Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured. Additional Interest will accrue at a
rate of 0.50% per annum over the rate at which interest is then otherwise
accruing or, as applicable, principal is then accreting during the 90-day
period immediately following the occurrence of any Registration Default and
shall increase by 0.25% per annum at the end of each subsequent 90-day period,
but in no event shall such Additional Interest exceed 2.0% per annum.
Additional Interest will be payable in cash, semiannually in arrears on each
March 15 and September 15, regardless of whether any such date is otherwise an
Interest Payment Date. All references herein and in the Indenture to
"interest" on the Notes and the New Notes shall be deemed to include any
Additional Interest that may become payable thereon according to the
provisions of this paragraph.
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Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Notes included in the Shelf Registration Statement and benefit from the
provisions regarding Additional Interest set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" is defined to mean, for any date of calculation, the amount
calculated pursuant to (i), (ii), (iii) or (iv) for each $1,000 of principal
amount at maturity of Notes:
(i) if such date of calculation occurs on one or more of the following
dates (each a "Semi-Annual Accrual Date"), the Accreted Value will equal
the amount set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
------------------------ ---------
<S> <C>
March 15, 1998................................................. $ 520.40
September 15, 1998............................................. 555.53
March 15, 1999................................................. 593.02
September 15, 1999............................................. 633.05
March 15, 2000................................................. 675.78
September 15, 2000............................................. 721.40
March 15, 2001................................................. 777.09
September 15, 2001............................................. 822.08
March 15, 2002................................................. 877.57
September 15, 2002............................................. 936.80
March 15, 2003................................................. 1,000.00
</TABLE>
(ii) if such date of calculation occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (a) $519.62 and (b)
an amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less $519.62 multiplied by (2) a fraction, the
numerator of which is the number of days from the issue date of the Notes
to such date of calculation, using a 360-day year of twelve 30-day months,
and the denominator of which is the number of days elapsed from the issue
date of the Notes to the first Semi-Annual Accrual Date, using a 360-day
year of twelve 30-day months;
(iii) if such date of calculation occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value of
Semi-Annual Accrual Date immediately preceding such date of calculation and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to such date of calculation, using a
360-day year of twelve 30-day months, and the denominator of which is 180;
or
(iv) if such date of calculation occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of any
other Person existing at the time such other Person is merged with or into or
becomes a Restricted Subsidiary of such specified Person, including, without
limitation, Debt incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Restricted Subsidiary of such
specified Person, and (ii) Debt secured by a Lien encumbering any asset
acquired by such specified Person.
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"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of services in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "--Change of Control" and/or the provisions described
above under the caption "--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following shall not be deemed to
be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned
Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary; (ii) an issuance of
Equity Interests by a Wholly Owned Restricted Subsidiary to the Company or to
another Wholly Owned Restricted Subsidiary; (iii) a Restricted Payment that is
permitted by the covenant described above under the caption "--Restricted
Payments"; (iv) disposals or replacements of obsolete, uneconomical,
negligible, worn-out or surplus property in the ordinary course of business;
or (v) a conveyance constituting or pursuant to a Permitted Lien.
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction, the present value at the time of determination (discounted at a
rate consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the applicable lease
(including any period for which such lease has been extended or may, at the
option of the lessee be extended) or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of a penalty
(in which case the rental payments shall be calculated to include such
penalty), after excluding all amounts required to be paid on account of
maintenance and repairs, insurance, taxes, assessments, water, utilities and
similar charges.
"Average Life to Stated Maturity" means, as of any date of determination
with respect to any Debt, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from the date of determination to the date
or dates of each successive scheduled principal payment of such Debt
multiplied by (b) the amount of each such principal payment; by (ii) the sum
of all such principal payments.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
of such Rules that a Person shall be deemed to have beneficial ownership of
all securities that such Person has a right to acquire within 60 days;
provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (1) arises solely as
a result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and
(2) is not also then reportable on Schedule 13D or Schedule 13G (or any
successor schedule) under the Exchange Act.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on the balance sheet of the
lessee in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests
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(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of (other than distributions of assets in respect
of Debt), the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers acceptances with maturities not
continued exceeding six months and overnight bank deposits, in each case with
any domestic commercial bank having capital and surplus in excess of $500
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within six months after the date of acquisition and (vi) money market
and mutual funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to any Person or group (as
such term is used in Section 13(d)(3) and 14 (d)(2) of the Exchange Act), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) any Person or group (as defined above) other than the Permitted
Holders is or becomes the Beneficial Owner, directly or indirectly, of more
than 50% of the total Voting Stock or Total Common Equity of the Company,
including by way of merger, consolidation or otherwise or (iv) the first day
on which a majority of the members of the Board of Directors of the Company
are not Continuing Directors.
"Closing Date" shall mean the first date on which Notes are issued by the
Company.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the
Nasdaq National Market or, if such shares are not listed or admitted to
trading on any national securities exchange or quoted on Nasdaq National
Market but the issuer is a Foreign Issuer (as defined in Rule 3b-4(b) under
the Exchange Act) and the principal securities exchange on which such shares
are listed or admitted to trading is a Designated Offshore Securities Market
(as defined in Rule 902(a) under the Securities Act), the average of the
reported closing bid and asked prices regular way on such principal exchange,
or, if such shares are not listed or admitted to trading on any national
securities exchange or quoted on Nasdaq National Market and the issuer and
principal securities exchange do not meet such requirements, the average of
the closing bid and asked prices in the over-the-counter market as furnished
by any New York Stock Exchange member firm is selected from time to time by
the Company for that purpose and is reasonably acceptable to the Trustee.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted.
"Common Stock" means the common stock, par value $0.001 per share, of the
Company.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries
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for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest
expense of such Person and its Restricted Subsidiaries for such period,
whether paid or accrued and whether or not capitalized (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Restricted Subsidiaries for
such period to the extent that such depreciation, amortization and other non-
cash expenses were deducted in computing such Consolidated Net Income, minus
(v) non-cash items increasing such Consolidated Net Income for such period, in
each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or
profits of, and the depreciation and amortization and other non-cash expenses
of, a Restricted Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
that a corresponding amount would be permitted at the date of determination to
be paid as a dividend to the Company by such Restricted Subsidiary without
prior governmental approval (that has not been obtained), and without direct
or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or the
holders of its Capital Stock.
"Consolidated Debt" means, with respect to any Person as of any date of
determination, the sum, without duplication, of (i) the total amount of Debt
of such Person and its Restricted Subsidiaries, plus (ii) the total amount of
Debt of any other Person, to the extent that such Debt has been guaranteed by
the referent Person or one or more of its Restricted Subsidiaries, plus (iii)
the aggregate liquidation value of all preferred stock of Restricted
Subsidiaries of such Person, in each case, determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to such Restricted Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (a) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Closing Date
in the book value of any asset owned by such Person or a consolidated
Restricted Subsidiary of
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such Person, (b) all investments as of such date in unconsolidated
Subsidiaries and in Persons that are not Restricted Subsidiaries and (c) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of issuance or (ii) was nominated for election to such
Board of Directors with the affirmative vote of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election or who was elected or appointed in the ordinary course by Continuing
Directors or other directors so elected or appointed.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities or commercial paper facilities with
any combination of banks, other institutional lenders and other Persons
extending financial accommodations or holding corporate debt obligations in
the ordinary course of their business, providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables
to such lenders or to special purpose entities formed to borrow from such
lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time by the same or different institutional
lenders.
"Debt" means, with respect to any Person, any indebtedness of such Person,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Debt of others secured
by a Lien on any asset of such Person (whether or not such Debt is assumed by
such Person, valued, if not assumed, at the lesser of the Fair Market Value of
the encumbered assets or the amount of Debt so secured) and, to the extent not
otherwise included, the guarantee by such Person of any indebtedness of any
other Person. The amount of any Debt outstanding as of any date shall be (i)
the accreted value thereof, in the case of any Debt issued with original issue
discount and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other Debt.
"Debt to Annualized Cash Flow Ratio" means, as of any date of determination,
the ratio of (a) the Consolidated Debt of the Company as of such date to (b)
two times the Consolidated Cash Flow of the Company for the two most recent
full fiscal quarters ending immediately prior to such date for which internal
financial statements are available (the "Measurement Period"), determined on a
pro forma basis after giving effect to all acquisitions or dispositions of
assets made by the Company and its Restricted Subsidiaries from the beginning
of such two-quarter period through and including such date of determination
(including any related financing transactions) as if such acquisitions and
dispositions had occurred at the beginning of such two-quarter period. In
addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the two-quarter Measurement Period or
subsequent to such Measurement Period and on or prior to the date of
calculation shall be deemed to have occurred on the first day of the two-
quarter Measurement Period and Consolidated Cash Flow for such Measurement
Period shall be calculated without giving effect to clause (iii) of the
proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or
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redeemable at the option of the holder thereof, in whole or in part, on or
prior to the date that is 91 days after the date on which the Notes mature;
provided, however, that any Capital Stock that would constitute Disqualified
Stock solely because the holders thereof have the right to require the Company
to repurchase such Capital Stock upon the occurrence of a Change of Control or
an Asset Sale shall not constitute Disqualified Stock if the terms of such
Capital Stock provide that the Company may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "Certain
Covenants--Restricted Payments."
"Equity Capital Investment" means the purchase of $16.0 million in Equity
Interests (other than Disqualified Stock) of the Company (i) pursuant to the
Equity Commitment or (ii) by any other equity investor, pursuant to a
"Replacement Financing" of the kind contemplated by the Equity Commitment, in
each case no later than March 11, 1999.
"Equity Commitment" means the collective purchase by a Warburg Entity and
Crosspoint Venture Partners 1996 of $16.0 million in Equity Interests (other
than Disqualified Stock) of the Company, no later than March 11, 1999,
pursuant to the Series C Preferred Stock and Warrant Subscription Agreement
dated as of February 20, 1998 among the Company and the Investors.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act), and the rules and regulations thereunder.
"Existing Debt" means Debt of the Company and its Restricted Subsidiaries in
existence on the Closing Date.
"Fair Market Value" means with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Closing Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"guarantee" means, with respect to any Person, without duplication, a
guarantee (other than by endorsement of negotiable instruments for collection
in the ordinary course of business), direct or indirect, in any manner
(including, without limitation, by way of a pledge of assets or through
letters of credit or reimbursement agreements in respect thereof), of all or
any part of any Debt of another Person.
"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to
execute a guarantee of the Notes pursuant to the "Limitations on Issuance of
Guarantees of Debt" covenant until a successor replaces such party pursuant to
the applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
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"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations), advances
or capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Debt, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the
Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--
Restricted Payments".
"Investor" means any Warburg Entity, Intel Corporation or Crosspoint Venture
Partners 1996.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Measurement Period" shall have the definition set forth above under "Debt
to Annualized Cash Flow Ratio."
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Debt of such Person or any of its
Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Debt secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Debt (i) as to which neither the Company nor any
of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Debt), (b) is directly or indirectly liable (as a guarantor or otherwise) or
(c) constitutes the lender; (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action
against an Unrestricted Subsidiary) would permit (upon notice, lapse of time
or both) any holder of any other Debt of the Company or any of its Restricted
Subsidiaries to declare a default on such other Debt or cause the payment
thereof to be accelerated or payable prior to its stated maturity; and (iii)
as to which the lenders have been notified in writing that they will not have
any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
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"Pari Passu Debt" means (i) any Debt of the Company that is pari passu
(equal) in right of payment to the Notes and (ii) with respect to any
guarantee, Debt which ranks pari passu (equal) in right of payment to such
guarantee.
"Permitted Holder" means (i) any Warburg Entity or (ii) Charles J. McMinn,
his spouse, his lineal descendants, whether acting in their own name or as a
majority of persons having the power to exercise the voting rights attached
to, or having investment power over, shares held by others, any Affiliate of
such persons, any trust principally for the benefit of one or more members of
such persons, (whether or not any such person is a trustee of such trust) and
any charitable foundation whose majority of members, trustees or directors, as
the case may be, are any of such persons.
"Permitted Investments" means (i) any Investment in the Company or in any
Wholly Owned Restricted Subsidiary of the Company; (ii) any Investment in Cash
Equivalents; (iii) any Investment by the Company or any Wholly Owned
Restricted Subsidiary of the Company in a Person if, as a result of such
Investment, (a) such Person becomes a Wholly Owned Restricted Subsidiary of
the Company or (b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its Debt, Equity Interests
or other securities to, or is liquidated into, the Company or a Wholly Owned
Restricted Subsidiary of the Company, (iv) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales;" (v) any
acquisition of assets to the extent acquired in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company and (vi) any
Investment by the Company in joint ventures or one or more Wholly Owned
Unrestricted Subsidiaries of the Company; provided, however, that the
aggregate amount of Investments made pursuant to this clause (vi) shall not
exceed $20.0 million at any one time outstanding and provided, further, that
Investments in joint ventures which are not also Unrestricted Subsidiaries
shall not exceed $10.0 million at any one time outstanding; (vii) accounts
receivable created or acquired in the ordinary course of business of the
Company or any Restricted Subsidiary and on ordinary business terms; and
(viii) Investments arising from transactions by the Company or any Restricted
Subsidiaries with trade creditors or customers in the ordinary course of
business (including any such Investment received pursuant to any plan of
reorganization or similar arrangement pursuant to the bankruptcy or insolvency
of such trade creditors or customers or otherwise in settlement of a claim).
"Permitted Liens" means (i) Liens in favor of the Company or Holders of the
Notes; (ii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Restricted Subsidiary of
the Company; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company;
(iii) Liens on property existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary of the Company; provided that such Liens
were in existence prior to the contemplation of such acquisition; (iv) Liens
to secure the performance of statutory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (v) Liens existing on the Closing Date; (vi)
Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (vii) Liens securing Vendor Debt or
Purchase Money Debt permitted by the Indenture, in each case, on the property
together with proceeds, product, accessions, substitutions and replacements
thereof; (viii) Liens created by "notice" or "precautionary" filings in
connection with operating leases or other transactions pursuant to which no
Debt or Attributable Debt is Incurred by the Company or any Restricted
Subsidiary; (ix) Liens on securities constituting "margin stock" within the
meaning of Regulation G, T, U or X promulgated by the Board of Governors of
the Federal Reserve System, to the extent that the Investment by the Company
or any Restricted Subsidiary in such margin stock is not prohibited by the
Indenture; (x) Liens on Capital Stock of Unrestricted Subsidiaries; (xi) Liens
in favor of the Trustee arising under the Indenture; and (xii) Liens incurred
in the ordinary course of business of the Company or any Subsidiary of the
Company with respect to obligations that do not exceed $2.0 million at any one
time outstanding and that (a) are not incurred in
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connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary.
"Permitted Refinancing Debt" means any Debt of the Company or any of its
Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other Debt of
the Company or such Restricted Subsidiary (other than intercompany Debt);
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Debt does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Debt so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Debt has a final maturity date later than the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Debt being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Debt being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right
of payment to the Notes, such Permitted Refinancing Debt has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Notes on terms at least as favorable to the holders of Notes
as those contained in the documentation governing the Debt being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Debt is
incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Debt being extended, refinanced, renewed, replaced, defeased or
refunded.
"Public Equity Offering" means an underwritten offering of Common Stock with
gross proceeds to the Company of at least $35.0 million pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-
8 or otherwise relating to equity securities issuable under any employee
benefit plan of the Company).
"Productive Assets" means assets (including assets owned directly or
indirectly through Capital Stock of a Restricted Subsidiary) of a kind used or
usable in the Telecommunications Business of the Company.
"Purchase Money Debt" means Debt of the Company (including Acquired Debt and
Debt represented by Capital Lease Obligations, mortgage financings and
purchase money obligations), including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or restated from
time to time incurred for the purpose of financing all or any part of the cost
of development, construction, acquisition or improvement by the Company or any
Restricted Subsidiary of the Company of any Productive Assets of the Company
or any Restricted Subsidiary of the Company.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. If no referent Person is
identified, the term "Restricted Subsidiaries" shall be deemed to refer to
Restricted Subsidiaries of the Company.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary, or, in the case of the
Company, a Restricted Subsidiary of such Person and is thereafter leased back
from the purchaser or transferee thereof by such Person or one of its
Subsidiaries or, in the case of the Company, one of its Restricted
Subsidiaries.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the
Closing Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Debt, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation governing
such Debt, and shall not include any contingent obligations to repay, redeem
or repurchase any such interest or principal prior to the date originally
scheduled for the payment thereof.
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"Strategic Equity Investor" means any Investor or other Person which is (or
a controlled Affiliate of any Person which is) engaged in the
Telecommunications Business and for which, as of the last available annual or
quarterly financial statements, the sum of (a) the consolidated Debt of such
Person and any Subsidiaries on such day plus (b) such Person's Total Common
Equity is at least $1.0 billion.
"Subordinated Debt" means Debt of the Company or a Guarantor subordinated in
right of payment to the Notes or the guarantee of such Guarantor, as the case
may be.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership, limited liability
company or similar pass-through entity, (a) the sole general partner or the
managing general partner or managing member of which is such Person or a
Subsidiary of such Person or (b) the only general partners, managing members,
or Persons, however designated in corresponding roles, of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in the business of transmitting, or
providing services relating to the transmission of, voice or data through
leased transmission facilities.
"Telecommunications Related Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, real or personal,
used or to be used, in connection with a Telecommunications Business.
"Total Common Equity" of any Person means, as of any date of determination
the product of (i) the aggregate number of outstanding primary shares of
Common Stock of such Person on such day (which shall not include any options
or warrants on, or securities convertible or exchangeable into, shares of
Common Stock of such Person) and (ii) the average Closing Price of such Common
Stock over the 20 consecutive Trading Days immediately preceding such day. If
no such Closing Price exists with respect to shares of any such class, the
value of such shares for purposes of clause (ii) of the preceding sentence
shall be determined by the Board of Directors of the Company in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee.
"Trading Day", with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (i) has no Debt other
than Non-Recourse Debt; (ii) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company, unless such agreement, contract, arrangement or
understanding constitutes a Restricted Payment permitted by the Indenture;
(iii) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe
for additional Equity Interests or (b) to maintain or preserve such Persons
financial condition or to cause such Person to achieve any specified levels of
operating results; (iv) has not guaranteed or otherwise directly or indirectly
provided credit support for any Debt of the Company or any of its Restricted
Subsidiaries; and (v) has at least one director on its board of directors that
is not a director or executive officer of the Company or any of its Restricted
Subsidiaries or has at least one executive officer that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries.
"Vendor Debt" means any Debt of the Company or any Restricted Subsidiary
incurred in connection with the acquisition or construction of
Telecommunications Related Assets.
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"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Warburg Entities" means Warburg, Pincus Ventures, L.P. or any wholly owned
Subsidiary thereof.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
DESCRIPTION OF THE NEW NOTES
The terms of the New Notes will be identical in all material respects to
those of the Old Notes, except that the New Notes (i) will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes and (ii) will not
be entitled to certain registration rights under the Registration Rights
Agreement, including the provision for Additional Interest of up to 2.0% on
the Old Notes. Holders of Old Notes should review the information set forth
under "Summary--Certain Consequences of a Failure to Exchange Old Notes" and
"--Terms of New Notes."
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
actual terms of the capital stock contained in the Company's Amended and
Restated Certificate of Incorporation and other agreements referenced below.
The Company's Amended and Restated Certificate of Incorporation authorizes
the issuance of up to 50,000,000 shares of Common Stock and 25,000,000 shares
of Preferred Stock, of which 500,000 shares are designated as Series A
Preferred, 11,400,002 shares are designated as Series B Preferred, and
7,432,858 shares are designated Series C Preferred. At April 30, 1998, the
Company had outstanding 7,642,136 shares of Common Stock, 500,000 shares of
Series A Preferred, 11,400,002 shares of Series B Preferred and 264,106 shares
of Series C Preferred (the Series A Preferred, Series B Preferred and Series C
Preferred are collectively referred to herein as the "Preferred Stock"). As of
such date, there were eleven (11) holders of record of Common Stock and ten
(10) holders of record of Preferred Stock. The Common Stock and Preferred
Stock each have a par value of $0.001 per share. No shares of undesignated
Preferred Stock are currently outstanding. As of April 30, 1998, options to
purchase 3,668,800 shares of Common Stock at a weighted average exercise price
of $0.252 per share were outstanding. The Company also has outstanding
warrants to purchase an aggregate 1,200,000 shares of Common Stock at an
exercise price of $0.005 per share.
The Company's Board of Directors and stockholders have authorized an
amendment to the Company's Certificate of Incorporation, contingent upon the
closing of the Equity Commitment if such closing would cause Warburg to own
more than 49% of the Company's outstanding voting securities, (i) to create a
second class of Common Stock designated as "Class B Common" and (ii) to create
a new series of Preferred Stock designated as "Series C-1 Preferred." The
Class B Common Stock will have the same rights, preferences, privileges and
restrictions as the Common Stock except that the Class B Common Stock will
have very limited voting rights and will not vote for the election of
directors and will be convertible into Common Stock solely to the extent that
such conversion would not result in the holder of such converted shares having
greater than 49% of the Company's outstanding voting securities. The Series C-
1 Preferred will have the same rights, preferences, privileges and
restrictions as the Series C Preferred, except that the Series C-1 Preferred
will have very limited voting rights and will not vote for the election of
directors and will be convertible into Series C Preferred or Class B Common.
The conversion of Series C-1 Preferred into Series C Preferred will not be
permitted if the conversion would result in the holder of such converted
shares having greater than 49% of the Company's outstanding voting securities.
See "Certain Relationships and Related Transactions--The Equity Commitment."
COMMON STOCK
The holders of Common Stock are entitled to receive dividends when and if
declared by the Board of Directors, except that no dividend or distribution
may be paid on any shares of Common Stock during any fiscal year unless (i)
all dividend preferences of the Preferred Stock have been paid or declared and
set aside during that fiscal year and any prior year in which dividends
accumulated but remain unpaid and (ii) a dividend is paid on all outstanding
shares of Preferred Stock, in an amount for each such share of Preferred Stock
equal to or greater than the aggregate amount of such dividends as would be
paid for all shares of Common Stock into which that share of Preferred Stock
could then be converted. Upon liquidation, dissolution, merger or sale of all
or substantially all of the assets of the Company, after paying in full the
preferential amounts due the holders of the Preferred Stock, all remaining
assets will be distributed ratably among the holders of Preferred Stock and
Common Stock based upon the number of shares of Common Stock then held by each
holder on an as-converted basis. The holders of Common Stock are entitled to
one vote for each share held of record on all matters submitted to a vote of
stockholders. The Common Stock has no preemptive or other subscription rights,
and there are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and non-
assessable.
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PREFERRED STOCK
Dividends
The holders of Series A Preferred, Series B Preferred and Series C Preferred
are entitled to receive dividends in preference to Common Stock at a rate of
$0.025 per share, $0.06 per share and $0.335 per share, respectively, per
annum. Unpaid dividends on the Preferred Stock are cumulative. Any accrued and
unpaid dividends are payable only in the event of a liquidation, dissolution
or winding up of the Company or other Liquidity Event (as defined below);
provided, that in the event the Liquidity Event is an underwritten public
offering, such unpaid dividends on the Series B Preferred and the Series A
Preferred shall be paid in shares of Common Stock valued at the initial public
offering price per share of Common Stock (prior to any underwriting discounts
and commissions).
Liquidation Preference
Upon a liquidation, dissolution or winding up of the Company, the holders of
Series A Preferred, Series B Preferred and Series C Preferred are entitled to
receive in preference to the holders of Common Stock an amount equal to the
Initial Series A Preferred Price (as defined below) for each share of Series A
Preferred, an amount equal to the Initial Series B Preferred Price (as defined
below) for each share of Series B Preferred and an amount equal to the Initial
Series C Preferred Price (as defined below) for each share of Series C
Preferred, respectively, plus any cumulated but unpaid dividends. The Series A
Preferred, the Series B Preferred and Series C Preferred rank in parity with
regard to the receipt of the respective preferential amounts. Thereafter, any
remaining assets shall be distributed ratably among the holders of Common
Stock and Preferred Stock on an as-converted basis. The "Initial Series A
Preferred Price" (i) in the event that the Liquidation Preference Threshold
(as defined below) is achieved, is $0.00 for each share of Series A Preferred
then held, or (ii) in the event that the Liquidation Threshold is not
achieved, is $0.50 for each such share. The "Initial Series B Preferred Price"
(i) in the event that the Liquidation Preference Threshold is achieved, is
$0.00 for each share of Series B Preferred then held, or (ii) in the event
that the Liquidation Preference Threshold is not achieved, is $0.75 for each
such share. The "Initial Series C Preferred Price" is $4.165 for each share of
Series C Preferred then held. The "Liquidation Preference Threshold" is deemed
achieved if the quotient obtained by dividing (i) (A) the aggregate value to
be received by the holders of the Company's capital stock upon a liquidation,
dissolution or winding up or other Liquidity Event or, if the Liquidity Event
is an underwritten public offering of the Company's Common Stock, the pre-
offering valuation of the Company, less (B) the sum of the aggregate purchase
price received by the Company for the Series B Preferred plus the aggregate
purchase price received by the Company for the Series A Preferred, less (C)
the sum of the cumulated but unpaid dividends on the Series B Preferred plus
the cumulated but unpaid dividends on the Series A Preferred, by (ii) the
total number of shares of the Company's Common Stock outstanding on the date
of such event on a fully-diluted, as converted basis, equals or exceeds $3.00,
as adjusted for any stock splits, combinations, stock distributions or
dividends.
A consolidation or merger of the Company with or into any other corporation,
or a sale of all or substantially all of the assets of the Company, the
effectuation of a transaction or series of related transactions in which more
than 50% of the voting power of the Company is disposed of, or an underwritten
public offering pursuant to an effective registration statement under the
Securities Act of shares of the Company's Common Stock (each, a "Liquidity
Event"), is considered a liquidation, dissolution or winding up of the Company
(except that an underwritten public offering is only deemed to be such a
liquidation, dissolution or winding up with respect to the holders of the
Series A Preferred and the Series B Preferred). In the event of a deemed
liquidation in connection with an underwritten public offering in which the
Liquidation Preference Threshold is not achieved, in addition to (and not in
lieu of) their respective conversion rights, the holders of the Series A
Preferred and the Series B Preferred will be entitled to receive immediately
upon the closing of such underwritten public offering, that number of shares
of Common Stock of the Company equal to the quotient obtained by dividing (i)
the full preferential amount to which such holder of Series A Preferred and
Series B Preferred is entitled by (ii) the public offering price per share
(prior to any underwriters' discounts and commissions) in such underwritten
public offering.
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Conversion
The Preferred Stock is convertible into Common Stock at the rate of its
initial conversion price divided by the conversion price in effect at the time
of conversion and may be converted by the holder at any time. The initial
conversion prices of the Series A Preferred, Series B Preferred and Series C
Preferred are $0.50, $0.75 and $4.165, respectively. The conversion price of
the Preferred Stock is subject to adjustment for stock splits, stock
dividends, consolidations, combinations, reclassifications, and other like
events. The conversion prices of the Preferred Stock may also be subject to
adjustment for certain dilutive issues of stock at a price per share below the
applicable conversion price of such respective series of Preferred Stock prior
to the closing of the Equity Commitment or an alternative financing, each
adjustment as to the Series C Preferred will result in the conversion price
being adjusted to the price per share in the dilutive issue; thereafter the
adjustment will be based on the weighted average dilution to such series. The
Series A Preferred and Series B Preferred are automatically convertible into
Common Stock upon the earlier of (i) the consent of holders of 70% of the
outstanding number of shares of Series A Preferred and Series B Preferred
voting together as a single class on an as-converted basis, or (ii) the
closing of an underwritten public offering of the Company's capital stock with
aggregate net proceeds of not less than $15 million ("IPO"). The Series C
Preferred is automatically convertible into Common Stock upon the earlier of
(i) the consent of the holders of 70% of the outstanding Series C Preferred,
or (ii) the closing of an underwritten public offering covering the offer and
sale of securities for the account of the Company to the public at a per share
price of $4.165 or greater (prior to any underwriters' discounts or
commissions) and with aggregate gross proceeds to the Company of not less than
$15.0 million.
Voting Rights
The holders of Common Stock are entitled to one vote for each share of
Common Stock and the holders of Preferred Stock are entitled to vote on an as-
converted basis.
Protective Provisions
So long as any shares of Series B Preferred or Series C Preferred are
outstanding, the Company may not, without first obtaining the approval of the
holders of at least a majority of the then-outstanding shares of Series A,
Series B Preferred and Series C Preferred, voting together as a class on an
as-converted basis, take any action that (i) alters the rights, preferences or
privileges of the Preferred Stock; (ii) creates any new class or series of
shares that has a preference over or is on a parity with the Preferred Stock
with respect to voting, dividends or liquidation preferences; (iii)
reclassifies stock into shares having a preference over or in parity with the
Preferred Stock with respect to voting, dividends or liquidation preferences;
(iv) repurchases, redeems or retires capital stock of the Company (subject to
certain exceptions); (v) results in the sale, merger or reorganization of the
Company or a sale of all or substantially all of the assets of the Company;
(vi) materially alters the strategic direction of the Company or business
operations of the Company in a manner that is not contemplated by the
Company's most recent Board-approved operating plan; (vii) increases the
authorized number of directors as set forth in the Bylaws of the Company;
(vii) amends the Certificate of Incorporation or Bylaws; (viii) results in a
change in accounting policies or in the auditors of the Company; (ix) permits
a Subsidiary of the Company to sell stock to a third party; (x) results in a
dissolution, liquidation or winding up of the Company; (xi) causes aggregate
capital expenditures that are not included in the Company's most recent annual
operating plan to exceed $500,000 in any given 12-month period; (xii) results
in the acquisition of stock or assets of any other business for an aggregate
consideration in excess of $500,000; (xiii) results in an encumbrance on any
assets of the Company not in the ordinary course of business; or (xiv) results
in the issuance of any equity securities of the Company, other than stock
options, warrants or other rights to purchase equity securities approved by
the Board of Directors, or issuance of any long-term debt.
The Amended and Restated Certificate of Incorporation does not contain any
restriction on the purchase or redemption of shares by the Company while there
is an arrearage in the payment of dividends. There are no sinking fund
provisions applicable to the Preferred Stock.
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REGISTRATION RIGHTS
Pursuant to the Amended and Restated Stockholder Rights Agreement dated
February 20, 1998 (the "Stockholder Rights Agreement"), certain holders of
outstanding shares of Preferred Stock (collectively, the "Rights Holders") are
entitled to certain rights with respect to the registration under the
Securities Act of the Common Stock issuable upon conversion of the Preferred
Stock, the Common Stock issuable upon exercise of the Common Warrants and any
Common Stock issued as a dividend or other distribution with respect to or in
exchange for or in replacement of the foregoing ("Registrable Securities").
The Rights Holders are entitled to demand, "piggy-back" and S-3 registration
rights, subject to certain limitations and conditions. The number of
securities requested to be included in a registration involving the exercise
of demand and "piggy-back" rights are subject to a pro rata reduction based on
the number of Registrable Securities held by each Rights Holder and any other
security holders exercising their respective registration rights to the extent
that the Company is so advised by the managing underwriter, if any, therefor
that the total number of securities requested to be included in the
underwriting is such as to materially and adversely affect the success of the
offering.
The registration rights terminate as to any Rights Holder at the later of
(i) two years after the Company's IPO, or (ii) such time as such Rights Holder
may sell under Rule 144 in a three month period all Registrable Securities
then held by such Rights Holder.
PREEMPTIVE RIGHTS, RIGHTS OF FIRST REFUSAL AND CO-SALE RIGHT
Preemptive Rights
Under the Stockholder Rights Agreement, the Company may not sell or issue
certain new securities for consideration other than cash without the prior
written consent of the holders of a majority of the outstanding Series B
Preferred and Series C Preferred. In addition, the Investors have the right to
purchase their pro rata portion of certain new issues of the Company's
securities for consideration solely in cash on the same terms and conditions
as the Company proposes to issue such securities, subject to certain
conditions and limitations. These preemptive rights shall terminate as to any
Investor at such time as the holder ceases to own any shares of Series B
Preferred and Series C Preferred or Common Stock issuable upon conversion of
the Series B Preferred and Series C Preferred and shall terminate as to all
Investors upon the closing of an IPO.
Right of First Refusal and Co-Sale Right
Except in certain situations, in the event any holder of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred or certain
holders of Common Stock (each a "Selling Holder") proposes to sell such shares
to a third party, the Company has a right of first refusal to acquire some or
all such shares from such Selling Holder under the same terms and conditions.
If the Company does not elect to exercise such right of first refusal, the
remaining holders of Common Stock and Preferred Stock who are parties to the
Stockholder Rights Agreement (the "Remaining Holders") may purchase their pro
rata portion of the Selling Holder's shares under the same terms and
conditions. If any Remaining Holder fails to exercise his or her pro rata
portion, the Selling Holder must give Warburg the option to buy the shares. If
Warburg does not purchase all of the shares, the Selling Holder may then sell
the unsubscribed shares to a third party buyer, subject to the right of the
Remaining Holders to sell a pro rata portion of their shares of Common Stock
or Preferred Stock to the buyer in such transaction. The rights of first
refusal and co-sale terminate on the earlier of (i) the closing of the
Company's IPO; or (ii) as to any stockholder at such time as such stockholder
holds less than 2.5% of the total number of shares of Common Stock held by all
stockholders (assuming the conversion of all shares of Preferred Stock into
Common Stock).
BOARD REPRESENTATION AND VOTING AGREEMENT
The Stockholder Rights Agreement provides that in all elections of directors
of the Company, certain holders of Common Stock and all holders of Series A,
Series B and Series C Preferred Stock shall vote all
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Common Stock and Preferred Stock owned or controlled by such stockholder to
fix the number of directors of the Company at seven and to elect (i) three
board members designated by Warburg and Crosspoint, two of whom must be
designees of Warburg and one of whom must be a designee of Crosspoint
(provided, however, that so long as the aggregate investment in the Company of
Crosspoint is less than $5,000,000, if Crosspoint fails to invest on a pro
rata basis with Warburg in subsequent equity financings of the Company, the
designee of Crosspoint must resign and his or her vacancy must be filled by a
person mutually designated by Warburg and the Company); (ii) two board members
who are senior officers of the Company, one of whom shall be the chief
executive officer of the Company; and (iii) one board member mutually
designated by Warburg and the Company. The parties to the Stockholder Rights
Agreement also agree to vote in favor of removing a director only if the
grounds for removal involve bad faith or wilful misconduct. This voting
agreement terminates in its entirety on July 16, 2007 or until such time as
any stockholder ceases to own voting stock of the Company.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal
income tax considerations relating to the Exchange Offer and to the purchase,
ownership and disposition of the New Notes. The tax consequences of these
transactions are uncertain. The discussion of the federal income tax
consequences set forth below is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), and judicial decisions and administrative
interpretations thereunder, as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. There can be no assurance
that the Internal Revenue Service (the "IRS") will not successfully challenge
one or more of the tax consequences described herein, and the Company has not
obtained, nor does it intend to obtain, a ruling from the IRS with respect to
the U.S. federal income tax consequences of acquiring or holding New Notes.
The discussion below pertains only to U.S. Holders, except as described below
under the caption "Tax Treatment of the Ownership and Disposition of New Notes
by Non-U.S. Holders." As used herein, a U.S. Holder means (i) citizens or
residents (within the meaning of Section 7701(b) of the Code) of the U.S.,
(ii) corporations, partnerships or other entities created in or under the laws
of the U.S. or any political subdivision thereof, (iii) estates the income of
which is subject to U.S. federal income taxation regardless of its source,
(iv) trusts subject to the primary supervision of a court within the U.S. and
the control of a U.S. person as described in Section 7701(a)(30) of the Code,
and (v) any other person whose income or gain is effectively connected with
the conduct of a U.S. trade or business.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular Holder in light of the
Holder's circumstances (for example, persons subject to the alternative
minimum tax provisions of the Code). Also, it is not intended to be wholly
applicable to all categories of investors, some of which (such as dealers in
securities, banks, insurance companies, tax-exempt organizations, and persons
holding New Notes as part of a hedging or conversion transaction or straddle
or persons deemed to sell New Notes under the constructive sale provisions of
the Code) may be subject to special rules. The discussion below is premised
upon the assumption that the New Notes and Old Notes are held (or would be
held if acquired) as capital assets within the meaning of Section 1221 of the
Code. This summary does not discuss the tax considerations applicable to
subsequent purchasers. The discussion also does not discuss any aspect of
state, local or foreign law.
EACH HOLDER OR PROSPECTIVE HOLDER OF NEW NOTES IS STRONGLY URGED TO CONSULT
ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR TAX SITUATION INCLUDING THE
TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX LAWS AND POSSIBLE
CHANGES IN THE TAX LAWS.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a Holder should have the same adjusted issue price, adjusted
basis and holding period in the New Notes as it had in the Old Notes
immediately before the exchange.
THE NEW NOTES
Original Issue Discount
The New Notes will be treated as issued with original issue discount, and
each Holder will be required to include in its gross income original issue
discount income as described below. Except as provided below in the section
entitled "Applicable High-Yield Discount Obligations," a Holder must include
original issue discount (to the extent there is not offsetting acquisition or
bond premium) in income as ordinary interest income as it accrues on the basis
of a constant yield to maturity. Generally, original issue discount must be
included in income in advance of the receipt of cash representing such income.
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The stated redemption price at maturity of a New Note will equal the sum of
all payments other than any "qualified stated interest" payments. Qualified
stated interest is stated interest that is unconditionally payable in cash or
in property (other than debt instrument of the issuer) at least annually at a
single fixed rate. Because interest on the New Notes will not be payable prior
to March 15, 2003, none of the payments on the New Notes will constitute
qualified stated interest. Accordingly, all payments on the New Notes will be
treated as part of their stated redemption price at maturity.
Because the Old Notes were issued as part of an investment unit, the issue
price of each investment unit was allocated between the Old Note and the
warrant constituting an investment unit based on their relative fair market
values on the issue date. Although the Company's allocation is not binding on
the IRS, a holder of a unit must use the Company's allocation unless the
holder discloses on its federal income tax return for the year in which the
unit was acquired that it plans to use an allocation that is inconsistent with
the Company's allocation.
A Holder must include in gross income, for all days during its taxable year
in which it holds such New Note, the sum of the "daily portions" of original
issue discount. The "daily portions" are determined by allocating to each day
in an "accrual period" (generally the period between interest payments or
compounding dates) a pro rata portion of the original issue discount that
accrued during such accrual period. The amount of original issue discount that
will accrue during an accrual period is the product of the "adjusted issue
price" of the New Note at the beginning of the accrual period and its yield to
maturity (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the particular accrual period).
The adjusted issue price of a New Note is the sum of the issue price of an Old
Note, plus prior accruals of original issue discount, reduced by the total
payments made with respect to such New Note in all prior periods and on the
first day of the current accrual period. Each payment on a New Note will be
treated as a payment of original issue discount to the extent that original
issue discount has accrued as of the date such payment is due and has not been
allocated to prior payments, and any excess will be treated as a payment of
principal.
There are several circumstances under which the Company could make a payment
on a New Note which would affect the yield to maturity of a New Note,
including the redemption or repurchase of a New Note (as described under
"Description of the Old Notes"). According to Treasury Regulations, the
possibility of a change in the yield will not be treated as affecting the
amount of interest income (including original issue discount) recognized by a
holder (or the timing of such recognition) if the likelihood of the change, as
of the date of the debt obligations are issued, is remote. The Company intends
to report on the basis that the likelihood of any change in the yield on the
New Notes is remote.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record Holders of a New Note, information with respect to
original issue discount accruing during the calendar year. That information
will be based upon the adjusted issue price of the New Note as if the Holder
were the original Holder of the New Note.
Election to Treat All Interest as Original Issue Discount
A Holder may elect to treat all "interest" on any New Note as original issue
discount and calculate the amount includable in gross income under the method
described above. For this purpose, "interest" includes stated and unstated
interest, original issue discount, acquisition discount, market discount and
de minimis market discount, as adjusted by any acquisition premium. The
election is to be made for the taxable year in which the Holder acquired the
note and may not be revoked without the consent of the IRS.
Acquisition Premium
To the extent a Holder had acquisition premium with respect to an Old Note,
the Holder generally will have acquisition premium with respect to a New Note.
A Holder will reduce the original issue discount otherwise includable for each
accrual period by an amount equal to the product of (i) the amount of such
original issue discount otherwise includable for such period, and (ii) a
fraction, the numerator of which is the acquisition premium and the
denominator of which is the excess of the amounts payable on the New Note
after the purchase date over the adjusted issue price.
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Market Discount
To the extent a Holder had market discount with respect to an Old Note, the
Holder generally will have market discount with respect to a New Note. Any
principal payment or gain realized by a Holder on disposition or retirement of
a New Note will be treated as ordinary income to the extent that there is
accrued market discount on the New Note. Unless a Holder elects to accrue
under a constant-interest method, accrued market discount is the total market
discount multiplied by a fraction, the numerator of which is the number of
days the Holder has held the obligation and the denominator of which is the
number of days from the date the Holder acquired the obligation until its
maturity. A Holder may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a New Note purchased with market discount. Any
such deferred interest expense would not exceed the market discount that
accrues during such taxable year and is, in general, allowed as a deduction
not later than the year in which such market discount is includable in income.
If the Holder elects to include market discount in income currently as it
accrues on all market discount instruments acquired by the Holder in that
taxable year or thereafter, the interest deferral rule described above will
not apply.
Sale, Exchange or Retirement of the New Notes
Upon the sale, exchange or retirement of a New Note, the Holder generally
will recognize gain or loss equal to the difference between the amount
realized on the sale, exchange or retirement (which does not include any
amount attributable to accrued but unpaid interest) and the Holder's adjusted
tax basis in the New Note. A Holder's adjusted tax basis in the New Note will
equal the Holder's cost for the Old Note exchanged therefor increased by any
original issue discount included in income by such Holder with respect to such
New Note and decreased by any payments received thereon other than qualified
stated interest.
Gain or loss realized on the sale, exchange or retirement of a New Note will
be capital, and will be long-term if at the time of sale, exchange or
retirement the New Note has been held for more than one year. The maximum rate
of tax on long-term capital gains on most capital assets held by an individual
for more than 18 months is 20%, and gain on most capital assets held by an
individual more than one year and up to 18months is subject to tax at a
maximum rate of 28%. The deductibility of capital losses is subject to
limitations.
Applicable High-Yield Discount Obligations
The New Notes will be subject to the "applicable high yield discount
obligation" provisions of the Code. Because the yield of the New Notes is at
least five percentage points above the applicable federal rate and the New
Notes are issued with "significant original issue discount," otherwise
deductible interest and original issue discount will not be deductible with
respect thereto until such interest is actually paid. In addition, because the
yield of the New Notes is more than six percentage points above the applicable
federal rate, (i) a portion of such interest corresponding to the yield in
excess of six percentage points above the applicable federal rate will not be
deductible by the Company at any time, and (ii) a corporate Holder may be
entitled to treat the portion of the interest that is not deductible by the
Company as a dividend for purposes of qualifying for the dividends received
deduction provided for by the Code, subject to applicable limitations. In such
event, corporate Holders should consult with their own tax advisors as to the
applicability of the dividends received deduction.
TAX TREATMENT OF THE OWNERSHIP AND DISPOSITION OF NEW NOTES BY NON-U.S.
HOLDERS
The following discussion is a general summary of certain U.S. federal income
and estate tax considerations of the ownership and disposition of New Notes by
Non-U.S. Holders. As used herein, a Non-U.S. Holder means any Holder other
than a U.S. Holder.
Withholding Tax on Payments of Principal and Interest on New Notes
The payment of principal and interest on a New Note to a Non-U.S. Holder
will not be subject to U.S. federal withholding tax pursuant to the "portfolio
interest exception," provided that (i) the Non-U.S. Holder
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does not actually or constructively own 10% or more of the total voting power
of all voting stock of the Company and is not a controlled foreign corporation
that is related to the Company within the meaning of the Code and (ii) the
beneficial owner of the New Notes certifies to the Company or its agent, under
penalties of perjury, that it is not a U.S. Holder and provides its name and
address on U.S. Treasury Form W-8 (or a suitable substitute form) or a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the debenture certificates under penalties
of perjury that such a Form W-8 (or suitable substitute form) has been
received from the beneficial owner by it or by a financial institution between
it and the beneficial owner and furnishes the payor with a copy thereof.
Treasury Regulations that will be effective January 1, 2000 (the "Withholding
Regulations") provide alternative methods for satisfying the certification
requirement described in (ii) above. The Withholding Regulations will
generally require, in the case of New Notes held by a foreign partnership,
that the certificate described in (ii) above be provided by the partners
rather that by the foreign partnership, and that the partnership provide
certain information including a U.S. tax identification number.
Gain on Disposition of the Notes
Non-U.S. Holders generally will not be subject to U.S. federal income tax on
gain realized on the sale, exchange or redemption of New Notes, unless in the
case of an individual Non-U.S. Holder such Holder is present in the U.S. for
183 days or more in the year of such sale, exchange or redemption and certain
other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal and interest on a New Note and payments on the proceeds of the sale
of a New Note to certain noncorporate U.S. Holders, and a 31% backup
withholding tax may apply to such payments if the Holder (i) fails to furnish
or certify its correct taxpayer identification number to the payor in the
manner required, (ii) is notified by the IRS that it has failed to report
payments of interest and dividends properly, or (iii) under certain
circumstances, fails to certify that it has not been notified by the IRS that
it is subject to backup withholding for failure to report interest and
dividend payments. Certain Holders (including, among others, all corporations)
are not subject to the backup withholding and reporting requirements.
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to withholding, or that is exempt from U.S.
withholding tax pursuant to a tax treaty, or interest that is exempt from U.S.
tax under the portfolio interest exception. Copies of these information
returns may also be made available under the provisions of a specific treaty
or agreement to the tax authorities of the country in which the Non-U.S.
Holder resides.
Treasury Regulations provide that backup withholding and additional
information reporting will not apply to payments of principal on the New Notes
by the Company to a Non-U.S. Holder if the Holder certifies as to its Non-U.S.
status under penalties of perjury or otherwise establishes an exemption
(provided that neither the Company nor its Paying Agent has actual knowledge
that the Holder is a U.S. person or that the conditions of any other exception
are not, in fact, satisfied).
The payment of the proceeds from the disposition of New Notes to or through
the U.S. office of any broker, U.S. or foreign, will be subject to information
reporting and possible backup withholding unless the owner certifies as to its
Non-U.S. Holder status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
Holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a New
Note to or through a non-U.S. office of a broker that is either a U.S. person
or a U.S. related person will be subject to information reporting (but
currently not backup withholding) unless the broker has documentary evidence
in the files that the owner is a Non-U.S. Holder and the broker has no
knowledge to the contrary. Backup withholding and information reporting will
not apply to payments made through foreign offices of a broker that is not a
U.S.
103
<PAGE>
person or a U.S. related person (absent actual knowledge that the payee is
U.S. person). For purposes of this paragraph, a "U.S. related person" is (i) a
"controlled foreign corporation" for U.S. federal income tax purposes, (ii) a
foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of
a U.S. trade or business, or (iii) with respect to payments made after
December 31, 1999, a foreign partnership that, at any time during its taxable
year, is 50% or more (by income or capital interest) owned by U.S. persons or
is engaged in the conduct of a U.S. trade or business. The Withholding
Regulations provide certain presumptions under which a Non-U.S. Holder will be
subject to backup withholding and information reporting unless the Non-U.S.
Holder provides a certification as to its Non-U.S. Holder status.
Any amounts withheld under the backup withholding rules from a payment to a
U.S. or Non-U.S. Holder will be allowed as a refund or a credit against such
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
104
<PAGE>
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
in connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus may
be used by Participating Broker-Dealers during the period referred to below in
connection with resales of the New Notes received in exchange for Old Notes if
such Old Notes were acquired by such Participating Broker-Dealers for their own
accounts. The Company has agreed that this Prospectus may be used by a
Participating Broker-Dealer in connection with resales of such New Notes for a
period ending 150 days after the effective date of the Registration Statement
(subject to extension under certain limited circumstances described herein) or,
if earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. See "The Exchange Offer--Terms of the Exchange Offer."
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. New Notes received by Participating Broker-Dealers for
their own accounts in connection with the Exchange Offer may be sold from time
to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any Participating Broker-Dealer that resells New Notes that were
received by it for its own account in connection with the Exchange Offer and
any broker or dealer that participates in a distribution of such New Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act, and
any profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31, 1997
and for the year then ended included in this Prospectus have been audited by
Ernst & Young LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
105
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheet as of December 31, 1997....................... F-3
Consolidated Statement of Operations for the year ended December 31,
1997.................................................................... F-4
Consolidated Statement of Stockholders' Equity for the year ended
December 31, 1997....................................................... F-5
Consolidated Statement of Cash Flows for the year ended December 31,
1997.................................................................... F-6
Notes to Consolidated Financial Statements--December 31, 1997............ F-7
Consolidated Balance Sheet as of March 31, 1998 (Unaudited).............. F-15
Consolidated Statements of Operations for the three months ended March
31, 1998 and 1997 (Unaudited)........................................... F-16
Consolidated Statements of Cash Flows for the three months ended March
31, 1998 and 1997 (Unaudited)........................................... F-17
Notes to Consolidated Financial Statements--March 31, 1998 (Unaudited)... F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Covad Communications Group, Inc.
We have audited the accompanying consolidated balance sheet of Covad
Communications Group, Inc. as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Covad Communications
Group, Inc. as of December 31, 1997, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Walnut Creek, California
January 16, 1998
F-2
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 4,378
Accounts receivable, net........................................ 25
Unbilled revenue................................................ 4
Inventories..................................................... 43
Prepaid expenses................................................ 52
Other current assets............................................ 317
-------
TOTAL CURRENT ASSETS.......................................... 4,819
PROPERTY AND EQUIPMENT:
Networks and communication equipment............................ 2,185
Computer equipment.............................................. 600
Furniture and fixtures.......................................... 185
Leasehold improvements.......................................... 114
-------
3,084
Less accumulated depreciation and amortization.................. (70)
-------
NET PROPERTY AND EQUIPMENT.................................... 3,014
OTHER ASSETS:
Restricted cash................................................. 210
Deposits........................................................ 31
-------
TOTAL OTHER ASSETS............................................ 241
-------
TOTAL ASSETS.................................................. $ 8,074
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 651
Unearned revenue................................................ 7
Accrued network costs........................................... 58
Other accrued liabilities....................................... 77
Current portion of capital lease obligations.................... 229
-------
TOTAL CURRENT LIABILITIES..................................... 1,022
Long-term capital lease obligations............................... 554
-------
TOTAL LIABILITIES............................................. 1,576
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $0.001 par value, 500,000
shares authorized, issued and outstanding...................... 1
Series B convertible preferred stock, $0.001 par value,
11,333,334 shares authorized, issued and outstanding........... 11
Common stock, $0.001 par value, 50,000,000 shares authorized,
7,574,136 shares issued and outstanding........................ 8
Additional paid-in capital...................................... 8,795
Retained earnings (deficit)..................................... (2,317)
-------
TOTAL STOCKHOLDERS' EQUITY.................................... 6,498
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $ 8,074
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Revenues.................................................... $ 26
Operating expenses:
Network and product costs................................. 54
Sales, marketing, general and administrative.............. 2,374
Depreciation and amortization............................. 70
---------
Total operating expenses.................................... 2,498
---------
Loss from operations........................................ (2,472)
Interest income (expense):
Interest income........................................... 167
Interest expense.......................................... (12)
---------
Net interest................................................ 155
---------
Net loss.................................................... $ (2,317)
=========
Net loss per common share................................... $ (0.32)
Weighted average shares used in computing net loss per
share...................................................... 7,344,276
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE ADDITIONAL RETAINED TOTAL
PREFERRED PREFERRED COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL (DEFICIT) EQUITY
----------- ----------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Initial issuance of com-
mon stock.............. $-- $-- $ 8 $ 42 $ -- $ 50
Repurchase of common
stock.................. -- -- (2) (8) -- (10)
Issuance of common
stock.................. -- -- 2 66 -- 68
Issuance of Series A
Preferred Stock........ 1 -- -- 249 -- 250
Issuance of Series B
Preferred Stock (net of
$43 of financing
costs)................. -- 11 -- 8,446 -- 8,457
Net loss................ -- -- -- -- (2,317) (2,317)
---- ---- --- ------ ------- -------
Balance at December 31,
1997................... $ 1 $ 11 $ 8 $8,795 $(2,317) $ 6,498
==== ==== === ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(2,317)
Reconciliation of net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization............................. 70
Net changes in current assets and liabilities:
Accounts receivable..................................... (25)
Inventories............................................. (43)
Other current assets.................................... (373)
Accounts payable........................................ 651
Unearned revenue........................................ 7
Other current liabilities............................... 135
-------
Net cash used in operating activities....................... (1,895)
INVESTING ACTIVITIES:
Purchase of restricted investment........................... (210)
Deposits.................................................... (31)
Purchase of property and equipment.......................... (2,253)
-------
Net cash used in investing activities....................... (2,494)
FINANCING ACTIVITIES:
Principal payments under capital lease obligations.......... (48)
Proceeds from common stock issuance, net of repurchase...... 108
Proceeds from Series A preferred stock issuance............. 250
Proceeds from Series B preferred stock issuance............. 8,457
-------
Net cash provided by financing activities................... 8,767
-------
Cash and cash equivalents at end of year.................... $ 4,378
=======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 9
=======
Supplemental schedule of non-cash investing and financing
activities:
Equipment purchased through capital leases................ $ 831
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Covad Communications Company was organized in October 1996. On July 16,
1997, Covad Communications Group, Inc. (the "Company") was incorporated in the
state of Delaware. Simultaneous with the Company's incorporation, an exchange
agreement was executed which effectively made Covad Communications Company a
wholly-owned subsidiary of the Company.
The Company is a packet-based Competitive Local Exchange Carrier ("CLEC")
which provides high-speed data communication services using Digital Subscriber
Line ("DSL") technology. The Company's services enhance remote access from
homes to enterprise Local Area Networks ("LANs") and enable Internet Service
Providers ("ISPs") to offer high speed Internet access to their end-users. The
Company's services are provided over standard copper telephone lines at
considerably faster speeds than available through a standard modem. The
Company markets its services directly to enterprises (corporations, government
entities, and educational institutions) that are increasingly emphasizing
remote LAN access to improve employee productivity and reduce operating costs.
The Company also markets its services indirectly through ISPs that wish to
sell high-speed Internet access to small- and medium-sized businesses and
subsequently consumers, using the Company's DSL lines.
The Company's operations are subject to significant risks and uncertainties
including competitive, financial, developmental, operational, growth and
expansion, technological, regulatory, and other risks associated with an
emerging business.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
all of its wholly-owned subsidiaries. There were no intercompany accounts and
transactions which required elimination.
The accompanying statements of operations, stockholders' equity, and cash
flows includes $50,000 received during 1996 upon issuance of the initial
capital stock of the Company and $2,000 expended in 1996 for general and
administrative expenses. Due to the insignificance of balances at December 31,
1996 and activity for the period from inception through December 31, 1996,
financial statements for 1996 have not been presented.
B. REVENUE RECOGNITION
Revenue related to installation of service and sale of customer premise
equipment is recognized when equipment is delivered and installation is
completed. Revenue from monthly recurring service is recognized in the month
the service is provided. Payments received in advance of providing services
are recorded as unearned revenue until the period such services are provided.
C. CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less from
the date of original issuance are considered to be cash equivalents.
D. RESTRICTED CASH
The Company has $210,000 in commercial deposits held in the Company's name
but restricted as security for certain of the Company's capital lease
arrangements. This amount is reflected in other assets.
F-7
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
E. INVENTORIES
Inventories are stated at the lower of cost or market. Costs are based on
the first-in first-out method.
F. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Leasehold improvements......................... 15 years or life of the lease
Electronic communications equipment............ 5 years
Furniture and fixtures......................... 7 years
Computer equipment............................. 3 years
Office equipment............................... 2 to 10 years
Computer software.............................. 3 to 7 years
</TABLE>
The Company capitalizes costs associated with the design and implementation
of the Company's network including internally and externally developed
software. Capitalized external software costs include the actual costs to
purchase existing software from vendors. Capitalized internal software costs
generally include personnel costs incurred in the enhancement and
implementation of purchased software packages. For 1997, total capitalized
internal costs were $139,000.
G. EQUIPMENT UNDER CAPITAL LEASES
The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of
the assets under lease, whichever is less. Assets under capital lease are
amortized over the lease term or useful life of the assets.
H. INCOME TAXES
From January 1, 1997 to June 30, 1997, Covad Communications Company was an S
Corporation under the provisions of the Internal Revenue Code. Effective June
30, 1997, Covad Communications Company terminated its S Corporation status and
became a C Corporation, and on July 16, 1997 Covad Communications Company
became a wholly-owned subsidiary of the Company. Under S Corporation
provisions, income or losses of Covad Communications Company were reported by
the stockholders on their individual federal and state income tax returns, and
Covad Communications Company did not pay income taxes or receive income tax
benefits.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
which provides for the establishment of deferred tax assets and liabilities
for the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. As of December 31, 1997, the Company has
deferred tax assets related to federal and California net operating loss
carryforwards of approximately $700,000 and $120,000, respectively. The net
deferred tax asset has been fully offset by a valuation allowance. The federal
and California net operating loss carryforwards of $2,062,000 expire in 2012
and 2003, respectively. Utilization of the net operating losses is subject to
a substantial annual limitation provided by the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the
expiration of net operating losses before utilization.
I. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
J. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," as
amended by SFAS No. 119, "Disclosures About Derivative Financial Instruments
and Fair Value of Financial Instruments," which are effective for the
Company's December 31, 1997 financial statements, requires disclosure of fair
value information about financial instruments whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available for identical or comparable
financial instruments, fair values are based on estimates using the present
value of estimated cash flows or other valuation techniques. The resulting
fair values can be significantly affected by the assumptions used, including
the discount rate and estimates as to the amounts and timing of future cash
flows.
The following methods and assumptions were used to estimate the fair value
for financial instruments:
Cash and cash equivalents. The carrying amount approximates fair value.
Borrowings. The fair value of borrowings, including capital lease
obligations and other obligations, is estimated by discounting the future cash
flows using estimated borrowing rates at which similar types of borrowing
arrangements with the same remaining maturities could be obtained by the
Company. For borrowings outstanding at December 31, 1997, fair value
approximates recorded value.
K. EARNINGS PER SHARE
In March 1997, SFAS No. 128 "Earnings Per Share" ("SFAS 128") was issued
specifying the computation, presentation, and disclosure requirements for
earnings per share for publicly held entities. This statement is effective for
financial statements for both interim and annual periods ending after December
15, 1997. The Company has applied the provisions of SFAS 128.
Basic earnings per share is computed by dividing income or loss applicable
to common shareholders by the weighted average number of shares outstanding
during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of stock options and warrants using the treasury stock method and
conversion of convertible preferred stock. In addition, income or loss is
adjusted for dividends and other transactions relating to preferred shares for
which conversion is assumed. The diluted earnings per share amount has not
been reported because the Company has a net loss and the impact of the assumed
exercise of the stock options and warrants and the assumed preferred stock
conversion is not dilutive.
F-9
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. BORROWING ARRANGEMENTS
During 1997, the Company entered into capital lease arrangements to finance
the acquisition of certain operating assets, two of which have bargain
purchase options. The principal value of these leases totaled $831,000 and was
equivalent to the fair value of the assets leased.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, CAPITAL LEASES
------------ --------------
<S> <C>
1998......................................................... $ 339,000
1999......................................................... 322,000
2000......................................................... 285,000
2001......................................................... 26,000
2002......................................................... --
Thereafter................................................... --
---------
972,000
Less amount representing interest............................ (189,000)
Less current portion......................................... (229,000)
---------
Total long-term portion...................................... $ 554,000
=========
</TABLE>
Accumulated amortization for equipment under capital leases is reflected in
accumulated depreciation and amortization for property and equipment.
3. OPERATING LEASES
The Company leases vehicles, equipment, and office space under various
operating leases. Future minimum lease payments at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
1998.............................................................. $ 405,000
1999.............................................................. 264,000
2000.............................................................. 65,000
2001.............................................................. 62,000
2002.............................................................. 65,000
Thereafter........................................................ 364,000
----------
Total........................................................... $1,225,000
==========
</TABLE>
Rental expense on operating leases for the year ended December 31, 1997 was
$131,000.
4. OTHER ASSETS AND OTHER LIABILITIES
On December 30, 1997, the Company entered into a capital lease agreement
(see Note 2) with a principal balance of $316,000. As of December 31, 1997,
this amount had not yet been received into the Company's bank account and is,
therefore, included as part of other current assets on the balance sheet.
5. STOCKHOLDERS' EQUITY
COVAD COMMUNICATIONS COMPANY
In October 1996, Covad Communications Company was granted authority to issue
up to 10,000,000 shares of stock. In May 1997, the shareholders of Covad
Communications Company voted to amend the articles of
F-10
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
incorporation granting authority to issue two classes of stock to be
designated "Preferred Stock" and "Common Stock". The number of shares of
Preferred Stock authorized was 7,500,000 shares with no par value. The number
of shares of Common Stock authorized was 12,500,000 shares with no par value.
In July 1997, the Company entered into an Exchange Agreement (the
"Agreement") with the shareholders of Covad Communications Company to convey
to the Company 100% of the issued and outstanding shares of capital stock of
Covad Communications Company for capital stock of the Company.
COVAD COMMUNICATIONS GROUP, INC.
Common Stock:
The number of shares of common stock ("Common Stock") authorized for
issuance by the Company is 50,000,000 shares with a par value of $.001 per
share. As of December 31, 1997, 7,574,136 shares were issued and outstanding.
Preferred Stock:
The number of shares of preferred stock authorized for issuance by the
Company is 25,000,000 shares. Of this amount, 500,000 shares have been
designated as Series A Preferred Stock ("Series A") and 11,333,334 shares as
Series B Preferred Stock ("Series B"), each with a par value of $.001 per
share. As of December 31, 1997, 500,000 and 11,333,334 shares of Series A and
Series B, respectively, were issued and outstanding.
The holders of Series A and Series B are entitled to receive in any fiscal
year, dividends at the rate of $0.025 per share and $0.06 per share,
respectively, payable in preference and priority to any payment of dividends
on Common Stock. The rights to such dividends are cumulative and accrue to the
holders to the extent they are not declared or paid and are payable only in
the event of a liquidation, dissolution or winding up of the Company, or other
liquidity event (as defined in the Certificate of Incorporation). The
cumulative dividends at December 31, 1997 for Series A and Series B were
$12,500 and $680,000, respectively, none of which has been declared or paid.
Subject to certain adjustments as set forth in the Certificate of
Incorporation, each share of Series A and Series B is convertible into one
share of Common Stock. Each share of Series A and Series B is entitled to the
number of votes equal to the number of shares of Common Stock in which such
shares of Series A and Series B, respectively, could be converted.
In the event of any liquidation or dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A and Series B are
entitled to receive, in addition to the cumulated and unpaid dividends, $0.50
and $0.75 per share, respectively (the "Initial Preference"), until a
"Liquidation Preference Threshold" is met based on a formula as set forth in
the Certificate of Incorporation. After payment of these preferences, any
remaining amounts are distributed to the holders of Series A, Series B, and
Common Stock on a pro rata basis based on the number of shares of Common Stock
held by each holder on an as-converted basis. If the "Liquidation Preference
Threshold" is met, the Initial Preference is eliminated and all amounts are
distributed to the holders of Series A, Series B, and Common Stock on a pro
rata basis based on the number of shares of Common Stock held by each holder
on an as-converted basis.
6. STOCK OPTIONS
In 1997, the Company adopted the Covad Communications Group, Inc. 1997 Stock
Plan (the "Plan"). The Plan provides for the grant of stock purchase rights
and options to purchase shares of Common Stock to
F-11
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employees and consultants from time to time as determined by the Board of
Directors. The options expire from two to eight years after the date of grant.
The Plan has reserved 3,513,500 shares of the Company's Common Stock for sale
and issuance under the Plan at prices to be determined by the Board of
Directors.
The following is a summary of the status of stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
EXERCISE NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
PRICE RANGE SHARES LIFE REMAINING EXERCISE PRICE SHARES EXERCISE PRICE
- ----------- --------- -------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.05 1,503,500 7.3 years $0.05 179,834 $0.05
$0.075 1,033,000 7.8 years $0.075 1,000 $0.075
--------- -------
2,536,500 7.5 years $0.06 180,834 $0.05
========= =======
</TABLE>
The following table summarizes stock option activity for the year ending
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OF COMMON OPTION PRICE
STOCK PER SHARE
--------- ------------
<S> <C> <C>
Balance as of December 31, 1996..................... -- N/A
Granted............................................. 2,562,500 $0.05-$0.075
Exercised........................................... (4,000) $ 0.05
Forfeited........................................... (22,000) $0.05-$0.075
--------- ------------
Balance as of December 31, 1997..................... 2,536,500 $0.05-$0.075
========= ============
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its employee stock options and the
disclosure only provisions of SFAS No. 123, "Accounting and Disclosure of
Stock-Based Compensation," ("SFAS 123"). Under APB 25, if the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation is recognized. No
compensation expense was recorded for the year ended December 31, 1997.
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by SFAS 123 as if the Company had accounted for its stock-based
awards under the fair value method of SFAS 123. The fair value of the
Company's stock-based awards to employees has been estimated using the minimum
value option pricing model which does not consider stock price volatility.
Because the Company does not have actively traded equity securities,
volatility is not considered in determining the fair value of stock-based
awards.
For 1997, the fair value of the Company's stock-based awards to employees
was estimated using the following weighted average assumptions:
<TABLE>
<S> <C>
Expected life of options in years.................................... 4.0
Risk-free interest rate.............................................. 7.0%
Expected dividend yield.............................................. 0.00%
</TABLE>
F-12
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair value of stock options granted during 1997 was
$0.01 per share. For pro forma purposes, the estimated fair value of the
Company's stock-based awards to employees is amortized over the options'
vesting period which would result in an increase in net loss of approximately
$2,200. The result of applying SFAS 123 to the Company's option grants in 1997
was not material to the results of operations or loss per share as reported in
the accompanying statement of operations.
7. YEAR 2000 COMPLIANT (UNAUDITED)
The Company is engaged in the development of information systems to manage
various aspects of the Company's operations. All of these information systems
will be in compliance with year 2000 requirements.
8. SUBSEQUENT EVENT (UNAUDITED)
Equity Commitment
On February 20, 1998, the Company entered into a Series C Preferred Stock
and Warrant Subscription Agreement (the "Subscription Agreement") with certain
of its investors (the "Series C Investors") pursuant to which the Series C
Investors have unconditionally agreed to purchase an aggregate of 3,842,762
shares of Series C Preferred Stock and warrants to purchase an aggregate of
3,153,000 shares of Series C Preferred Stock (the "Series C Warrants") for an
aggregate purchase price of $16.0 million at a date to be determined by the
Company but no later than March 11, 1999. The Company either has agreed to
call the Equity Commitment or to complete an alternate equity financing of at
least $16.0 million by March 11, 1999. In consideration of this commitment,
the Company has issued to the Series C Investors warrants to purchase an
aggregate of 1,129,432 shares of the Company's Common Stock at a purchase
price of $0.005 per share (the "Common Warrants").
On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement between the Company, the Series C
Investors, and a director of the Company whereby the Series C Investors
assigned to the director of the Company their obligation to purchase 24,010
shares of Series C Preferred Stock and 19,706 Series C Warrants for an
aggregate purchase price of $100,000. On the same date, the director purchased
24,010 shares of Series C Preferred Stock. As a result of this amendment, the
aggregate obligation of the Series C Investors to purchase Series C Preferred
Stock and Series C Warrants was reduced from 3,842,762 shares to 3,818,752
shares, and from 3,153,000 shares to 3,133,294 shares, respectively, for an
aggregate purchase price of $15.9 million, reduced from $16.0 million.
The Series C Warrants issuable in connection with the closing of the Equity
Commitment will have five-year terms, have an exercise price of $4.165 per
share of Series C Preferred Stock (subject to adjustment in certain events),
are immediately exercisable and contain a net exercise provision. The Common
Warrants issued upon the signing of the Subscription agreement have five-year
terms (but must be exercised prior to the closing of an initial public
offering of equity securities by the Company), have exercise prices of $0.005
per share, are immediately exercisable and contain net exercise provisions.
The Stock Purchase
On March 11, 1998, an investor in the Company purchased 240,096 shares of
Series C Preferred Stock and Series C Warrants to purchase an aggregate of
197,000 shares of Series C Preferred Stock for an aggregate purchase price of
$1,000,000; provided, that the Company does not have any obligation to issue
such Series C Warrants to this investor until such time as the Equity
Commitment is called. In connection with its agreement to purchase such Series
C Preferred Stock and Series C Warrants, the Company issued to this investor
Common Warrants to purchase an aggregate of 70,568 shares of Common Stock at a
purchase price of $0.005 per share.
F-13
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Debt Issuance
On March 11, 1998, the Company received net proceeds of approximately $130
million in connection with the issuance of 13 1/2% Senior Discount Notes due
2008 (the "Notes") and Warrants to purchase 3,369,176 shares of Common Stock
due March 15, 2008. The Notes will accrete in value through March 15, 2003
(the "Full Accretion Date") at a rate of 13 1/2% per annum compounded semi-
annually. Cash interest will neither accrue nor be payable on the Notes prior
to March 15, 1998. Thereafter, the Notes will bear interest at the rate of 13
1/2% per annum, payable in cash semi-annually in arrears on March 15 and
September 15, commencing September 15, 2003.
Stock Split
The consolidated financial statements applicable to the prior period have
been restated to reflect a two-for-one stock split effective in May 1998 for
common stock ("Common Stock") and preferred stock ("Preferred Stock").
Concurrent with the stock split, the Company amended the authorized shares of
Common Stock to 50,000,000 and Preferred Stock to 25,000,000, of which 500,000
are designated Series A Preferred, 11,400,002 are designated Series B
Preferred, 7,432,858 are designated Series C Preferred, and 5,667,140 are
undesignated.
F-14
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $131,758
Accounts receivable, net........................................... 154
Unbilled revenue................................................... 52
Inventories........................................................ 117
Prepaid expenses................................................... 114
Other current assets............................................... 16
--------
TOTAL CURRENT ASSETS............................................. 132,211
PROPERTY AND EQUIPMENT:
Networks and communication equipment............................... 5,208
Computer equipment................................................. 1,317
Furniture and fixtures............................................. 205
Leasehold improvements............................................. 156
--------
6,886
Less accumulated depreciation and amortization..................... (234)
--------
NET PROPERTY AND EQUIPMENT....................................... 6,652
OTHER ASSETS:
Deferred debt issuance costs (net)................................. 6,653
Restricted cash.................................................... 210
Deposits........................................................... 31
--------
TOTAL OTHER ASSETS............................................... 6,894
--------
TOTAL ASSETS..................................................... $145,757
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 1,722
Unearned revenue................................................... 41
Accrued network costs.............................................. 195
Accrued financing costs............................................ 750
Other accrued liabilities.......................................... 179
Current portion of capital lease obligations....................... 237
--------
TOTAL CURRENT LIABILITIES........................................ 3,124
Long-term debt (net of discount)..................................... 132,518
Long-term capital lease obligations.................................. 485
--------
TOTAL LIABILITIES................................................ 136,127
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $0.001 par value, 500,000
shares authorized, issued and outstanding......................... 1
Series B convertible preferred stock, $0.001 par value, 11,400,002
shares authorized, issued and outstanding......................... 11
Series C convertible preferred stock, $0.001 par value, 7,432,858
shares authorized, 240,096 shares issued and outstanding.......... --
Common stock, $0.001 par value, 50,000,000 shares authorized,
7,576,136 shares issued and outstanding........................... 8
Additional paid-in capital......................................... 14,464
Retained earnings (deficit)........................................ (4,854)
--------
TOTAL STOCKHOLDERS' EQUITY....................................... 9,630
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $145,757
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Revenues................................................ $ -- $ 186
Operating expenses:
Network and product costs............................. -- 203
Sales, marketing, general and administrative.......... 24 1,944
Depreciation and amortization......................... -- 164
--------- ---------
Total operating expenses................................ 24 2,311
--------- ---------
Loss from operations.................................... (24) (2,125)
Interest income (expense):
Interest income....................................... -- 435
Interest expense...................................... -- (847)
--------- ---------
Net interest............................................ -- (412)
--------- ---------
Net loss................................................ $ (24) $ (2,537)
========= =========
Net loss per common share............................... $(0.00) $ (0.33)
Weighted average shares used in computing net loss per
share.................................................. 8,000,000 7,575,803
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES............... $ 51 $ 521
INVESTING ACTIVITIES:
Purchase of property and equipment...................... (48) (3,802)
------- -----------
Net cash used in investing activities................... (48) (3,802)
FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and
warrants............................................... -- 129,622
Principal payments under capital lease obligations...... -- (61)
Proceeds from common stock issuance, net of repurchase.. 50 --
Proceeds from Series B preferred stock issuance......... -- 100
Proceeds from Series C preferred stock issuance......... -- 1,000
------- -----------
Net cash provided by financing activities............... 50 130,661
------- -----------
Net increase in cash and cash equivalents............... 53 127,380
Cash and cash equivalents at beginning of period........ -- 4,378
------- -----------
Cash and cash equivalents at end of period.............. $ 53 $ 131,758
======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheets and related interim statements
of income and cash flows include all adjustments (which include
reclassifications and normal recurring adjustments) necessary for presentation
in conformity with generally accepted accounting principles. The preparation
of financial statements requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. These consolidated
financial statements should be read in conjunction with Covad Communications
Group, Inc.'s (the "Company") audited annual financial statements and notes
thereto. The Company's quarterly results of operations are not indicative of,
and should not be relied upon as an indicator of, future performance of the
Company.
2. DEBT
On March 11, 1998, the Company completed a private placement (the "1998
Private Offering") through the issuance of 260,000 units (the "Units"), each
unit consisting of $1,000 in principal amount at maturity of 13 1/2% Senior
Discount Notes due 2008 (the "Notes") and one warrant, initially exercisable
to purchase 12.9584 shares of common stock, $0.001 par value, of the Company
(the "Unit Warrants"). Net proceeds from the 1998 Private Offering were
approximately $129.6 million, after transaction costs of approximately $5.5
million.
The principal amount of the Notes will accrete from the date of issuance at
the rate of 13 1/2% per annum through March 15, 2003, compounded semi-
annually, and thereafter bear interest at the rate of 13 1/2% per annum,
payable semi-annually, in arrears on March 15 and September 15 of each year,
commencing on September 15, 2003. The Notes are unsecured senior obligations
of the Company that will mature on March 15, 2008. The Notes will be
redeemable at the option of the Company at any time after March 15, 2003 plus
accrued and unpaid interest thereon, if any, to the redemption date.
The Notes were originally recorded at approximately $131.7 million, which
represents the $135.1 million in gross proceeds less the approximate $3.4
million value assigned to the Unit Warrants, which is included in additional
paid-in capital. The value assigned to the Unit Warrants, representing debt
discount, is being amortized over the life of the notes. Additional debt
issuance costs were incurred through the issuance of warrants associated with
the commitment of equity by certain investors. Financing costs for the Notes
and the additional debt issuance costs are also being amortized over the life
of the Notes. The accretion of interest on the Notes, and amortization of debt
issuance costs, debt discount, and financing costs are included in interest
expense as shown in the accompanying consolidated financial statements.
3. STOCKHOLDERS' EQUITY
Stock Split
The consolidated financial statements applicable to the prior period have
been restated to reflect a two-for-one stock split effective in May 1998 for
common stock ("Common Stock") and preferred stock ("Preferred Stock").
Concurrent with the stock split, the Company amended the authorized shares of
Common Stock to 50,000,000 and Preferred Stock to 25,000,000, of which 500,000
are designated Series A Preferred, 11,400,002 are designated Series B
Preferred, 7,432,858 are designated Series C Preferred, and 5,667,140 are
undesignated.
F-18
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Equity Commitment
On February 20, 1998, the Company entered into a Series C Preferred Stock
and Warrant Subscription Agreement (the "Subscription Agreement") with certain
of its investors (the "Series C Investors") pursuant to which the Series C
Investors have unconditionally agreed to purchase an aggregate of 3,842,762
shares of Series C Preferred Stock and warrants to purchase an aggregate of
3,153,000 shares of Series C Preferred Stock (the "Series C Warrants") for an
aggregate purchase price of $16.0 million at a date to be determined by the
Company but no later than March 11, 1999. The Company either has agreed to
call the Equity Commitment or to complete an alternate equity financing of at
least $16.0 million by March 11, 1999. In consideration of this commitment,
the Company has issued to the Series C Investors warrants to purchase an
aggregate of 1,129,432 shares of the Company's Common Stock at a purchase
price of $0.005 per share (the "Common Warrants").
On April 24, 1998 the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement between the Company, the Series C
Investors, and a director of the Company whereby the Series C Investors
assigned to the director of the Company their obligation to purchase 24,010
shares of Series C Preferred Stock and 19,706 Series C Warrants for an
aggregate purchase price of $100,000. On the same date, the director purchased
24,010 shares of the Series C Preferred Stock. As a result of this amendment,
the aggregate obligation of the Series C Investors to purchase Series C
Preferred Stock and Series C Warrants was reduced from 3,842,762 shares to
3,818,752 shares, and from 3,153,000 shares to 3,133,294 shares, respectively,
for aggregate purchase price of $15.9 million, reduced from $16.0 million.
The Series C Warrants issuable in connection with the closing of the Equity
Commitment will have five-year terms, have an exercise price of $4.165 per
share of Series C Preferred Stock (subject to adjustment in certain events),
are immediately exercisable and contain a net exercise provision. The Common
Warrants issued upon the signing of the Subscription agreement have five-year
terms (but must be exercised prior to the closing of an initial public
offering of equity securities by the Company), have exercise prices of $0.005
per share, are immediately exercisable and contain net exercise provisions.
The Stock Purchase
On March 11, 1998, an investor in the Company purchased 240,096 shares of
Series C Preferred Stock and Series C Warrants to purchase an aggregate of
197,000 shares of Series C Preferred Stock for an aggregate purchase price of
$1,000,000; provided, that the Company does not have any obligation to issue
such Series C Warrants to this investor until such time as the Equity
Commitment is called. In connection with its agreement to purchase such Series
C Preferred Stock and Series C Warrants, the Company issued to this investor
Common Warrants to purchase an aggregate of 70,568 shares of Common Stock at a
purchase price of $0.005 per share.
Preferred Stock
The holders of Series A Preferred, Series B Preferred, and Series C
Preferred are entitled to receive in any fiscal year, dividends at the rate of
$0.025 per share, $0.06 per share, and $0.335 per share, respectively, payable
in preference and priority to any payment of dividends on Common Stock. The
rights to such dividends are cumulative and accrue to the holders to the
extent they are not declared or paid and are payable only in the event of a
liquidation, dissolution or winding up of the Company or other liquidity event
(as defined in the Company's Certificate of Incorporation).
Subject to certain adjustments as set forth in the Certificate of
Incorporation, each share of Series A Preferred, Series B Preferred, and
Series C Preferred is convertible into one share of Common Stock. Each share
F-19
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
of Series A Preferred, Series B Preferred, and Series C Preferred is entitled
to the number of votes equal to the number of shares of Common Stock in which
such shares of Series A Preferred, Series B Preferred, and Series C Preferred,
respectively, could be converted.
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of Series A Preferred, and Series
B Preferred are entitled to receive, in addition to the cumulated and unpaid
dividends, $0.50 and $0.75 per share, respectively (the "Initial Preference")
until a "Liquidation Preference Threshold" is met based on a formula as set
forth in the Certificate of Incorporation. If the "Liquidation Preference
Threshold" is met, the Initial Preference is eliminated. In the event of any
liquidation, dissolution, or winding up of the Company, either voluntary or
involuntary, the holders of Series C Preferred are entitled to receive, in
addition to the cumulated and unpaid dividends, $4.165 (the "Initial
Preference"). After payment of these preferences, if applicable, any remaining
amounts are distributed to the holders of Series A Preferred, Series B
Preferred, Series C Preferred, and Common Stock on a pro rata basis based on
the number of shares of Common Stock held by each holder on an as-converted
basis.
4. LEGAL PROCEEDINGS
On March 11, 1998, the Company initiated an arbitration proceeding against
Pacific Bell before the American Arbitration Association seeking damages and
equitable relief from Pacific Bell regarding its collocation practices that
have led to the denial of physical collocation space for the installation of
the Company's equipment in multiple central offices in California. On May 8,
1998, the Company filed a complaint in Federal Court against Pacific Bell
seeking damages and equitable relief from Pacific Bell regarding its
collocation practices, failures to timely and properly deliver transmission
and local loop facilities, position on local loop spectral interference
issues, as well as other practices.
5. NEW ACCOUNTING PRONOUNCEMENT
Accounting for Internal Use Computer Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or
obtained for internal use and identifies the characteristics of internal-use
software. The Company's accounting policy with respect to accounting for
computer software developed or obtained for internal use is consistent with
SOP 98-1. Therefore, SOP 98-1 is not expected to have a material impact on
future reported financial results of the Company.
F-20
<PAGE>
APPENDIX A
COVAD COMMUNICATIONS GROUP, INC.
GLOSSARY OF TERMS
Access Line--A circuit that connects a telephone user (customer) to the ILEC
CO.
Analog Modem--A telecommunications device that allows the communication of
digital information over analog telephone lines and through the public
switched telephone network by translating such information in a way that
simulates and uses only the bandwidth of normal voice transmissions.
Asynchronous Transfer Mode (ATM)--A protocol that segments digital
information into 53-byte cells (5-byte header and 48-byte payload) that are
switched throughout a network over virtual circuits. Able to accommodate
multiple types of media (voice, video, data).
Bandwidth--Refers to the maximum amount of data that can be transferred
through a computer's backplane or communication channel in a given time. It is
usually measured in Hertz for analog communications and bits per second for
digital communications.
CO (Central Office)--ILEC facility where subscriber lines are joined to
switching equipment.
CLEC (Competitive Local Exchange Carrier)--Category of telephone service
provider (carrier) that offers services similar to those of the ILEC, as
allowed by recent changes in telecommunications law and regulation. A CLEC may
also provide other types of services such as long distance, Internet access
and entertainment.
CLEC Certification--Granted by a state public service commission or public
utility commission, this certification provides a telecommunications services
provider with the legal standing to offer telecommunications services in
direct competition with the ILEC and other CLECs. Such certifications are
granted on a state-by-state basis.
Communications Act of 1934--The federal legislation governing broadcast and
non-broadcast communications, including both wireless and wired telephone
service, and which established the FCC.
CPE--Customer Premise Equipment.
Digital Service 3 (DS-3)--In the digital hierarchy, this signaling standard
defines a transmission speed of 44.736 Mbps, equivalent to 28 T1 channels;
this term is often used interchangeably with T3.
FCC (Federal Communications Commission)--The U.S. government agency charged
with the oversight of communications originating in the U.S. and crossing
state lines.
Facilities-Based Provider--A telecommunications provider that delivers its
services to the end-user via owned equipment and leased (or owned) transport
in contrast to a reseller of an ILEC's services.
Frame Relay--A high-speed packet-switched data communications protocol.
HFC (Hybrid Fiber Coax)--A combination of fiber optic and coaxial cable,
which has become the primary architecture utilized by cable operators in
recent and ongoing upgrades of their systems. An HFC architecture generally
utilizes fiber optic wire between the headend and the nodes and coaxial wire
from nodes to individual end-users.
ILEC (Incumbent Local Exchange Carrier)--The local exchange carrier that was
the monopoly carrier in a region, prior to the opening of local exchange
services to competition.
ILEC Collocation--A location serving as the interface point for a CLEC
network's interconnection to that of the ILEC. Collocation can be (i)
physical, in which the CLEC places and directly maintains equipment in the
ILEC CO, or (ii) virtual, in which the CLEC leases a facility, similar to that
which it might build, to effect a presence in the ILEC CO.
A-1
<PAGE>
Interconnection (Co-Carrier) Agreement--A contract between an ILEC and a
CLEC for the interconnection of the two networks and CLEC access to ILEC UNEs.
These agreements set out the financial and operational aspects of such
interconnection and access.
ISP (Internet Service Provider)--A vendor that provides subscribers access
to the Internet.
ISDN (Integrated Services Digital Network)--ISDN provides standard
interfaces for digital communications networks and is capable of carrying
data, voice, and video over digital circuits. ISDN protocols are used
worldwide for connections to public ISDN networks or to attach ISDN devices to
ISDN-capable PBX systems (ISPBXs). Developed by the International
Telecommunications Union, ISDN includes two user-to-network interfaces: basic
rate interface (BRI) and primary rate interface (PRI). An ISDN interface
contains one signaling channel (D-channel) and a number of information
channels ("bearer" or B channels). The D-channel is used for call setup,
control, and call clearing on the B-channels. It also transports feature
information while calls are in progress. The B-channels carry the voice, data,
or video information.
IXC (Interexchange Carrier)--Facilities-based interLATA carriers (e.g., AT&T
Corp., MCI Communications Corp., Sprint Corp. and WorldCom, Inc.), who also
provide intraLATA toll service and may operate as CLECs.
Kbps (Kilobits per second)--One thousand bits per second.
LATA (Local Access and Transport Area)--A geographic area inside of which a
local telephone company can offer switched telecommunications services,
including long distance (known as toll). There are 196 LATAs in the U.S.
Mbps (Megabits Per Second)--One million bits per second.
RBOC (Regional Bell Operating Company)--One of the ILECs created by AT&T's
divestiture of its local exchange business. The remaining RBOCs include
BellSouth, Bell Atlantic Corporation, Ameritech Corporation, US West, Inc. and
SBC Communications, Inc.
T1--This is a Bell system term for a digital transmission link with a
capacity of 1.544 Mbps.
UNEs (Unbundled Network Elements)--The various portions of an ILEC's network
that a CLEC can lease for purposes of building a facilities-based competitive
network, including copper lines, CO collocation space, inter-office transport,
operational support systems, local switching and rights of way.
A-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SO-
LICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RE-
LATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OF-
FER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITA-
TION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Capitalization........................................................... 26
Selected Financial Data.................................................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 34
Management............................................................... 50
Certain Relationships and Related Transactions........................... 56
Principal Stockholders................................................... 59
The Exchange Offer....................................................... 61
Description of the Old Notes............................................. 69
Description of the New Notes............................................. 94
Description of Capital Stock............................................. 95
United States Federal Income Tax Considerations.......................... 100
Plan of Distribution..................................................... 105
Legal Matters............................................................ 105
Independent Auditors..................................................... 105
Index to Financial Statements............................................ F-1
Glossary................................................................. A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$260,000,000
PRINCIPAL AMOUNT AT MATURITY
[LOGO]
COVAD COMMUNICATIONS GROUP, INC.
13 1/2% SENIOR DISCOUNT NOTES DUE 2008
---------------
PROSPECTUS
---------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article X of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors, employees and agents of the corporation if such person
acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding the indemnified party had no reason to believe
his conduct was unlawful.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Registrant has entered into indemnification agreements with its
directors and executive officers, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
The Registrant does not maintain any liability insurance coverage for its
directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
1.1* Purchase Agreement dated March 6, 1998 among the Registrant and Bear,
Stearns & Co. Inc. and BT Alex. Brown Incorporated.
3.1 Amended and Restated Certificate of Incorporation filed with the
Delaware Secretary of State on May 21, 1998.
3.2* Bylaws.
4.1* Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York, including form of Senior Discount Note Due 2008.
4.2* Registration Rights Agreement dated as of March 11, 1998 among the
Registrant and the Initial Purchasers.
4.3* Warrant Agreement dated as of March 11, 1998 between the Registrant
and The Bank of New York.
4.4* Warrant Registration Rights Agreement dated as of March 11, 1998 among
the Registrant and the Initial Purchasers.
4.5* Specimen 13 1/2% Senior Discount Note Due 2008, Series B.
4.6 Amended and Restated Stockholders Rights Agreement dated March 11,
1998 among the Registrant and certain of its stockholders, as amended
by Amendment No. 1 to the Amended and Restated Stockholder Rights
Agreement among the Registrant and certain of its stockholders dated
as of April 24, 1998.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement entered into between the Registrant
and each of the Registrant's executive officers and directors.
10.2* Employment Agreement entered into between the Registrant and Rex
Cardinale.
10.3* Employment Agreement entered into between the Registrant and Dhruv
Khanna.
10.4 1997 Stock Plan and related form of option agreement, as amended.
10.5 Series C Preferred Stock and Warrant Subscription Agreement dated as
of February 20, 1998 among the Registrant, Warburg, Pincus Ventures,
L.P. ("Warburg"), Crosspoint Venture Partners 1996 ("Crosspoint") and
Intel Corporation, as amended by the Assignment and Assumption
Agreement and First Amendment to the Series C Preferred Stock and
Warrant Subscription Agreement dated as of April 24, 1998 among the
Registrant, Warburg, Crosspoint and Robert Hawk.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
10.6* Sublease dated August 15, 1997 between Intevac, Inc. and Registrant
for the Registrant's facility located in Santa Clara, California.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Counsel.
24* Power of Attorney.
25.1* Statement of Eligibility of Trustee.
27.1 Amended Financial Data Schedule as of and for the year ended December
31, 1997.
27.2 Financial Data Schedule as of and for the three months ended March 31,
1998.
99.1* Form of Letter of Transmittal with respect to Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Exchange Agent Agreement.
99.4 Tax Opinion
</TABLE>
- --------
* Previously filed
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information to be
set forth therein is not applicable or is shown in the financial statements or
Notes thereto.
ITEM 22. UNDERTAKING
1. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
2. The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
3. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
4. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement.
II-2
<PAGE>
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) If the registrant is a foreign private issuer, to file a post-
effective amendment to the registration statement to include any financial
statements required by (S)210.3-19 of this chapter at the start of any
delayed offering or throughout a continuous offering. Financial statements
and information otherwise required by Section 10(a)(3) of the Act need not
be furnished, provided that the registrant includes in the prospectus, by
means of a post-effective amendment, financial statements required pursuant
to this paragraph (d) and other information necessary to ensure that all
other information in the prospectus is at least as current as the date of
those financial statement. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or (S)210.3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Form F-3.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA CLARA,
STATE OF CALIFORNIA ON JUNE 16, 1998.
Covad Communications Group, Inc.
/s/ Timothy Laehy
By:
----------------------------------
Timothy Laehy
Chief Financial Officer,
Treasurer and Vice President,
Finance
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT TO THE
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON THE 16TH
DAY OF JUNE, 1998 IN THE CAPACITIES INDICATED:
SIGNATURE TITLE
* President, Chief Executive Officer and
- ------------------------------------- Director (Principal Executive Officer)
(CHARLES MCMINN)
/s/ Timothy Laehy Chief Financial Officer, Treasurer and
- ------------------------------------- Vice President, Finance (Principal
(TIMOTHY LAEHY) Financial and Accounting Officer)
* Director
- -------------------------------------
(ROBERT HAWK)
* Director
- -------------------------------------
(HENRY KRESSEL)
* Director
- -------------------------------------
(JOSEPH LANDY)
* Director
- -------------------------------------
(DANIEL LYNCH)
* Director
- -------------------------------------
(FRANK MARSHALL)
* Director
- -------------------------------------
(RICH SHAPERO)
*By: /s/ Timothy Laehy
----------------------------------
Timothy Laehy, attorney-in-fact
II-4
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
REGISTRATION STATEMENT ON FORM S-4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
1.1* Purchase Agreement dated March 6, 1998 among the Registrant and Bear,
Stearns & Co. Inc. and BT Alex. Brown Incorporated.
3.1 Amended and Restated Certificate of Incorporation filed with the
Delaware Secretary of State on May 21, 1998.
3.2* Bylaws.
4.1* Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York, including form of Senior Discount Note Due 2008.
4.2* Registration Rights Agreement dated as of March 11, 1998 among the
Registrant and the Initial Purchasers.
4.3* Warrant Agreement dated as of March 11, 1998 between the Registrant
and The Bank of New York.
4.4* Warrant Registration Rights Agreement dated as of March 11, 1998 among
the Registrant and the Initial Purchasers.
4.5* Specimen 13 1/2% Senior Discount Note Due 2008, Series B.
4.6 Amended and Restated Stockholders Rights Agreement dated March 11,
1998 among the Registrant and certain of its stockholders, as amended
by Amendment No. 1 to the Amended and Restated Stockholder Rights
Agreement among the Registrant and certain of its stockholders dated
as of April 24, 1998.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement entered into between the Registrant
and each of the Registrant's executive officers and directors.
10.2* Employment Agreement entered into between the Registrant and Rex
Cardinale.
10.3* Employment Agreement entered into between the Registrant and Dhruv
Khanna.
10.4 1997 Stock Plan and related form of option agreement, as amended.
10.5 Series C Preferred Stock and Warrant Subscription Agreement dated as
of February 20, 1998 among the Registrant, Warburg, Pincus Ventures,
L.P. ("Warburg"), Crosspoint Venture Partners 1996 ("Crosspoint") and
Intel Corporation, as amended by the Assignment and Assumption
Agreement and First Amendment to the Series C Preferred Stock and
Warrant Subscription Agreement dated as of April 24, 1998 among the
Registrant, Warburg, Crosspoint and Robert Hawk.
10.6* Sublease dated August 15, 1997 between Intevac, Inc. and Registrant
for the Registrant's facility located in Santa Clara, California.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Counsel.
24* Power of Attorney.
25.1* Statement of Eligibility of Trustee.
27.1 Amended Financial Data Schedule as of and for the year ended December
31, 1997.
27.2 Financial Data Schedule as of and for the three months ended March 31,
1998.
99.1* Form of Letter of Transmittal with respect to Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Exchange Agent Agreement.
99.4 Tax Opinion
</TABLE>
- --------
* Previously filed
<PAGE>
EXHIBIT 3.1
COVAD COMMUNICATIONS GROUP, INC.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
Covad Communications Group, Inc., a Delaware corporation, hereby certifies
as follows:
The Certificate of Incorporation of Covad Communications Group, Inc. (the
"CORPORATION") was filed in the office of the Secretary of State of the State of
Delaware on July 14, 1997. The Certificate of Incorporation was amended on
February 11, 1998. The Certificate of Incorporation was amended and restated on
February 23, 1998. The Certificate of Incorporation is hereby amended and
restated pursuant to Section 242 and Section 245 of the Delaware General
Corporation Law. All amendments to the Certificate of Incorporation reflected
herein have been duly authorized and adopted by the Corporation's Board of
Directors and stockholders in accordance with the provisions of Sections 242 and
245 of the Delaware General Corporation Law.
This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the Certificate of Incorporation of the
Corporation. The text of the Certificate of Incorporation is amended hereby to
read as herein set forth in full:
ARTICLE I
The name of the corporation is Covad Communications Group, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, zip code 19801. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purpose to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
<PAGE>
The Corporation is authorized to issue two classes of shares to be
designated, respectively, "Common Stock" and "Preferred Stock." Upon the filing
of this Amended and Restated Certificate of Incorporation (the "FILING DATE"),
each outstanding share of Common Stock shall be divided into two shares of
Common Stock, and each outstanding share of Preferred Stock shall be divided
into two shares of Preferred Stock of the same series. The number of shares of
Common Stock authorized to be issued is Fifty Million (50,000,000). The number
of shares of Preferred Stock authorized to be issued is Twenty-Five Million
(25,000,000), of which Five Hundred Thousand (500,000) shares have been
designated as Series A Preferred Stock (the "SERIES A PREFERRED"), Eleven
Million Four Hundred Thousand and Two (11,400,002) shares have been designated
Series B Preferred Stock (the "SERIES B PREFERRED") and Seven Million Four
Hundred Thirty-Two Thousand Eight Hundred Fifty-Eight (7,432,858) shares have
been designated Series C Preferred Stock (the "SERIES C PREFERRED"). The Common
Stock and the Preferred Stock shall each have a par value of $.001 per share.
The remaining shares of Preferred Stock may be issued from time to time in
one or more series. The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of this Article IV, to provide for the
issuance of the shares of Preferred Stock in series and, by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following: (a) The number of shares
constituting that series and the distinctive designation of that series; (b) The
dividend rate on the shares of that series, whether dividends shall be
cumulative, and, if so, from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of that series; (c) Whether
that series shall have voting rights, in addition to the voting rights provided
by law, and, if so, the terms of such voting rights; (d) Whether that series
shall have conversion privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the conversion rate in such
events as the Board of Directors shall determine; (e) Whether or not the shares
of that series shall be redeemable and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates; (f)
Whether that series shall have a sinking fund for the redemption or Purchase of
shares of that series and, if so, the terms and amount of such sinking fund; (g)
The rights of the shares of that series in the event of voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and the relative
rights of priority, if any, of payment of shares of that series; and (h) Any
other relative or participating rights, preferences and limitations of that
series.
The relative designations, rights, preferences and restrictions of the
Preferred Stock are as follows:
1. Dividends.
---------
-2-
<PAGE>
(a) The holders of the Series C Preferred, the Series B Preferred and
the Series A Preferred shall be entitled to receive in any fiscal year, out of
the funds legally available therefor, dividends at the rate of $0.335 per share,
$0.06 per share and $0.025 per share (adjusted for any subdivisions,
combinations, consolidations or stock distributions or stock dividends with
respect to such shares occurring after the Filing Date) per annum, respectively,
on each outstanding share of Series C Preferred, Series B Preferred and Series A
Preferred, respectively, payable in preference and priority to any payment of
any dividend on the Common Stock. The right to such dividends on the Series C
Preferred, the Series B Preferred and the Series A Preferred shall be
cumulative, and the right to receive such shall accrue to holders of Series C
Preferred, Series B Preferred and the Series A Preferred, respectively, by
reason of the fact that dividends on such shares are not declared or paid in any
prior year. Any accrued and unpaid dividends on the Series C Preferred, the
Series B Preferred and the Series A Preferred shall be payable only in the event
of a liquidation, dissolution or winding up of the Corporation or other
Liquidity Event (as defined in Section 2(d) below); provided, that, in the event
that the Liquidity Event is an underwritten public offering, such unpaid
dividends on the Series B Preferred and the Series A Preferred shall be paid in
shares of Common Stock of the Corporation, in which case the value of such
shares of Common Stock shall be equal to the initial public offering price per
share of Common Stock (prior to any underwriting discounts and commissions).
(b) No dividends shall be paid on any share of Common Stock during any
fiscal year of the Corporation until dividends in the total amount of $0.335 per
share, $0.06 per share and $0.025 per share (adjusted for any subdivisions,
combinations, consolidations or stock distributions or stock dividends with
respect to such shares occurring after the Filing Date) on the Series C
Preferred, the Series B Preferred and the Series A Preferred, respectively,
shall have been paid or declared and set apart during that fiscal year and any
prior year in which dividends accumulated but remain unpaid, and no dividends
shall be paid on any share of Common Stock unless a dividend is paid with
respect to all outstanding shares of Series C Preferred, Series B Preferred and
Series A Preferred, in an amount for each such share of Series C Preferred,
Series B Preferred and Series A Preferred equal to or greater than the aggregate
amount of such dividends for all shares of Common Stock into which each such
share of Series C Preferred, Series B Preferred or Series A Preferred could then
be converted, as the case may be.
2. Liquidation Preference. In the event of any liquidation, dissolution
----------------------
or winding up of the Corporation, either voluntary or involuntary, distributions
to the stockholders of the Corporation shall be made in the following manner:
(a) The holders of the Series C Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common Stock by reason of
their ownership of such stock, the amount equal to the Initial Series C
Preferred Price (as defined in paragraph (b) below) for each share of Series C
Preferred then held by them and, in addition, an amount equal to all cumulated
and unpaid dividends on the Series C Preferred. The holders of the Series B
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock by reason of their ownership of such stock, the
amount equal to the Initial Series B Preferred Price (as
-3-
<PAGE>
defined in paragraph (b) below) for each share of Series B Preferred then held
by them and, in addition, an amount equal to all cumulated and unpaid dividends
on the Series B Preferred. The holders of the Series A Preferred shall be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus funds of the Corporation to the holders of the Common Stock by
reason of their ownership of such stock, the amount equal to the Initial Series
A Preferred Price (as defined in paragraph (b) below) for each share of Series A
Preferred then held by them and, in addition, an amount equal to all cumulated
and unpaid dividends on the Series A Preferred. The Series C Preferred, the
Series B Preferred and the Series A Preferred shall rank on a parity (based on
the amount of the respective liquidation preferences of such series) as to the
receipt of the respective preferential amounts for each such series upon the
occurrence of such a liquidation, dissolution or winding up of the Corporation.
(b) For purposes of this Section 2, the "Initial Series C Preferred
Price" is $4.165 for each share of Series C Preferred then held by a holder
thereof, adjusted for any subdivisions, combinations, consolidations or stock
distributions or dividends with respect to such shares occurring after the
Filing Date. For purposes of this Section 2, the "Initial Series B Preferred
Price" (i) in the event that the Liquidation Preference Threshold is achieved,
is $0.00 for each share of Series B Preferred then held by a holder thereof,
adjusted for any subdivisions, combinations, consolidations or stock
distributions or dividends with respect to such shares occurring after the
Filing Date, or (ii) in the event that the Liquidation Preference Threshold is
not achieved, is $0.75 for each such share, adjusted for any subdivisions,
combinations, consolidations or stock distributions or dividends with respect to
such shares occurring after the Filing Date. For purposes of this Section 2,
the "Initial Series A Preferred Price" (i) in the event that the Liquidation
Preference Threshold is achieved, is $0.00 for each share of Series A Preferred
then held by a holder thereof, adjusted for any subdivisions, combinations,
consolidations or stock distributions or dividends with respect to such shares
occurring after the Filing Date, or (ii) in the event that the Liquidation
Preference Threshold is not achieved, is $0.50 for each such share, adjusted for
any subdivisions, combinations, consolidations or stock distributions or
dividends with respect to such shares occurring after the Filing Date. If upon
the occurrence of a liquidation, dissolution or winding-up of the Corporation
the assets and funds thus distributed among the holders of the Series C
Preferred, the Series B Preferred and the Series A Preferred shall be
insufficient to permit the payment to such holders of the full preferential
amount, then the entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably among the holders of the Series C
Preferred, the Series B Preferred and the Series A Preferred in proportion to
the preferential amount each such holder is otherwise entitled to receive. For
purposes of this Section 2, the "LIQUIDATION PREFERENCE THRESHOLD" shall be
deemed to have been achieved if the quotient obtained by dividing (i) (A) the
aggregate value to be received by the holders of the Corporation's capital stock
in such liquidation, dissolution, winding-up or other Liquidity Event or, if the
Liquidity Event is an underwritten public offering of the Corporation's Common
Stock, the pre-offering valuation of the Corporation, less (B) the sum of the
aggregate purchase price received by the Corporation for the Series B Preferred
plus the aggregate purchase price received by the Corporation for the Series A
Preferred, less (C) the sum of the cumulated but unpaid dividends on the Series
B Preferred plus the cumulated but unpaid dividends on the Series A Preferred,
by (ii) the total number of shares of the Corporation's Common Stock outstanding
on the date of such event on a fully-diluted, as-converted basis, equals or
exceeds $3.00,
-4-
<PAGE>
adjusted for any subdivisions, combinations, consolidations, stock distributions
or dividends occurring after the Filing Date.
(c) After setting apart or paying in full the preferential amounts due
pursuant to Section 2(a) above, the remaining assets of the Corporation
available for distribution to stockholders, if any, shall be distributed to the
holders of the Series A Preferred, Series B Preferred, Series C Preferred and
Common Stock on a pro rata basis, based on the number of shares of Common Stock
then held by each holder on an as-converted basis.
(d) A consolidation or merger of this Corporation with or into any
other corporation or corporations, or a sale, conveyance or disposition of all
or substantially all of the assets of this Corporation, 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 an
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, of shares of Common Stock of this
Corporation (each, a "LIQUIDITY EVENT"), shall be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 2; provided,
however, that such underwritten public offering shall be deemed to be a
liquidation, dissolution or winding up of this Corporation solely with respect
to the holders of the Series A Preferred and the Series B Preferred.
(e) Notwithstanding any other provision of this Section 2, the
Corporation may at any time, out of funds legally available therefor, repurchase
shares of Common Stock of the Corporation issued to or held by employees,
officers or consultants of the Corporation or its subsidiaries upon termination
of their employment or services, pursuant to any agreement providing for such
right of repurchase, whether or not dividends on the Series C Preferred, Series
B Preferred and Series A Preferred shall have been declared and funds set aside
therefor and such repurchases shall not be subject to the liquidation
preferences of the Series C Preferred, Series B Preferred or Series A Preferred.
(f) In the event the Corporation proposes to distribute assets other
than cash in connection with any liquidation, dissolution or winding up of the
Corporation (other than an underwritten public offering of the Corporation's
Common Stock), the value of the assets to be distributed to the holders of
shares of Series C Preferred, Series B Preferred, Series A Preferred and Common
Stock shall be determined in good faith by the Board. Any securities not
subject to investment letter or similar restrictions on free marketability shall
be valued as follows:
(i) If traded on a securities exchange, the value shall be deemed
to be the average of the security's closing prices on such exchange over the
thirty (30) day period ending one (1) day prior to the distribution;
(ii) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the thirty (30) day
period ending three (3) days prior to the distribution; and
-5-
<PAGE>
(iii) If there is no active public market, the value shall be the
fair market value thereof as determined in good faith by the Board.
The method of valuation of securities subject to investment letter or
other restrictions on free marketability shall be adjusted to make an
appropriate discount from the market value determined as above in clauses (i),
(ii) or (iii) to reflect the fair market value thereof as determined in good
faith by the Board. The holders of at least a majority of the outstanding
Preferred Stock shall have the right to challenge any determination by the Board
of fair market value pursuant to this Section 2(f), in which case the
determination of fair market value shall be made by an independent appraiser
selected jointly by the Board and the challenging parties, the cost of such
appraisal to be borne equally by the Corporation and the challenging parties.
(g) Notwithstanding any provision of this Section 2 to the contrary,
in the event of a deemed liquidation of this Corporation in connection with an
underwritten public offering in which the Liquidation Preference Threshold is
not achieved with respect to the Series A Preferred and the Series B Preferred,
in addition to (and not in lieu of) the conversion rights set forth in Section 4
below, the holders of the Series A Preferred and the Series B Preferred shall be
entitled to receive, immediately upon the closing of such underwritten public
offering, that number of shares of Common Stock of the Corporation equal to the
quotient obtained by dividing (i) the full preferential amount to which such
holder of Series A Preferred and Series B Preferred is entitled under paragraph
(a) above, by (ii) the public offering price per share (prior to any
underwriters' discounts and commissions) in such underwritten public offering.
3. Voting Rights. Except as otherwise required by law or as set forth
-------------
herein, the holder of each share of Common Stock issued and outstanding shall
have one vote for each share of Common Stock held by such holder, and the holder
of each share of Series C Preferred, Series B Preferred and Series A Preferred
shall be entitled to the number of votes equal to the number of shares of Common
Stock into which such share of Series C Preferred, Series B Preferred and Series
A Preferred, respectively, could be converted at the record date for
determination of the stockholders entitled to vote on such matters, or, if no
such record date is established, at the date such vote is taken or any written
consent of stockholders is solicited, such votes to be counted together with all
other shares of stock of the Corporation having general voting power and not
counted separately as a class. Holders of Common Stock, Series A Preferred,
Series B Preferred and Series C Preferred shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation.
4. Conversion. The holders of the Series C Preferred, Series B Preferred
----------
and Series A Preferred have conversion rights as follows (the "CONVERSION
RIGHTS"):
(a) Right to Convert Series C Preferred. Each share of Series C
-----------------------------------
Preferred 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 the Corporation or any
transfer agent for the Series C Preferred, into such number of fully paid and
nonassessable shares of Common Stock as is determined in the case of the Series
C Preferred by dividing $4.165 by the Series C Conversion Price, determined as
hereinafter provided, in effect at the
-6-
<PAGE>
time of the conversion. The price at which shares of Common Stock shall be
deliverable upon conversion of the Series C Preferred (the "SERIES C CONVERSION
PRICE") shall initially be $4.165 per share of Common Stock. Such initial
Conversion Price shall be subject to adjustment as hereinafter provided.
(b) Right to Convert Series B Preferred. Each share of Series B
-----------------------------------
Preferred 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 the Corporation or any
transfer agent for the Series B Preferred, into such number of fully paid and
nonassessable shares of Common Stock as is determined in the case of the Series
B Preferred by dividing $0.75 by the Series B Conversion Price, determined as
hereinafter provided, in effect at the time of the conversion. The price at
which shares of Common Stock shall be deliverable upon conversion of the Series
B Preferred (the "SERIES B CONVERSION PRICE") shall initially be $0.75 per share
of Common Stock. Such initial Conversion Price shall be subject to adjustment
after the Filing Date as hereinafter provided.
(c) Right to Convert Series A Preferred. Each share of Series A
-----------------------------------
Preferred 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 the Corporation or any
transfer agent for the Series A Preferred, into such number of fully paid and
nonassessable shares of Common Stock as is determined in the case of the Series
A Preferred by dividing $0.50 by the Series A Conversion Price, determined as
hereinafter provided, in effect at the time of the conversion. The price at
which shares of Common Stock shall be deliverable upon conversion of the Series
A Preferred (the "SERIES A CONVERSION PRICE") shall initially be $0.50 per share
of Common Stock. Such initial Conversion Price shall be subject to adjustment
after the Filing Date as hereinafter provided.
(d) Automatic Conversion. Each share of Series C Preferred shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Series C Conversion Price upon the earlier of (i) the date specified by vote or
written consent of holders of seventy percent (70%) of the then Outstanding
shares of Series C Preferred, or (ii) the closing of an underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of securities for the
account of the Corporation to the public at a per share price of $4.165 or
greater (adjusted for any subdivisions, combinations, consolidations or stock
distributions or dividends with respect to such shares occurring after the
Filing Date) prior to any underwriter's discounts or commissions and with
aggregate gross proceeds to the Corporation of not less than Fifteen Million
Dollars ($15,000,000). In the event of the automatic conversion of the Series C
Preferred upon a public offering as aforesaid, the person(s) entitled to receive
the Common Stock issuable upon such conversion of Series C Preferred shall not
be deemed to have converted such Series C Preferred until immediately prior to
the closing of such sale of securities.
Each share of Series A Preferred and Series B Preferred shall
automatically be converted into shares of Common Stock at the then effective
Series A Conversion Price or Series B Conversion Price, respectively, upon the
earlier of (i) the date specified by vote or written consent of holders of
seventy percent (70%) of the then outstanding shares of Series A Preferred and
Series B Preferred,
-7-
<PAGE>
voting together as a single class on an as converted to Common Stock basis, or
(ii) upon the closing of an underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of securities for the account of the Corporation to
the public with aggregate gross proceeds to the Corporation of not less than
Fifteen Million Dollars ($15,000,000). In the event of the automatic conversion
of the Series A Preferred and Series B Preferred upon a public offering as
aforesaid, the person(s) entitled to receive the Common Stock issuable upon such
conversion of Series A Preferred or Series B Preferred shall not be deemed to
have converted such Series A Preferred or Series B Preferred, respectively,
until immediately prior to the closing of such sale of securities.
(e) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of Series C Preferred, Series B Preferred or
Series A Preferred. In lieu of any fractional shares to which the holder would
otherwise be entitled, the Corporation shall pay cash equal to such fraction
multiplied by the then effective applicable Conversion Price. Before any holder
of Series C Preferred, Series B Preferred or Series A Preferred shall be
entitled to convert the same into full shares of Common Stock and to receive
certificates therefor, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series C Preferred, Series B Preferred or Series A
Preferred, as the case may be, and shall give written notice to the Corporation
at such office that such holder elects to convert the same. The Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Series C Preferred, Series B Preferred or Series A Preferred, as
the case may be, a certificate or certificates for the number of shares of
Common Stock to which he shall be entitled as aforesaid and a check payable to
the holder in the amount of any cash amounts payable as the result of a
conversion into fractional shares of Common Stock. 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 C Preferred, Series B Preferred or
Series A Preferred, as the case may be, 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 on such date.
(f) 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, Series B Preferred and Series C Preferred 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,
Series B Preferred and Series C Preferred; 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, Series
B Preferred and Series C Preferred, in addition to such other remedies as shall
be available to the holder of such Series A Preferred, Series B Preferred or
Series C Preferred, 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.
5. Adjustments to Conversion Price.
-------------------------------
-8-
<PAGE>
(a) Special Definitions. For purposes of this Section 5, the
--------------------
following definitions shall apply:
(i) "OPTIONS" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(ii) "ORIGINAL ISSUE DATE" for the Series A Preferred, Series B
Preferred and Series C Preferred shall mean the date on which a share of Series
A Preferred, Series B Preferred or Series C Preferred, as the case may be, was
first issued.
(iii) "CONVERTIBLE SECURITIES" shall mean any evidences of
indebtedness, shares (other than the Series A Preferred, Series B Preferred or
Series C Preferred and Common Stock) or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
(iv) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares
(including reissued shares) of Common Stock issued (or, pursuant to paragraph
5(c), deemed to be issued) by the Corporation after the Original Issue Date,
other than:
(A) shares of Common Stock issued upon conversion of the
Series A Preferred, Series B Preferred and Series C Preferred authorized herein;
(B) shares of Common Stock (including any of such shares
which are repurchased) issued to officers, directors, employees and consultants
of the Corporation pursuant to stock option or purchase plans approved by at
least 80% of the members of the Board of Directors and any other shares of
Common Stock held by officers, directors, employees, and consultants which are
repurchased at cost subsequent to the Original Issue Date; and
(C) as a dividend or distribution on Series A Preferred,
Series B Preferred or Series C Preferred or any event for which adjustment is
made pursuant to paragraph 5(g) or 5(h) hereof.
(D) Options (or shares of Common Stock issued upon exercise
thereof) issued or issuable in connection with any commitments to purchase the
Series C Preferred; or
(E) Options (or shares of Common Stock issued upon exercise
thereof) issued in connection with the issuance of the Senior Notes.
(v) "SENIOR NOTES" shall mean the Senior Notes due 2005 issued
by the Corporation on or before April 30, 1998.
(vi) "RATCHET CUT-OFF DATE" shall mean the date that is the
earlier to occur of (i) the business day next following the closing of a
Replacement Financing within the meaning of the
-9-
<PAGE>
Series C Subscription Agreement, or (ii) the Second Closing within the meaning
of the Series C Subscription Agreement.
(vii) "SERIES C SUBSCRIPTION AGREEMENT" shall mean that certain
Series C Preferred Stock and Warrant Subscription Agreement dated as of February
20, 1998 among the Corporation and certain stockholders of the Corporation, as
amended.
(b) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
Conversion Price of the Series A Preferred, Series B Preferred or Series C
Preferred shall be made in respect of the issuance of Additional Shares of
Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Corporation is less than the
applicable Conversion Price of such series in effect on the date of and
immediately prior to such issue.
(c) Deemed Issue of Additional Shares of Common Stock. In the event
-------------------------------------------------
the Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities entitled to receive any
such Options or Convertible Securities. then the maximum number of shares (as
set forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number that would result
in an adjustment pursuant to clause (ii) below) of Common Stock issuable upon
the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the close
of business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to paragraph 5(f) hereof) of such Additional Shares of
Common Stock would be less than the applicable Conversion Price of the Series A
Preferred, Series B Preferred or Series C Preferred, as the case may be, in
effect on the date of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(i) no further adjustment in the Conversion Price shall be made
upon the subsequent issue of Convertible Securities or shares of Common Stock
upon the exercise of such Options or conversion or exchange of such Convertible
Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, or increase or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
-10-
<PAGE>
(iii) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common Stock issued were shares of
Common Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(B) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued upon the exercise thereof
were issued at the time of issue of such Options, and the consideration received
by the Corporation for the Additional Shares of Common Stock deemed to have been
then issued was the consideration actually received by the Corporation for the
issue of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Corporation upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(iv) no readjustment pursuant to clause (ii) or (iii) above shall
have the effect of increasing the Conversion Price to an amount which exceeds
the lower of (i) the Conversion Price on the original adjustment date, or (ii)
the Conversion Price that would have resulted from any issuance of Additional
Shares of Common Stock between the original adjustment date and such
readjustment date; and
(v) in the case of any Options which expire by their terms not
more than 30 days after the date of issue thereof, no adjustment of the
Conversion Price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the manner provided in
clause (iii) above.
(d) Adjustment of Conversion Price of Series A Preferred Stock and
--------------------------------------------------------------
Series B Preferred Stock Upon Issuance of Additional Shares of Common Stock. In
- ---------------------------------------------------------------------------
the event that after the Original Issue Date this Corporation shall issue
Additional Shares of Common Stock without consideration or for a consideration
per share less than the Conversion Price of the Series A Preferred Stock or the
Series B Preferred Stock, as the case may be, in effect on the date of and
immediately prior to such issue, then and in such event, such Conversion Price
for such Series A Preferred Stock or Series B Preferred Stock, as the case may
be, shall be reduced, concurrently with such issue, to a price (calculated to
the nearest cent) 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
-11-
<PAGE>
such issue plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued 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 issue plus the number of such Additional
Shares of Common Stock so issued; and provided further that, for the purposes of
this subsection (d), all shares of Common Stock issuable upon conversion of
outstanding Series A Preferred, Series B Preferred and Series C Preferred and
outstanding Convertible Securities or exercise of outstanding Options shall be
deemed to be outstanding, and immediately after any Additional Shares of Common
Stock are deemed issued pursuant to subsection 5(c), such Additional Shares of
Common Stock shall be deemed to be outstanding.
(e) Adjustment of Conversion Price of Series C Preferred Upon Issuance
------------------------------------------------------------------
of Additional Shares of Common Stock.
- ------------------------------------
(i) ISSUANCES ON OR BEFORE THE RATCHET CUT-OFF DATE. In the event
that after the Original Issue Date (A) this Corporation shall issue Additional
Shares of Common Stock without consideration or for a consideration per share
less than the Series C Conversion Price in effect on the date of and immediately
prior to such issue, and (B) such issuance of Additional Shares of Common Stock
occurs on or before the Ratchet Cut-Off Date, then and in such event, the Series
C Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by dividing the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued by the total number of Additional Shares of
Common Stock so issued.
(ii) ISSUANCES AFTER THE RATCHET CUT-OFF DATE. In the event that
after the Original Issue Date (A) this Corporation shall issue Additional Shares
of Common Stock without consideration or for a consideration per share less than
the Series C Conversion Price in effect on the date of and immediately prior to
such issue, and (B) such issuance of Additional Shares of Common Stock occurs
after the Ratchet Cut-Off Date, then and in such event, the Series C Conversion
Price shall be reduced, concurrently with such issue, to a price (calculated to
the nearest cent) 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 issue plus the number of shares of Common
Stock which the aggregate consideration received by the Corporation for the
total number of Additional Shares of Common Stock so issued 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 issue plus the
number of such Additional Shares of Common Stock so issued; and provided further
that, for the purposes of this subsection (d), all shares of Common Stock
issuable upon conversion of outstanding Series A Preferred, Series B Preferred
and Series C Preferred and outstanding Convertible Securities or exercise of
outstanding Options shall be deemed to be outstanding, and immediately after any
Additional Shares of Common Stock are deemed issued pursuant to subsection 5(c),
such Additional Shares of Common Stock shall be deemed to be outstanding.
-12-
<PAGE>
(f) Determination of Consideration. For purposes of this Section 5,
------------------------------
the consideration received by the Corporation for the issue of any Additional
Shares of Common Stock shall be computed as follows:
(i) CASH AND PROPERTY. Except as provided in clause (ii) below,
such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such issue, as determined in
good faith by the Board; provided, however, that no value shall be attributed to
any services performed by any employee, officer or director of the Corporation;
and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received with respect to such Additional Shares of Common
Stock, computed as provided in clauses (A) and (B) above, as determined in good
faith by the Board.
(ii) EXPENSES. In the event the Corporation pays or incurs
expenses, commissions or compensation, or allows concessions or discounts to
underwriters, dealers or others performing similar services in connection with
such issue, in an aggregate amount in excess of 10% of the aggregate
consideration received by the Corporation for such issue, as determined in
clause (i) above, consideration shall be computed as provided in clause (i)
above after deducting the aggregate amount in excess of 10% of the aggregate
consideration received by the Corporation for the issue.
(iii) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per
share received by the Corporation for Additional Shares of Common Stock deemed
to have been issued pursuant to Section 5(c), relating to Options and
Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of Common Stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent
-13-
<PAGE>
adjustment of such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(g) Adjustments for Stock Dividends, Subdivisions, Combinations or
--------------------------------------------------------------
Consolidations of Common Stock. In the event the outstanding shares of Common
- ------------------------------
Stock shall be subdivided (by stock dividend, stock split, or otherwise), into a
greater number of shares of Common Stock (and there is no corresponding
subdivision of the outstanding shares of Preferred Stock), the Series A, Series
B and Series C Conversion Prices then in effect shall, concurrently with the
effectiveness of such subdivision, be proportionately decreased. In the event
the outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock
(and there is no corresponding combination or consolidation of the outstanding
shares of Preferred Stock), the Series A, Series B and Series C Conversion
Prices then in effect shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.
(h) Adjustments for Other Distributions. In the event the Corporation
-----------------------------------
at any time or from time to time makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive any distribution
payable in securities or assets of the Corporation other than shares of Common
Stock then and in each such event provision shall be made so that the holders of
Series A Preferred, Series B Preferred and Series C Preferred shall receive upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities or assets of the Corporation
which they would have received had their Series A Preferred, Series B Preferred
and Series C Preferred been converted into Common Stock on the date of such
event and had they thereafter, during the period from the date of such event to
and including the date of conversion, retained such securities or assets
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the Series A Preferred, Series B Preferred and
Series C Preferred.
(i) Adjustments for Reclassification, Exchange and Substitution. If
-----------------------------------------------------------
the Common Stock issuable upon conversion of the Series A Preferred, Series B
Preferred and Series C Preferred shall be changed into the same or a different
number of shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), then and in each such event the
holder of each share of Series A Preferred, Series B Preferred and Series C
Preferred shall have the right thereafter to convert such share into the kind
and amount of shares of stock and other securities and property receivable upon
such reorganization or reclassification or other change by holders of the number
of shares of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series A Preferred, Series B Preferred and Series C
Preferred immediately before that change, all subject to further adjustment as
provided herein.
(j) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, 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 the Corporation but will at
all times in
-14-
<PAGE>
good faith assist in the carrying out of all the provisions of Section 5 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, Series B
Preferred and Series C Preferred against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to Section 5, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series A Preferred, Series B Preferred and Series C Preferred a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series A Preferred, Series B
Preferred or Series C Preferred, furnish or cause to be furnished to such holder
a like certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price at the time in effect, and (iii) 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 Series A Preferred, Series B Preferred or
Series C Preferred, as the case may be.
(l) Miscellaneous.
-------------
(i) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the case may
be.
(ii) The holders of at least 50% of the outstanding Preferred
Stock shall have the right to challenge any determination by the Board of fair
value pursuant to this Section 5, in which case such determination of fair value
shall be made by an independent appraiser selected jointly by the Board and the
challenging parties, the cost of such appraisal to be borne equally by the
Corporation and the challenging parties.
(iii) No adjustment in the applicable Conversion Price of the
Series A Preferred, Series B Preferred and Series C Preferred, as the case may
be, need be made if such adjustment would result in a change in such Conversion
Price of less than $0.01. Any adjustment of less than $0.01 which is not made
shall be carried forward and shall be made at the time of and together with any
subsequent adjustment which, on a cumulative basis, amounts to an adjustment of
$0.01 or more in such Conversion Price.
6. Notices of Record Date. In the event that this Corporation shall
----------------------
propose at any time:
(a) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series
or other rights;
-15-
<PAGE>
(c) to effect any reclassification or recapitalization of its Common
Stock outstanding involving a change in the Common Stock; or
(d) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up, then, in connection with each such event, this
Corporation shall send to the holders of the Series A Preferred, Series B
Preferred and Series C Preferred:
(i) at least 20 days' prior written notice of the date on which
a record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (c) and (d) above; and
(ii) in the case of the matters referred to in (c) and (d) above,
at least 20 days' prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).
Each such written notice shall be delivered personally or given by
first class mail, postage prepaid, addressed to the holders of the Preferred
Stock at the address for each such holder as shown on the books of this
Corporation.
7. Protective Provisions. So long as any shares of Series B Preferred or
---------------------
Series C Preferred are outstanding, the Corporation shall not, without first
obtaining the approval of the holders of at least a majority of the then-
outstanding shares of Series A Preferred, Series B Preferred and Series C
Preferred, voting together as a single class, take any action that:
(a) alters the rights, preferences or privileges of the Preferred
Stock;
(b) creates any new class or series of shares that has a preference
over or is on a parity with the Preferred Stock with respect to voting,
dividends or liquidation preferences;
(c) reclassifies stock into shares having a preference over or on a
parity with the Preferred Stock with respect to voting, dividends or liquidation
preferences;
(d) repurchases, redeems or retires any shares of capital stock of the
Corporation other than pursuant to contractual rights to repurchase shares of
Common Stock held by employees, directors or consultants of the Corporation or
its subsidiaries upon termination of their employment or services or pursuant to
the exercise of a contractual right of first refusal held by the Corporation;
(e) other than in the ordinary course of business, results in the
consolidation or merger with or into any other Corporation or the sale or other
transfer in a single transaction or a series of related
-16-
<PAGE>
transactions of all or substantially all of the assets of this Corporation, or
otherwise results in the reorganization of this Corporation;
(f) materially alters or changes the strategic direction or business
operations of the Corporation in a manner that is not contemplated by the
Corporation's most recent Board approved operating plan;
(g) increases the authorized number of directors as set forth in the
Bylaws of the Corporation;
(h) amends or repeals any provision of the Corporation's certificate
of incorporation or by-laws;
(i) results in a change in the Company's accounting policies or in the
Company's auditors;
(j) permits a subsidiary of the Corporation to sell stock to a third
party;
(k) results in the dissolution, liquidation or winding up of the
Corporation;
(l) causes aggregate capital expenditures that are not included in the
Corporation's most recent annual operating plan to exceed, in any given 12-month
period, $500,000;
(m) results in the acquisition of stock or assets of any other
business for an aggregate consideration in excess of $500,000;
(n) other than in the ordinary course of the Corporation's business,
results in a pledge of any assets of the Corporation or results in a security
interest, lien, or other encumbrance on any assets of the Corporation; or
(o) results in the issuance of any equity securities of the
Corporation, other than stock options, warrants or other rights to purchase
equity securities approved by the Board of Directors, or the issuance of any
long-term debt.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
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<PAGE>
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
ARTICLE VII
The number of directors which will constitute the whole Board of Directors
of the Corporation shall be as designated in the Bylaws of the Corporation.
ARTICLE VIII
The election of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
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<PAGE>
ARTICLE X
1. To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, 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.
2. The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil administrative or investigative, by reason of the fact
that he or she, or his or her testator or intestate is or was a director or
officer of the Corporation or any predecessor of the Corporation or serves or
served at any other enterprise as a director, officer or employee at the request
of the Corporation or any predecessor to the Corporation.
3. Neither any amendment nor repeal of this Article, nor the adoption of
any provision of this Corporation's Certificate of Incorporation inconsistent
with this Article, shall eliminate or reduce the effect of this Article in
respect of any matter occurring, or any action or proceeding accruing or arising
or that, but for this Article, would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
ARTICLE XI
Except as provided in Article X above, the Corporation reserves the right
to amend, alter, change or repeal any provision contained in this 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.
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<PAGE>
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by Charles McMinn, the President and Chief Executive Officer of the
Corporation, and attested by Dhruv Khanna, the Secretary of the Corporation.
The signatures below shall constitute the affirmation and acknowledgment under
penalties of perjury, that the facts herein stated are true.
Dated: May 19, 1998
COVAD COMMUNICATIONS GROUP, INC.
By: /s/CHARLES J. MCMINN
--------------------
Charles J. McMinn
President and Chief Executive Officer
ATTEST:
/s/Dhruv Khanna
- ---------------
DHRUV KHANNA
Secretary
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<PAGE>
EXHIBIT 4.6
COVAD COMMUNICATIONS GROUP, INC.
AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
This Amended and Restated Stockholder Rights Agreement (the "AGREEMENT") is
amended and restated as of March 11, 1998, by and among Covad Communications
Group, Inc., a Delaware corporation (the "COMPANY"), and the individuals and
entities listed on Exhibit A attached hereto (collectively, the "STOCKHOLDERS").
---------
R E C I T A L S
---------------
A. The Company and the Stockholders are parties to that certain
Stockholder Rights Agreement dated as of July 16, 1997, as amended by Amendment
No. 1 thereto dated February 12, 1998 and as amended and restated by the Amended
and Restated Stockholder Rights Agreement dated February 20, 1998 (the "PRIOR
AGREEMENT").
B. The Company is offering Units (the "High Yield Offering"), each
consisting of $1,000 principal amount at maturity of 13.5% Senior Discount Notes
due 2008 and warrants to purchase shares of Common Stock pursuant to a Purchase
Agreement dated March 6, 1998 with Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated (the "Initial Purchasers").
C. In order to consummate the High Yield Offering, the Company must amend
this Agreement to, among other things, conform certain inconsistent registration
rights of the Holders with rights proposed to be granted to the Initial
Purchasers with respect to the aforementioned warrants.
NOW THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties hereto agree that the Prior Agreement is
terminated and superseded in its entirety by this Agreement, and further agree
as follows:
1. Certain Definitions. As used in this Agreement, the terms defined in
-------------------
the preamble to this Agreement shall have the meanings given therein and the
following terms shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act.
"COMMON STOCK" shall mean all shares of Common Stock of the Company.
"COMMON WARRANTS" shall mean the warrants to purchase Common Stock of
the Company issued to the Investors pursuant to the terms of the Subscription
Agreement.
<PAGE>
"COMMON WARRANT SHARES" shall mean the shares of Common Stock issued
or issuable upon exercise of the Common Warrants.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
"HOLDER" shall mean any person who holds of record or holds an option
or warrant for Registrable Securities and any holder of Registrable Securities
to whom the registration rights conferred by this Agreement have been
transferred in compliance with Section 2 and Section 13 hereof.
"INITIATING HOLDERS" shall mean any Holder or Holders of twenty
percent (20%) or more of the then outstanding Registrable Securities.
"INVESTORS" shall mean Warburg, Pincus Ventures, L.P., Crosspoint
Venture Partners 1996 and Intel Corporation.
"IPO" shall mean an underwritten public offering pursuant to an
effective registration statement under the Securities Act, covering the initial
offer and sale of Common Stock for the account of the Company to the public with
aggregate gross proceeds to the Company of not less than Fifteen Million Dollars
($15,000,000).
"PREFERRED STOCK" shall mean the Series A Preferred, Series B
Preferred and Series C Preferred.
"REGISTRABLE SECURITIES" shall mean (i) all shares of Common Stock
issued or issuable upon conversion of the Series A Preferred, the Series B
Preferred and the Series C Preferred; (ii) the Common Warrant Shares; and (iii)
all shares of Common Stock issued as a dividend or other distribution with
respect to or in exchange for or in replacement of the shares referenced in (i)
and (ii) above.
The terms "REGISTER", "REGISTERED" and "REGISTRATION" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in compliance with Sections 5, 6 and 8 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company which shall include any fees and
disbursements for legal services provided by counsel for the Company on behalf
of the Holders, blue sky fees and expenses for state qualifications or
registrations, and the expense of any audit of the Company's fiscal year-end
financial statements incident to or required by any such registration (but
excluding the compensation of regular employees of the Company, which shall be
paid in any event by the Company).
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<PAGE>
"RESTRICTED SECURITIES" shall mean the securities of the Company
required to bear or bearing the legend set forth in Section 3 hereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar successor federal statute and the rules and regulations thereunder,
all as the same shall be in effect from time to time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and expense allowances applicable to the sale of Registrable
Securities and all fees and disbursements of counsel for any Holder (other than
the fees and disbursements of the Company's counsel included in Registration
Expenses, and the fees of one special counsel to the Holders, which shall be
borne by the Company).
"SENIOR NOTES" shall mean the 13.5% Senior Discount Notes due March
15, 2008 issued on March 11, 1998 as governed by the Indenture dated as of March
11, 1998 between the Company and The Bank of New York as Trustee.
"SENIOR NOTE WARRANTS" shall mean the warrants issued in connection
with the issuance of the Senior Notes on March 11, 1998 pursuant to the Warrant
Agreement and any additional warrants issued pursuant to the terms of the
Warrant Agreement.
"SENIOR NOTE WARRANT SHARES" shall mean the shares of Common Stock
issued or issuable upon exercise of the Senior Note Warrants.
"SERIES A PREFERRED" shall mean shares of Series A Preferred Stock of
the Company.
"SERIES B PREFERRED" shall mean shares of Series B Preferred Stock of
the Company.
"SERIES C PREFERRED" shall mean shares of Series C Preferred Stock of
the Company.
"SERIES C WARRANTS" shall mean the warrants to purchase Series C
Preferred issued to the Investors pursuant to the terms of the Subscription
Agreement.
"SHARES" shall mean all Registrable Securities and all Officers
Common Stock.
"WARRANT AGREEMENT" shall mean the Warrant Agreement dated as of March
11, 1998 by and between the Company and The Bank of New York as warrant agent.
"WARRANT REGISTRATION RIGHTS AGREEMENT" shall mean the Warrant
Registration Rights Agreement dated as of March 11, 1998 entered into among the
Company and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated.
"WARRANTS" shall mean the Common Warrants and the Series C Warrants.
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<PAGE>
2. Restrictions on Transferability. The Common Stock, the Preferred
-------------------------------
Stock and the Warrants held by any Stockholder, and any other securities issued
in respect of the foregoing upon any stock split, stock dividend,
recapitalization, merger, consolidation, or similar event, shall not be
transferred except upon the conditions specified in this Agreement, which
conditions are intended to ensure compliance with the provisions of the
Securities Act. Any transferee of such securities shall take and hold such
securities subject to the provisions and upon the conditions specified in this
Agreement.
3. Restrictive Legend. Each certificate representing the Common Stock or
------------------
the Preferred Stock held by any Stockholder, and any other securities issued in
respect of the foregoing upon any stock split, stock dividend, recapitalization,
merger, consolidation or similar event, shall (unless otherwise permitted or
unless the securities evidenced by such certificate shall have been registered
under the Securities Act) be stamped or otherwise imprinted with a legend
substantially in the following form (in addition to any legend required under
applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS. SUCH SHARES MAY NOT
BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF SUCH REGISTRATION OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT. COPIES OF THE AGREEMENTS
COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE
OFFICE OF THE CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND MAY BE
TRANSFERRED ONLY IN COMPLIANCE WITH, THAT CERTAIN STOCKHOLDER RIGHTS
AGREEMENT AMONG THE HOLDER OF THESE SECURITIES AND CERTAIN OTHER HOLDERS OF
THE COMPANY'S STOCK, WHICH INCLUDES A VOTING AGREEMENT OF SUCH HOLDERS, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER.
Upon request of a holder of such a certificate, the Company shall
remove the foregoing legend from the certificate or issue to such holder a new
certificate therefor free of any transfer legend, if, with such request, the
Company shall have received either the opinion referred to in Section 4(a) or
the "no-action" letter referred to in Section 4(b) to the effect that any
transfer by such holder of the securities evidenced by such certificate will not
violate the Securities Act and applicable state securities laws, unless any such
transfer legend may be removed pursuant to Rule 144(k) or any successor rule, in
which case no such opinion or "no-action" letter shall be required, and provided
that the Company shall not be obligated to remove any such legends prior to the
date of the release of the lock-up provisions set forth in Section 15 hereof
following the initial public offering of the Company's Common Stock under the
Securities Act.
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<PAGE>
4. Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4. Prior to any proposed transfer
of any Restricted Securities (other than under circumstances described in
Section 5, 6 or 8 hereof), the holder thereof shall give written notice to the
Company of such holder's intention to effect such transfer. Each such notice
shall describe the manner and circumstances of the proposed transfer in
sufficient detail, and shall be accompanied (except (i) in transactions in
compliance with Rule 144 promulgated under the Securities Act, (ii) for a
transfer to a holder's majority owned subsidiary or an entity that directly or
indirectly controls a majority of the voting securities of such holder, (iii)
for a transfer to such holder's spouse, ancestors, descendants or a trust for
any of their benefit, (iv) in transactions involving the distribution without
consideration of Restricted Securities by a holder to any of its partners or
retired partners or to the estate of any of its partners or retired partners, or
(v) repurchases by the Company of Common Stock issued to employees or directors
of the Company pursuant to restricted stock purchase agreements (collectively,
"EXEMPT TRANSACTIONS")) by either (a) a written opinion of legal counsel to the
holder who shall be reasonably satisfactory to the Company, addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act or (b) a "no-
action" letter from the Commission to the effect that the distribution of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
such holder to the Company. Each certificate evidencing the Restricted
Securities transferred as above provided shall bear the restrictive legend set
forth in Section 3 above, except that such certificate shall not bear such
restrictive legend after the date of the Company's initial public offering under
the Securities Act if the opinion of counsel or "no-action" letter referred to
above expressly indicates that such legend is not required in order to establish
compliance with the Act or if such legend is no longer required pursuant to Rule
144(k) or any successor rule.
5. Requested Registrations.
-----------------------
(a) Request for Registration. If at any time beginning at the earlier
------------------------
of (i) six months after the closing of a public offering by the Company of its
Common Stock pursuant to a registration statement under the Securities Act and
(ii) the fourth anniversary of the date of this Agreement, the Company shall
receive from Initiating Holders a written request that the Company effect a
registration with respect to Registrable Securities held by such Initiating
Holders the Company will:
(i) promptly give written notice of the proposed registration to
all other Holders; and
(ii) as soon as practicable, use its diligent best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) as may be so
requested and as would permit or facilitate the sale and distribution of the
Registrable Securities requested to be registered by the Initiating Holders and
by any Holder or Holders joining in such request
-5-
<PAGE>
as are specified in a written request given within 30 days after receipt of such
written notice from the Company. In the event that holders of a majority of the
outstanding Registrable Securities elect to limit the number of Registrable
Securities to be registered, the number of shares that are included in the
registration shall be allocated among all Holders of Registrable Securities in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by each Holder at the time of the filing of the registration
statement.
The Company shall file a registration statement covering the
Registrable Securities to be registered as soon as practicable after receipt of
the request of the Initiating Holders; provided, however, that if the Company
shall furnish to such Initiating Holders (in the event of an underwritten
offering) a certificate signed by the representatives of the underwriters of the
offering to which such registration statement relates, to the effect that market
conditions are such that a delay in the filing of such registration statement is
advisable (or, in the event of a non-underwritten offering, a certificate signed
by the President of the Company stating that in the good faith judgment of the
Board of Directors of the Company a delay in filing such registration
statement is necessary in order to avoid a serious detriment to the Company),
the Company shall have the right, exercisable on only one occasion in any twelve
month period, to defer such filing for a period of not more than 120 days after
receipt of the request of the Initiating Holders.
The Company shall not be obligated to effect, or to take any action to
effect, any registration pursuant to this Section 5 after the Company has
effected two such registrations pursuant to this Section 5 and such
registrations have been declared or ordered effective by the Commission.
Any registration statement filed pursuant to this Section 5(a) may,
subject to the provisions of Section 5(b) below, include securities of the
Company being sold for the account of the Company.
(b) Underwriting. 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
Section 5(a) and the Company shall include such information in the written
notice referred to in Section 5(a)(i) above. The Company, together will all
Initiating Holders proposing to distribute their securities through such
underwriting, shall enter into an underwriting agreement in customary form with
the managing underwriter(s) selected for such underwriting by a majority in
interest of the Initiating Holders, which underwriter(s) shall be reasonably
acceptable to the Company.
Notwithstanding any other provision of this Section 5, if the managing
underwriter(s) have informed the Company and the Initiating Holders in writing
that in such underwriter's or underwriters' opinion the total number of
securities which the Holders and any other person desiring to participate in
such registration intend to include in such offering is such as to affect
adversely the success of such offering, including the price at which such
securities can be sold, then the Company will be required to include in such
registration only the amount of securities which it is so advised should be
included in such registration. In such event, securities shall be registered in
such registration in the following order of priority: (i) first, the securities
-----
which have been requested to be included in such
-6-
<PAGE>
registration by the Holders of Registrable Securities pursuant to this
Agreement and the Senior Note Warrant Shares sought to be included in such
registration pursuant to the exercise of "piggy-back" registration rights under
the Warrant Registration Rights Agreement pro rata between the Holders of
Registrable Securities and the holders of Senior Note Warrant Shares based upon
the aggregate amount of securities then held, (ii) second, provided that no
------
securities sought to be included by the Holders of Registrable Securities and
the holders of the Senior Note Warrant Shares have been excluded from such
registration, the securities of other persons entitled to exercise "piggy-back"
registration rights pursuant to contractual commitments of the Company (pro rata
based on the amount of securities sought to be registered by such persons) and
(iii) third, provided that no securities of any other person sought to be
-----
included therein have been excluded from such registration, securities to be
offered and sold for the account of the Company.
If the Company or any Holder in its sole discretion disapproves of the
terms of the underwriting, it may elect to withdraw therefrom by written notice
to the underwriter and the Initiating Holders. The securities so withdrawn
shall also be withdrawn from registration.
6. Company Registration.
--------------------
(a) If, at any time, the Company shall determine to register any of
its securities either for its own account or the account of a security holder or
holders (other than Holders of Registrable Securities) exercising their
respective demand registration rights, other than (i) a registration relating
solely to employee benefit plans, (ii) a registration relating solely to a
Commission Rule 145 transaction involving the acquisition of a business (but not
a Rule 145 Transaction designed solely to exchange restricted securities for
registered securities in a manner that is the functional equivalent of
registration rights), (iii) a registration on any registration form which does
not permit secondary sales, or (iv) a registration relating solely to non-
convertible debt securities of the Company, the Company will:
(i) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all of the Registrable Securities specified in a written request or
requests made by any Holder within 30 days after receipt of the written notice
from the Company described in clause (i) above, except as set forth in Section
6(b) below. Such written request may specify all or a part of a Holder's
Registrable Securities.
(b) If a registration statement under which the Company gives notice
under Section 6(a)(i) is for an underwritten offering, and if the managing
underwriter or underwriters of such underwritten offering have informed the
Company and the Holders of Registerable Securities requesting inclusion in such
offering, in writing, that in such underwriter's or underwriters' opinion the
total number of securities which the Company, such Holders and any other persons
desiring to participate in such registration intend to include in such offering
is such as to adversely affect the success of such offering, including the price
at which such securities can be sold, then the Company will be required to
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<PAGE>
include in such registration only the number of securities which it is so
advised should be included in such registration; provided, however, that the
number of Registrable Securities, together with Senior Note Warrant Shares and
other securities which have been requested to be included in such registration
pursuant to a contractual "piggy-back" right, shall not be reduced to less than
30% of the total number of securities included in such registration or
underwriting. In such event: (x) in cases only involving the registration for
sale of securities for the Company's own account (other than pursuant to the
exercise of "piggy-back" rights herein and in other contractual commitments of
the Company), securities shall be registered in such offering in the following
order of priority: (i) first, the securities which the Company proposes to
-----
register, (ii) second, provided that no securities sought to be included by the
------
Company have been excluded from such registration, the securities which have
been requested to be included in such registration by the Holders of Registrable
Securities and the holders of Senior Note Warrant Shares pro rata between the
Holders of Registrable Securities and the holders of Senior Note Warrant Shares
based upon the aggregate amount of securities then held, (iii) third, provided
-----
that no securities sought to be included by the Company, the Holders and the
holders of Senior Note Warrant Shares have been excluded from such registration,
the securities of other persons entitled to exercise "piggy-back" registration
rights pursuant to contractual commitments of the Company (pro rata based on the
respective numbers of securities sought to be registered by such persons); (y)
in cases not involving the registration for sale of securities for the Company's
own account only or not for the account of any Holder, securities shall be
registered in such offering in the following order of priority: (i) first, the
------
securities of any person whose exercise of a "demand" registration right
pursuant to a contractual commitment of the Company is the basis for the
registration (provided that if such person is a holder of Senior Note Warrant
Shares, as among holders of Senior Note Warrant Shares there shall be no
priority and Senior Note Warrant Shares sought to be included by holders thereof
shall be included pro rata based on the respective numbers of securities sought
to be registered by such persons), (ii) second, provided that no securities of
------
such person referred to in the immediately preceding clause (i) have been
excluded from such registration, the securities which have been requested to be
included in such registration by the Holders of Registrable Securities and the
holders of Senior Note Warrant Shares pro rata between the Holders of
Registrable Securities and the holders of Senior Note Warrant Shares based upon
the aggregate amount of securities held, (iii) third, provided that no
-----
securities of such person referred to in the immediately preceding clause (i) or
of the Holders of Registrable Securities or of the holders of Senior Note
Warrant Shares have been excluded from such registration, securities of other
persons entitled to exercise "piggy-back" registration rights pursuant to
contractual commitments (pro rata based on the respective numbers of securities
sought to be registered by such persons) and (iv) fourth, provided that no
------
securities of any other person have been excluded from such registration, the
securities which the Company proposes to register; and (z) in cases involving
the registration for sale of securities for the account of any Holder of
Registerable Securities, securities shall be registered in such offering in the
following order of priority: (i) first, the securities which have been requested
-----
to be included in such registration by the Holders of Registrable Securities and
the holders of Senior Note Warrant Shares pro rata based upon the aggregate
amount of securities then held, (ii) second, provided that no Senior Note
------
Warrant Shares or Registrable Securities have been excluded from such
registration, securities of other persons entitled to exercise "piggy-back"
registration rights pursuant to contractual commitments (pro rata based on the
respective numbers of securities sought to be registered by such persons) and
(iii) third, provided that no securities of any other person has been excluded
-----
from such registration, the securities which the Company proposes to register.
-8-
<PAGE>
If, as a result of the provisions of this Section 6(b)), any Holder of
Registerable Securities shall not be entitled to include all Registrable
Securities in a "piggy-back" registration that such Holder of Registerable
Securities has requested to be included, such Holder of Registerable Securities
may elect to withdraw his request to include Registrable Securities in such
registration.
7. Expenses of Registration. The Company shall bear all Registration
------------------------
Expenses incurred in connection with any registration, qualification or
compliance pursuant to this Agreement and all underwriting discounts, selling
commissions and expense allowances applicable to the sale of any securities by
the Company for its own account in any registration. All Selling Expenses shall
be borne by the Holders, if any, whose securities are included in such
registration pro rata on the basis of the number of their Registrable Securities
so registered, provided, however, that if in such registration, the Company pays
any expenses included in the defined term "Selling Expenses" for other security
holders, the Company will pay such expenses for the Holders.
8. Registration on Form S-3.
------------------------
(a) The Company shall use its best efforts to qualify for registration
on Form S-3 or any comparable or successor form or forms, and to that end the
Company shall register (whether or not required by law to do so) the Common
Stock under the Exchange Act in accordance with the provisions of the Exchange
Act following the closing of the first registration of any securities of the
Company on Form SB-2, S-1 or any comparable or successor form. After the
Company has qualified for the use of Form S-3, in addition to the rights
contained in the foregoing provisions of this Agreement, the Holders of
Registrable Securities shall have unlimited rights to request from time to time
registrations on Form S-3 (such requests shall be in writing and shall state the
number of shares of Registrable Securities to be disposed of and the intended
methods of disposition of such shares by such Holder or Holders) provided that
in each case the aggregate proceeds of such registration are expected to exceed
$500,000; provided, however, that the Company shall not be required to effect
more than two registrations pursuant to this Section 8 in any six (6) month
period.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 8:
(i) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(ii) if the Company, within ten (10) days of the receipt of the
request of the Initiating Holders, gives notice of its bona fide intention to
effect the filing of a registration statement with the Commission within sixty
(60) days of receipt of such request (other than a registration of securities in
a Rule 145 transaction or with respect to an employee benefit plan);
(iii) during the period starting with the date of filing of, and
ending on the date 90 days immediately following the effective date of, any
registration statement pertaining to securities
-9-
<PAGE>
of the Company (other than a registration of securities in a Rule 145
transaction or with respect to an employee benefit plan), provided that the
Company is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(iv) if the Company shall furnish to such Holder or Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its stockholders for registration statements to be filed in the
near future, in which case the Company's obligation to use its best efforts to
file a registration statement shall be deferred for a period not to exceed
ninety (90) days from the receipt of the request to file such registration by
such Holder or Holders, provided that the Company may not exercise this deferral
right more than once per twelve-month period.
9. Registration Procedures. In the case of each registration effected by
-----------------------
the Company pursuant to this Agreement, the Company will keep each Holder who is
entitled to registration rights hereunder advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense, the Company will:
(a) Except as otherwise provided herein, keep such registration
effective for a period of six months or until such Holders, if any, have
completed the distribution described in the registration statement relating
thereto, whichever first occurs; provided, however, that in the case of any
registration of Registrable Securities on Form S-3 that are intended to be
offered on a continuous or delayed basis, such six month period shall be
extended, if necessary, to keep the registration statement effective until all
such Registrable Securities are sold;
(b) Prepare and file with the Commission 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 Securities Act with respect to the disposition of securities
covered by such registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including supplements and amendments, as a Holder may reasonably
request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities 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 fact required to be stated therein or necessary to make the statements
therein not misleading or incomplete in the light of the circumstances then
existing, and at the request of any such seller, prepare and furnish to such
seller a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the purchaser
of such shares, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or incomplete in the
light of the circumstances then existing;
-10-
<PAGE>
(e) Cause all such Registrable Securities to be listed on each
securities exchange or interdealer quotation system on which the same securities
issued by the Company are then listed;
(f) Provide a transfer agent and registrar for all such Registrable
Securities and a CUSIP number for all such Registrable Securities not later than
the effective date of such registration;
(g) Make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement, and any attorney or accountant retained by any such
seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers and
directors to supply all information reasonably requested by any such seller,
underwriter, attorney or accountant in connection with such registration
statement; provided, however, that such seller, underwriter, attorney or
accountant shall agree to hold in confidence and trust all information so
provided;
(h) Furnish to each selling Holder a signed counterpart, addressed to
the selling Holder, of
(i) an opinion of counsel for the Company, dated the effective
date of the registration statement, and
(ii) "comfort" letters signed by the Company's independent public
accountants who have examined and reported on the Company's financial statements
included in the registration statement, to the extent permitted by the standards
of the AICPA or other relevant authorities, covering substantially the same
matters with respect to the registration statement (and the prospectus included
therein) and (in the case of the accountants' "comfort" letters, with respect to
events subsequent to the date of the financial statements) as are customarily
covered in opinions of issuer's counsel and in accountants' "comfort" letters
delivered to the underwriters in underwritten public offerings of securities;
(i) Furnish to each selling Holder a copy of all documents filed with
and all correspondence from or to the Commission in connection with any such
offering other than nonsubstantive cover letters and the like;
(j) Otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first month after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
(k) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Sections 5 or 6 hereof, the Company
will enter into any underwriting agreement reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the underwriter
so requests the underwriting agreement will contain customary contribution
provisions; and
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<PAGE>
(l) From and after the date of this Agreement, the Company shall not,
without the prior written consent of a majority in interest of the Holders,
enter into any agreement with any holder or prospective holder of any securities
of the Company giving such holder or prospective holder rights that are superior
to, or which adversely affect, the rights given to the holders of Registrable
Securities hereunder to require the Company to initiate registration of any
securities of the Company or to require the Company, upon any registration of
any of its securities, to include, among the securities that the Company is then
registering, securities owned by such holder.
10. Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers,
directors, agents, employees and partners, and each person controlling such
Holder, with respect to each registration, qualification or compliance effected
pursuant to this Agreement, and each underwriter, if any, and each person who
controls any underwriter, and their respective counsel against all claims,
losses, damages and liabilities (or actions, proceedings or settlements in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular or other document prepared by the Company (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any 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 any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers, directors, agents, employees
and partners, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses as they are reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement (or alleged untrue statement) or omission (or alleged omissions) based
upon written information furnished to the Company by such Holder or underwriter
and stated to be specifically for use therein.
(b) Each Holder whose Registrable Securities are included in any
registration, qualification or compliance effected pursuant to this Agreement
will indemnify the Company, each of its directors and officers and each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of the Securities Act and the rules and regulations thereunder, each
other such Holder and each of their officers, directors and partners, and each
person controlling such Holder, and their respective counsel against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and such Holders,
directors, officers, partners, persons, underwriters or control persons for any
legal or any other expenses as they are reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action, in
each case
-12-
<PAGE>
to the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by such Holder
and stated to be specifically for use therein; provided, however, that the
obligations of such Holders hereunder shall be limited to an amount equal to the
net proceeds to each such Holder sold under such registration statement,
prospectus, offering circular or other document as contemplated herein.
(c) Each party entitled to indemnification under this Section 10 (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; and provided further that if any Indemnified
Party reasonably concludes that there may be one or more legal defenses
available to it that are not available to the Indemnifying Party, or that such
claim or litigation involves or could have an effect on matters beyond the scope
of this Agreement, then the Indemnified Party may retain its own counsel at the
expense of the Indemnifying Party; and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless and only to
the extent that such failure to give notice results in material prejudice to the
Indemnifying Party. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with defense of
such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 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 herein,
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 which 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.
-13-
<PAGE>
11. Information by Holder. Each Holder of Registrable Securities to be
---------------------
included in a registration referred to in this agreement shall furnish to the
Company such information regarding such Holder, the securities to be offered and
sold and the intended plan of distribution of the securities by such Holder as
the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement and shall promptly advise the Company in writing
of any material changes to such information while the registration is in effect.
12. Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after the effective date of the first registration under the Securities Act
filed by the Company for an offering of its securities to the general public;
(b) Use its reasonable best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act at any time after it has become subject to
such reporting requirements; and
(c) So long as a Holder owns any Restricted Securities, furnish to the
Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
as a Stockholder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Stockholder to sell any such securities
without registration.
13. Transfer of Rights; Termination of Rights.
-----------------------------------------
(a) The rights to cause the Company to register a Holder's securities
granted by the Company under this Agreement may be transferred or assigned by a
Holder to a transferee or assignee of not less than five percent (5%) of the
total outstanding number of Registrable Securities, provided that the Company is
given written notice prior to the time that such right is exercised, stating the
name and address of said transferee or assignee and identifying the securities
with respect to which such registration rights are being transferred or
assigned, and provided further that the transferee or assignee of such rights is
not deemed by the Board of Directors of the Company, in its reasonable judgment,
to be a competitor of the Company; and provided further that the transferee or
assignee of such rights assumes in writing the obligations of the Holder under
this Agreement.
(b) The rights granted pursuant to Sections 5 through 12 of this
Agreement shall terminate as to any Holder at the later of (i) two years after
the Company's IPO or (ii) at such time as
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<PAGE>
such Holder may sell under Rule 144 in a three month period all Registrable
Securities then held by such Holder.
14. "Lock-Up" Agreement. Each Stockholder agrees, if requested by the
------------------
Company and an underwriter of Common Stock (or other securities) of the Company
in connection with the IPO, not to sell or otherwise transfer or dispose of any
Common Stock (or other securities) of the Company held by such Stockholder
during a period of time determined by the Company and its underwriters (not to
exceed 180 days) following the effective date of the registration statement of
the Company filed under the Securities Act relating to such IPO, provided that
all officers and directors of the Company who then hold Common Stock (or other
securities) of the Company enter into similar agreements, and provided further
that, in no event, shall a Stockholder be prohibited from transferring or
selling Common Stock or other securities of the Company to an affiliate of such
Stockholder.
Such agreement shall be in writing in a form reasonably satisfactory
to the Company and such underwriter. The Company may impose stop-transfer
instructions with respect to the Shares (or securities) subject to the foregoing
restriction until the end of said period. The Company agrees that any release
of shares subject to the foregoing lock-up agreement shall be made on a pro rata
basis among all Stockholders based upon their percentage ownership of the
outstanding shares of Common Stock of the Company. Any shares so released shall
be subject to the provisions of Section 4 hereof.
15. Preemptive Rights.
-----------------
(a) New Issuances. The Company hereby agrees not to issue or sell any
-------------
"NEW SECURITIES" (as defined in this Section 15) in a transaction in which the
Company receives any consideration other than cash without the prior written
consent of holders of a majority of the outstanding shares of Series B Preferred
and Series C Preferred. The Company hereby grants to the Investors a right (the
"PREEMPTIVE RIGHT") to purchase all or any part of their pro rata share of any
New Securities that the Company may, from time to time, propose to sell and
issue solely for cash. Such pro rata share, for purposes of this Preemptive
Right, is the ratio of (x) the sum of the number of shares of Common Stock then
held by such Investor immediately prior to the issuance of the New Securities,
assuming the full conversion of any Preferred Stock held by such Investor (but
not including options or warrants to acquire Common Stock or Preferred Stock),
to (y) the total number of shares of Common Stock then outstanding immediately
prior to the issuance of the New Securities, assuming the full conversion of
outstanding Preferred Stock (but not including options or warrants to acquire
Common Stock or Preferred Stock). This Preemptive Right shall be subject to the
following provisions:
(i) "NEW SECURITIES" shall mean any Common Stock or Preferred Stock
--------------
of the Company, whether or not authorized on the date hereof, and rights,
options or warrants to purchase Common Stock or Preferred Stock and securities
of any type whatsoever that are, or may become, convertible into Common Stock or
Preferred Stock; provided, however, that "NEW SECURITIES" does not include the
following:
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<PAGE>
(A) shares of capital stock of the Company issuable upon
conversion or exercise of any currently outstanding securities or any New
Securities issued in accordance with this Agreement;
(B) shares or options granted to officers, directors and
employees of, and consultants to, the Company pursuant to stock option or
purchase plans approved by at least 80% of the members of the Board of
Directors;
(C) shares of Common Stock or Preferred Stock issued in
connection with any pro rata stock split, stock dividend or recapitalization by
the Company (in which case, all numbers of shares and per share amounts
referenced in this Section 15(a)(i) will be adjusted accordingly);
(D) the Warrants or shares of Series C Preferred or Common Stock
issuable upon exercise thereof; or
(E) the Senior Note Warrants issued in connection with the
issuance of Senior Notes and the Senior Note Warrant Shares issued upon exercise
thereof.
(ii) In the event that the Company proposes to undertake an issuance
of New Securities for cash, it shall give each Investor written notice (the
"NOTICE") of its intention, describing the type of New Securities, the price,
and the general terms upon which the Company proposes to issue the same. Each
Investor shall have twenty (20) business days after receipt of such notice to
agree to purchase all or any portion of its pro rata share of such New
Securities at the price and upon the terms specified in the notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased. If any Investor fails to agree to purchase its full pro rata
share within such twenty (20) business day period, the Company will give each
Investor who did so agree (the "ELECTING STOCKHOLDERS") notice of the number of
shares that were not subscribed for. Such notice may be by telephone if followed
by written confirmation within two days. The Electing Stockholders shall have
five (5) business days from the date of receipt of such notice to agree to
purchase all or any share of such Electing Stockholders pro rata share of the
New Securities not purchased in response to the Notice.
(iii) In the event that any New Securities subject to the Preemptive
Right are not purchased by the Investors within the twenty (20) business day
plus five (5) business day period specified above, the Company shall have ninety
(90) days thereafter to sell (or enter into an agreement pursuant to which the
sale of New Securities that had been subject to the Preemptive Right shall be
closed, if at all, within sixty (60) days from the date of said agreement) the
New Securities with respect to which the rights of the Investors were not
exercised at a price and upon terms, including manner of payment, no more
favorable to the purchasers thereof than specified in the Notice. In the event
the Company has not sold all offered New Securities within such ninety (90) day
period (or sold and issued New Securities in accordance with the foregoing
within sixty (60) days from the date of such agreement) the Company shall not
thereafter issue or sell any New Securities, without first again offering such
New Securities to the Investors in the manner provided above.
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<PAGE>
(iv) This Preemptive Right is nonassignable except to any
transferee to whom registration rights may be transferred under this Agreement.
(v) This Preemptive Right shall terminate as to any Investor (or
any transferee or assignee of such Investor) at such time as such Investor
ceases to own any Series B Preferred and Series C Preferred or Common Stock
issued upon conversion of the Series B Preferred and Series C Preferred and
shall terminate as to all Investors immediately prior to the closing of an IPO.
16. Rights of First Refusal and Co-Sale Respecting Shares.
-----------------------------------------------------
(a) Rights of First Refusal and Co-Sale.
-----------------------------------
(i) In the event that a Stockholder proposes to sell or otherwise
transfer any shares of stock of the Company, or any interest in such shares
("TRANSFER SHARES"), now held by or hereafter acquired by such Stockholder (the
"SELLING STOCKHOLDERS") to any person or entity, the Company and the other
Stockholders shall have a right of first refusal on the terms described below to
purchase the Transfer Shares proposed to be transferred, and each of the other
Stockholders shall have a right of co-sale on the terms described below. At
least twenty-five (25) business days before the date of a sale or transfer of
Transfer Shares, the Selling Stockholder shall give a written notice (the
"TRANSFER NOTICE") simultaneously to the Company and to each of the other
Stockholders at such Stockholder's address as shown on the Company's records.
The Transfer Notice shall describe in detail the proposed transfer, including
the number of Transfer Shares proposed to be transferred, the proposed transfer
price or consideration to be paid, the address of the Selling Stockholder
proposing to transfer shares, and the name and address of the proposed
transferee (the "TRANSFEREE").
(ii) The Company shall have ten (10) business days following
receipt of the Transfer Notice to agree to purchase all or any portion of the
Transfer Shares at the price and upon the terms specified in the Transfer Notice
by giving written notice to the Selling Stockholder and stating the number of
shares to be purchased. If the Company fails to deliver notice of its intent to
purchase all of the Transfer Shares within such ten (10) day period, the Selling
Stockholder shall give each of the other Stockholders notice of the number of
shares which the Company did not elect to purchase. Such notice may be by
telephone if followed by written confirmation in two (2) days. The other
Stockholders shall each have five (5) business days from receipt of such notice
to agree to purchase all or any portion of their respective First Refusal Pro
Rata Shares (as hereinafter defined) of such Transfer Shares which the Company
did not elect to purchase, by giving written notice to the Selling Stockholder
and stating the number of shares to be purchased. If any Stockholder fails to
deliver notice of its intent to purchase all of its First Refusal Pro Rata Share
of the Transfer Shares which the Company did not elect to purchase, the Selling
Stockholder shall give Warburg notice of the number of shares the Stockholders
did not elect to purchase. Such notice may be by telephone if followed by
written confirmation in two (2) days. Warburg shall have five (5) business days
from receipt of such notice to agree to purchase all or portion of such
remaining Transfer Shares, by delivering written notice to the Selling
Stockholder and stating the number of shares to be purchased. Any Transfer
Shares purchased by the Company or the Stockholders pursuant to this Section
16(a)(ii) are hereinafter referred to as the "UNSOLD TRANSFER SHARES."
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<PAGE>
(iii) Each Stockholder shall have the right to sell to the
Transferee (or, upon the unwillingness of any Transferee to purchase directly
from such Stockholder, to the Selling Stockholder) not more than its Co-Sale Pro
Rata Share (as hereinafter defined) of the Unsold Transfer Shares subject to the
Transfer Notice on the terms set forth in the Transfer Notice. If the
consideration to be paid by the Transferee is of a nature that cannot be given
to the Stockholders, then each Stockholder shall have the right to sell its Co-
Sale Pro Rata Share of the Unsold Transfer Shares subject to the Transfer Notice
to the Selling Stockholder at the fair market value per share of such
consideration. To the extent that any prospective purchaser or purchasers
prohibits such assignment or otherwise refuses to purchase shares or other
securities from a Purchaser exercising its right of co-sale hereunder, the
Selling Stockholder shall not sell such prospective purchaser or purchasers any
Transfer Shares unless and until, simultaneously with such sale, the Selling
Stockholder shall purchase such shares or other securities from such other
Stockholders for the same consideration and on the same terms and conditions as
the proposed transfer described in the Transfer Notice. A Stockholder shall
exercise his right of co-sale by delivering a notice to the Selling Stockholder
within five (5) business days after receipt by such Purchaser of notice from the
Selling Stockholder stating the number of Unsold Transfer Shares such
Stockholder desires to sell.
(iv) Each Stockholder's "FIRST REFUSAL PRO RATA SHARE" is the
ratio of (i) the total number of shares of Common Stock held by such Stockholder
as of the date of the Transfer Notice (after giving effect to the conversion of
all shares of Preferred Stock held by such Stockholder) to (ii) the number of
shares of Common Stock held by all Stockholders other than the Selling
Stockholder as of such date (after giving effect to the conversion of all shares
of Preferred Stock held by all Stockholders).
(v) Each Stockholder's "CO-SALE PRO RATA SHARE" is the ratio
of (i) the total number of shares of Common Stock of the Company held by such
Stockholder as of the date of the Transfer Notice (after giving effect to the
conversion of all shares of Preferred Stock held by such Stockholder) to (ii)
the number of shares of Common Stock held by all Stockholders as of such date
(after giving effect to the conversion of all shares of Preferred Stock held by
all Stockholders).
(b) Transfer of Shares Upon Failure to Exercise Right of Co-Sale.
------------------------------------------------------------
Subject to the rights of the Company Stockholders who have elected to exercise
rights of first refusal or co-sale, the Selling Stockholder may, not later than
sixty (60) days following delivery to the Company and each of the Stockholders
of the Transfer Notice, conclude a transfer of any or all of the Transfer Shares
covered by the Transfer Notice on terms and conditions substantially similar to
those described in the Transfer Notice. Any proposed transfer on terms and
conditions materially different than those described in the Transfer Notice, as
well as any subsequent proposed transfer of any of the Transfer Shares by the
Selling Stockholder, shall again be subject to the rights of first refusal and
rights of co-sale and shall require compliance by the Selling Stockholder with
the procedures described in this Section.
(c) Binding Effect of Right of Co-Sale. The rights of first refusal
----------------------------------
and co-sale shall be binding upon any transferee of Transfer Shares other than a
transferee acquiring Transfer Shares in a transaction which complies with this
Section.
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<PAGE>
(d) Termination of Right of Co-Sale. Notwithstanding anything in this
-------------------------------
Section to the contrary, the rights of first refusal and of co-sale shall
terminate on the earlier of (i) the closing date of the Company's IPO; or (ii)
as to any Stockholder at such time as such Stockholder holds less than 2.5% of
the total number of shares of Common Stock held by all Stockholders (after
giving effect to the conversion of all shares of Preferred Stock held by all
Stockholders).
(e) Exceptions. Without regard and not subject to the provisions of
----------
this Section, each Stockholder may transfer all or part of its Shares pursuant
to Section 4 above in an Exempt Transaction; provided, however, that this
Agreement shall be binding upon each transferee in any such Exempt Transaction
and, prior to the completion of such transfer, each transferee or his or her
legal representative shall have executed documents in form and substance
satisfactory to the Company and to a majority in interest of the Investors
evidenced by their written acknowledgment of such satisfaction, assuming the
obligations of the Transferring Stockholder under this Agreement with respect to
the Transfer Shares. Such Transfer Shares shall remain subject to this Section
hereunder, and references to the "Stockholders" hereunder shall be deemed
thereafter to apply to and include the transferor or transferees of any such
shares.
(f) Conditions to Exercise of Rights. Exercise of the Stockholder's
--------------------------------
rights under this Section shall be subject to and conditioned upon, and the
Selling Stockholder and the Company shall use their best efforts to assist the
Stockholders in, compliance with applicable laws.
(g) Transferability. The rights of first refusal and co-sale rights
---------------
granted to the Stockholders pursuant to this Section shall be transferable only
to a transferee to whom registration rights may be transferred hereunder and who
following such transfer will hold no less than 2.5% of the total number of
shares of Common Stock held by all Stockholders (after giving effect to the
conversion of all shares of Preferred Stock held by all Stockholders).
17. Certain Rights.
--------------
(a) Basic Financial Information. The Company will furnish the
---------------------------
following reports to each Investor (or its representative) so long as such
Investor owns Preferred Stock (or Common Stock issued upon conversion of such
Preferred Stock):
(i) As soon as practicable after the end of each fiscal year of
the Company, and in any event within 90 days thereafter, the consolidated
balance sheet of the Company and its subsidiaries, if any, as at the end of such
fiscal year, consolidated statements of income and cash flow and notes thereto
(including notes with respect to each department or operating entity) of the
Company and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles consistently applied and setting forth
in each case in comparative form the figures for the previous fiscal year, all
in reasonable detail and certified by independent public accountants of
recognized national standing that are among the six largest accounting firms in
the United States selected by the Company and approved by its Board of
Directors.
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<PAGE>
(ii) As soon as practicable after the end of the first, second
and third quarterly accounting periods in each fiscal year of the Company and in
any event within 45 days thereafter, an unaudited consolidated balance sheet and
an unaudited statement of cash flows of the Company and its subsidiaries, if
any, as of the end of each such quarterly period, and unaudited consolidated
statements of income of the Company and its subsidiaries for such period and for
the current fiscal year to date, in each case with comparable prior periods,
prepared in accordance with generally accepted accounting principles
consistently applied, all in reasonable detail, including any material
discrepancies between the results reported and the Company's budgeted
projections for the period, as well as other financial or business events of
material importance, and certified, subject to changes resulting from year-end
audit adjustments, by the principal financial or accounting officer of the
Company.
(iii) As soon as practicable after the end each month in each
fiscal year of the Company, and in any event within 30 days thereafter, a
consolidated balance sheet of the Company and its subsidiaries, if any, as of
the end of each such month, and consolidated statements of income and cash flows
and notes thereto (including notes with respect to each department or operating
entity) and its subsidiaries for such period and for the current fiscal year to
date, prepared in accordance with generally accepted accounting principles
consistently applied, subject to changes resulting from year-end audit
adjustments, all in reasonable detail and certified by the principal financial
or accounting officer of the Company.
(iv) Annually (but in any event at least 30 days prior to the
commencement of each fiscal year of the Company) the yearly budget and operating
plan of the Company, in such manner and form as approved by the Board of
Directors of the Company, which plan shall include projected statements of
income and cash flow for such fiscal year and a projected balance sheet as of
the end of such fiscal year. Any material changes in such plan shall be
delivered to the Investors as promptly as practicable after such changes have
been approved by the Board of Directors of the Company.
(v) Access to the Company's and its subsidiaries' books,
records and facilities during normal business hours, and reasonable access to
the Company's officers to discuss the Company's and its subsidiaries' accounts,
finances and affairs.
The provisions of this Section 17(a) shall not be in limitation of any
rights that the Stockholders may have with respect to the books and records of
the Company and its subsidiaries, or to inspect their properties or discuss
their affairs, finances and accounts; and, in the event that the Company is
unable to comply with the provisions of Section 17(a), the Board of Directors of
the Company shall, by resolution duly adopted, authorize and cause a firm of
independent public accountants of nationally recognized standing that is among
the six largest accounting firms in the United States to prepare promptly and
furnish such information to the eligible Stockholders at the Company's expense.
From the date the Company becomes subject to the reporting requirements of
the Exchange Act, and in lieu of the information required pursuant to this
Section 17(a), Company may furnish to the Investors copies of its annual reports
on Form 10-K, its quarterly reports on Form 10-Q, any current reports on Form 8-
K and such other information or interim reports as it provides to all
stockholders.
-20-
<PAGE>
(b) Transfers of Rights. The rights granted to the Investors under
-------------------
Section 17(a) hereof may be transferred or assigned by an Investor to any
transferee or assignee of any Shares to whom registration rights may be assigned
provided that the Company is given written notice at the time of or within a
reasonable time after such transfer or assignment, stating the name and address
of the transferee or assignee and identifying the securities with respect to
which such rights are being transferred or assigned.
18. Board Representation and Voting of Shares.
-----------------------------------------
(a) In any and all elections of directors of the Company (whether at
a meeting or by written consent in lieu of a meeting), each Stockholder shall
vote or cause to be voted all Preferred Stock or Common Stock (for purposes of
this Section 18, the "Voting Stock") owned by such Stockholder, or over which
such Stockholder has voting control, and otherwise use such Stockholder's
respective best efforts, so as to fix the number of directors constituting the
Board of Directors of the Company at seven (7) and to elect as members of said
Board (i) three persons designated by the Investors, of which two persons shall
be designees of Warburg and one person shall be a designee of Crosspoint;
provided, however, that so long as Crosspoint's aggregate investment in the
Company is less than $5,000,000, if Crosspoint fails to invest on a pro rata
basis with Warburg in a subsequent equity financing of the Company, the
Crosspoint designee shall resign and his or her vacancy shall be filled by, and
the third such person shall be, a person mutually designated by Warburg and the
Company; (ii) two persons who are senior officers of the Company, one of whom
shall be the Chief Executive Officer of the Company; and (iii) one person
mutually designated by Warburg and the Company. The directors initially
designated by the Investors are Joseph Landy, Henry Kressel and Rich Shapero,
the directors initially designated by the Company are Charles McMinn and Daniel
Lynch and the director initially designated by Warburg and the Company is Frank
Marshall.
(b) The Company shall provide the Stockholders with prior written
notice of any intended mailing of notice to stockholders for a meeting at which
directors are to be elected and the Investors shall notify the Company in
writing, prior to such mailing, of the persons designated by the investors as
nominees for election as directors. If the Investors shall fail to give notice
to the Company as provided above, it shall be deemed that the designees of the
Investors then serving as directors shall be their designees for reelection.
(c) The Stockholders shall not vote to remove any director designated
pursuant to this Agreement, except for bad faith or wilful misconduct.
(d) In the event of any vacancy in the Board, such vacancy shall be
filled by a person designated as provided in Section 18(a) above.
(e) In the event any shares of Preferred Stock, Common Stock or other
voting securities are issued by the Company to any Stockholder at any time
during the term of this Agreement, either directly or upon the exercise or
exchange of securities of the Company exercisable for or exchangeable into
shares Preferred Stock, Common Stock or voting securities, such additional
shares
-21-
<PAGE>
of Preferred Stock, Common Stock or voting securities, as the case may be, shall
be voted, or consent in respect thereof shall be given, in accordance with the
provisions of this Agreement.
(f) The voting agreements contained in this Section 18 shall
terminate in its entirety July 16, 2007. Notwithstanding the foregoing, the
provisions of this Agreement shall no longer be applicable in respect of any
Stockholder at such time as such Stockholder shall cease to own any Voting Stock
of the Company.
(g) The voting agreements contained in this Section 18 are coupled
with an interest and may not be revoked, except by written consent of all of the
Stockholders.
(h) Each and every transferee or assignee of the Voting Stock from
any Stockholder shall be bound by and subject to all the terms and conditions of
this Section 18. So long as the provisions of this Section 18 are in effect, the
Company shall require, as a condition precedent to the transfer of any Voting
Stock covered by this Section 18, that the transferee agrees in writing to be
bound by, and subject to, the terms and conditions of this Section 18 as
provided in this Section 18 and to ensure that Stockholder's transferees of the
Voting Stock shall be likewise bound.
(i) Each of the parties acknowledge that all other parties hereto
will be irreparably damaged in the event that the provisions of this Section 18
are not specifically enforced. Accordingly, should any dispute arise pursuant to
this Section 18, the parties agree that a decree of specific performance shall
be an appropriate remedy. Such remedy shall be cumulative and shall be in
addition to any other remedies which any party may have at law or in equity.
19. Visitation. The Company shall permit each Investor (or a
----------
representative thereof), so long as such Investor owns no less than five percent
(5%) of the total number of shares of Preferred Stock outstanding, during such
periods as no designee of such Investor is a member of the Company's Board of
Directors, to attend all meetings of the Board of Directors and committees
thereof and will provide to such Investor copies of written materials provided
to all members of the Board of Directors at the same time and in the same manner
that such materials are provided to the members of the Board of Directors.
20. Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of Delaware, without giving effect to the conflicts of
laws principles thereof.
21. Entire Agreement. This Agreement and the other documents delivered
----------------
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.
22. Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto.
-22-
<PAGE>
23. Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service or
five days after deposit with the United States mail, by First Class mail,
postage prepaid, addressed (a) if to a Stockholder, at the Stockholder's address
as set forth on Exhibit A hereto, or (b) if to any other holder of any
---------
securities, at such address as such holder shall have furnished the other
parties hereto in writing, or, until any such holder so furnishes an address to
the Company, then to and at the address of the last holder of such Shares who
has so furnished an address to the Company, or (c) if to the Company, to Covad
Communications Group, Inc., 3560 Bassett Street, Santa Clara, CA 95054, and
addressed to the attention of the President, or at such other address as the
Company shall have furnished to the Stockholders.
24. Amendments or Waivers. This Agreement may not be amended, waived,
---------------------
discharged or terminated other than by written instrument signed by the Company
and (a) holders of more than a majority of the outstanding Registrable
Securities (on an as-converted to Common Stock basis).
25. Waiver of Conflict. Each party to this Agreement that has been or
------------------
continues to be represented by Wilson Sonsini Goodrich & Rosati P.C., counsel to
the Company, hereby acknowledges that Rule 3-310 of the Rules of Professional
Conduct promulgated by the State Bar of California requires an attorney to avoid
representations in which the attorney has or had a relationship with another
party interested in the representation without the informed written consent of
all parties affected. By executing this Agreement, each such party gives his or
its informed written consent to the representation of the Company by Wilson
Sonsini Goodrich & Rosati P.C. in connection with this Agreement and the
transactions contemplated hereby.
26. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by fewer than all of parties hereto,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
27. Confidentiality. Each party hereto agrees that, except with the prior
---------------
written permission of the other parties, it shall at all times keep confidential
and not divulge, furnish or make accessible to anyone any confidential
information, knowledge or data concerning or relating to the business or
financial affairs of the other parties to which such party has been or shall
become privy by reason of this Agreement. The parties hereto further agree that
there shall be no press release or other public statement issued by either party
relating to this Agreement or the transactions contemplated hereby, unless the
parties otherwise agree in writing.
-23-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Timothy Laehy
-------------------------------
Name: Timothy Laehy
-------------------------------
Title: Chief Financial Officer
-------------------------------
WARBURG, PINCUS VENTURES, L.P.
By: Warburg, Pincus & Co., its General Partner
By: /s/ Stephen Distler
----------------------------
Partner
CROSSPOINT VENTURE PARTNERS 1996
By: /s/ Rich Shapero
--------------------------------
Name: Rich Shapero
--------------------------------
Title: General Partner
-------------------------------
INTEL CORPORATION
By: /s/ Arvind Sodhani
-----------------------------------
Name: Arvind Sodhani
--------------------------------
Title: Treasurer
-------------------------------
[Stockholder Rights Agreement Signature Page]
-24-
<PAGE>
/s/ Charles J. McMinn
_______________________________________
Charles J. McMinn
/s/ Dhruv Khanna
_______________________________________
Dhruv Khanna
/s/ Charles Haas
_______________________________________
Charles J. Haas
/s/ Duncan M. Davidson
---------------------------------------
Duncan M. Davidson
/s/ Daniel Lynch
_______________________________________
Daniel Lynch
/s/ Rex Cardinale
_______________________________________
Rex Cardinale
/s/ Frank Marshall
_______________________________________
Frank Marshall
/s/ Timothy Laehy
_______________________________________
Timothy P. Laehy
[Stockholder Rights Agreement Signature Page]
-25-
<PAGE>
EXHIBIT A
SCHEDULE OF STOCKHOLDERS
<TABLE>
<CAPTION>
HOLDERS OF COMMON STOCK NUMBER OF SHARES
- ----------------------- ----------------
<S> <C>
Charles McMinn 1,000,000
24627 Olive Tree Lane
Los Altos Hills, CA 94024
Dhruv Khanna 1,000,000
742 Alester Ave.
Palo Alto, CA 94303
Charles J. Haas 1,000,000
10533 Esquire Place
Cupertino, CA 95014
Duncan Davidson 196,568
415 Camberly Way
Redwood City, CA 94061
Daniel Lynch 48,000
25660 La Lanne Court
Los Altos Hills, CA 94022
Rex Cardinale 375,000
Frank Marshall 48,000
20100 Hill Avenue
Saratoga, CA 95070
Timothy P. Laehy 115,000
HOLDERS OF SERIES A PREFERRED STOCK NUMBER OF SHARES
- ------------------------------------- ----------------
Charles McMinn 50,000
24627 Olive Tree Lane
Los Altos Hills, CA 94024
Dhruv Khanna 50,000
742 Alester Ave.
Palo Alto, CA 94303
Charles J. Haas 50,000
10533 Esquire Place
Cupertino, CA 95014
Daniel Lynch 100,000
25660 La Lanne Court
Los Altos Hills, CA 94022
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HOLDERS OF SERIES B PREFERRED STOCK NUMBER OF SHARES
- ----------------------------------- ----------------
<S> <C>
Warburg, Pincus Ventures, L.P. 4,000,000
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue
New York, NY 10017-3147
Crosspoint Venture Partners 1996 1,000,000
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062
Intel Corporation 666,667
2200 Mission College Boulevard
Santa Clara, CA 95052-8199
Frank Marshall 33,334
20100 Hill Avenue
Saratoga, CA 95070
HOLDERS OF SERIES C PREFERRED STOCK NUMBER OF SHARES
- ----------------------------------- ----------------
Intel Corporation 120,048
2200 Mission College Boulevard
Santa Clara, CA 95052-8199
</TABLE>
-2-
<PAGE>
AMENDMENT NO. 1 TO
AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
This Amendment so made this 24th day of April, 1998 to the Amended and
Restated Stockholder Rights Agreement dated March 11, 1998 (the "Agreement") by
and among COVAD COMMUNICATIONS GROUP, INC., a Delaware Corporation (the
"Company") and the persons and entities (the "Stockholders") whose names are set
forth in Schedule A attached thereto. For purposes of this amendment,
capitalized terms shall have the same meaning as those terms defined in the
Agreement, unless otherwise provided.
RECITALS
WHEREAS, the Stockholders possess registration rights, preemptive rights,
information rights, rights of first refusal, co-sale rights, financial
information rights and Board representation, voting and visitation rights
granted under the Agreement;
WHEREAS, pursuant to that certain Assignment and Assumption Agreement and
First Amendment to Series C Preferred Stock and Warrant Subscription Agreement
dated April 24, 1998, (the "Assignment and Assumption Agreement") between the
Company, Warburg, Pincus Ventures, L.P., Crosspoint Venture Partners 1996 L.P.
and Robert Hawk (the "Purchaser"), the Purchaser is assuming the right to
purchase and is purchasing shares of the Company's Series C Preferred Stock (the
"Series C Shares") and warrants to purchase Series C Shares (the "Warrant
Shares");
WHEREAS, the Stockholders desire to amend the Agreement in connection with
the issuance of the Series C Shares and the Warrant Shares to grant certain
rights to and impose certain obligations upon the Purchaser pursuant to the
Agreement;
WHEREAS, as an inducement for the Purchaser to enter into the Assignment
and Assumption Agreement, the Company desires to grant certain rights to the
Purchaser as provided herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties hereto agree that the Agreement is amended by
this Amendment, and all parties agree as follows:
1. Purchaser Party to the Agreement. The Purchaser shall be party to the
--------------------------------
Agreement with rights and obligations as provided herein and therein. The
Purchaser shall be included in the definition of "Stockholders" as provided in
the preamble to the Agreement.
<PAGE>
2. Governing Law. This Amendment shall be governed by and construed
-------------
under the laws of the State of Delaware, without giving effect to the conflicts
of laws principles thereof.
3. Entire Agreement. This Amendment and the Agreement constitute the
----------------
full and entire understanding and agreement between the parties with regard to
the subjects hereof and thereof.
4. Full Force and Effect. Except as amended hereby, the Agreement shall
---------------------
remain in full force and effect.
5. Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6. Severability. In case any provision of this Amendment shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Amendment shall not in any way be affected or
impaired thereby.
-2-
<PAGE>
The foregoing Amendment to the Amended and Restated Stockholder Rights
Agreement is hereby executed as of the date first above written.
COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By: /s/ Charles J. McMinn
--------------------------------------------
Charles J. McMinn
Chief Executive Officer
STOCKHOLDER
-----------------------------------------------
(Print Name)
-----------------------------------------------
(Signature of Holder or Authorized Signatory)
-----------------------------------------------
(Print Name and Title of Authorized Signatory if
Applicable)
AMENDMENT NO. 1 TO
AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
-3-
<PAGE>
The foregoing Amendment to the Amended and Restated Stockholder Rights
Agreement is hereby executed as of the date first above written.
COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By:
--------------------------------------------
Charles J. McMinn
Chief Executive Officer
STOCKHOLDER
Robert Hawk
-----------------------------------------------
(Print Name)
/s/ Robert Hawk
-----------------------------------------------
(Signature of Holder or Authorized Signatory)
-----------------------------------------------
(Print Name and Title of Authorized Signatory if
Applicable)
AMENDMENT NO. 1 TO
AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
-3-
<PAGE>
The foregoing Amendment to the Amended and Restated Stockholder Rights
Agreement is hereby executed as of the date first above written.
COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By:
--------------------------------------------
Charles J. McMinn
Chief Executive Officer
STOCKHOLDER
Crosspoint Venture Partners 1996, L.P.
-----------------------------------------------
(Print Name)
/s/ Rich Shapero
-----------------------------------------------
(Signature of Holder or Authorized Signatory)
-----------------------------------------------
(Print Name and Title of Authorized Signatory if
Applicable)
AMENDMENT NO. 1 TO
AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
-3-
<PAGE>
The foregoing Amendment to the Amended and Restated Stockholder Rights
Agreement is hereby executed as of the date first above written.
COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By:
--------------------------------------------
Charles J. McMinn
Chief Executive Officer
STOCKHOLDER
Warburg, Pincus Ventures, L.P.
By: Warburg, Pincus & Co., General Partner
-----------------------------------------------
(Print Name)
/s/ Joseph P. Landy
-----------------------------------------------
(Signature of Holder or Authorized Signatory)
Joseph P. Landy, partner
-----------------------------------------------
(Print Name and Title of Authorized Signatory if
Applicable)
AMENDMENT NO. 1 TO
AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
-3-
<PAGE>
EXHIBIT 10.4
COVAD COMMUNICATIONS GROUP, INC.
1997 STOCK PLAN
(AMENDED APRIL, 1998)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Covad Communications Group, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting or advisory services to such
entity.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
-2-
<PAGE>
(r) "Option Agreement" means a written or electronic agreement
----------------
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 1997 Stock Plan.
----
(x) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(y) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(z) "Service Provider" means an Employee, Director or Consultant.
----------------
(aa) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(bb) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 5,513,500 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued
-3-
<PAGE>
under the Plan, upon exercise of either an Option or Stock Purchase Right, shall
not be returned to the Plan and shall not become available for future
distribution under the Plan, except that if Shares of Restricted Stock are
repurchased by the Company at their original purchase price, such Shares shall
become available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Administrator. The Plan shall be administered by the Board or a
-------------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
-4-
<PAGE>
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by Optionees to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
-5-
<PAGE>
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5)
-6-
<PAGE>
consideration received by the Company under a cashless exercise program
implemented by the Company in connection with the Plan, or (6) any combination
of the foregoing methods of payment. In making its determination as to the type
of consideration to accept, the Administrator shall consider if acceptance of
such consideration may be reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after
-7-
<PAGE>
termination, the Optionee does not exercise his or her Option within the time
specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified
time in the Option Agreement, the Option shall remain exercisable for twelve
(12) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (of at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. The Options
--------------------------------------------------------
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to
-8-
<PAGE>
purchase, the price to be paid, and the time within which such person must
accept such offer. The terms of the offer shall comply in all respects with
Section 260.140.42 of Title 10 of the California Code of Regulations. The offer
shall be accepted by execution of a Restricted Stock purchase agreement in the
form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five (5) years from the date of
purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason
-9-
<PAGE>
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
-10-
<PAGE>
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Service Provider to whom an
Option or Stock Purchase Right is so granted within a reasonable time after the
date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
-11-
<PAGE>
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
-12-
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: Incentive Stock Option
---
____ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
<PAGE>
12.5% of the Shares subject to the Option shall vest six months on the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to Optionee's continuing to be a Service
Provider on such dates.
Termination Period:
------------------
This Option shall be exercisable for thirty days after Optionee ceases to
be a Service Provider. Upon Optionee's death or Disability, this Option may be
exercised for one year after Optionee ceases to be a Service Provider. In no
event may Optionee exercise this Option after the Term/Expiration Date as
provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the Exercise Notice@)
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax
-2-
<PAGE>
purposes the Shares shall be considered transferred to the Optionee on the date
on which the Option is exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
B.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be by
-----------------
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
7. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
-3-
<PAGE>
8. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Tax Consequences. Set forth below is a brief summary as of the date of
----------------
this Option of some of the federal tax consequences of exercise of this Option
and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A
TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) Exercise of Nonstatutory Stock Option. There may be a regular
-------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(c) Disposition of Shares. In the case of an NSO, if Shares are held
---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and of at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
(d) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in
-4-
<PAGE>
writing of such disposition. Optionee agrees that Optionee may be subject to
income tax withholding by the Company on the compensation income recognized by
the Optionee.
10. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
12. Vesting Acceleration on Change of Control.
-----------------------------------------
(a) Vesting Acceleration. In the event of a "Change of Control,"
--------------------
all of the Optionee's rights to purchase stock under this Agreement with the
Company shall be automatically vested in their entirety on an accelerated basis
and be fully exercisable:
(A) as of the date immediately preceding such "Change of Control" in
the event this stock option agreement is or will be terminated or
canceled (except by mutual consent) or any successor to the Company
fails to assume and agree to perform such stock option agreement as
provided in Section 2(13) hereof at or prior to such time as any such
person becomes a successor to the Company; or
-5-
<PAGE>
(B) as of the date immediately preceding such "Change of Control" in
the event the Optionee does not or will not receive upon exercise of
the Optionee's stock purchase rights under such stock option agreement
the same identical securities and/or other consideration as is
received by all other shareholders in any merger, consolidation, sale,
exchange or similar transaction occurring upon or after such "Change
of Control"; or
(C) as of the date immediately preceding any "Involuntary Termination"
of the Optionee occurring upon or after any such "Change of Control";
or
(D) as of the date one (1) year following the first such "Change of
Control," provided that the Optionee shall have remained an employee
of the Company continuously throughout such one-year period, other
than a termination as a result of death or disability;
whichever shall first occur (all quoted terms as defined below).
(b) Change of Control. "Change of Control" means the occurrence
-----------------
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A change in the composition of the Board of Directors
of the Company occurring within a two-year period as a result of which fewer
than a majority of the directors are "Incumbent Directors." "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of the date hereof, or (B) are elected, or nominated for election, to the Board
of Directors with the affirmative votes (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for election as a director without objection to such nomination) of at
least a majority of the Incumbent Directors at the time of such election or
nomination; or
(iii) The consummation of (A) a merger or consolidation of
the Company with any other entity, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or the entity
that controls the Company or such surviving entity) at least fifty percent (50%)
of the total voting power represented by the voting securities of the Company or
such surviving entity or the entity that controls the Company or such surviving
entity outstanding immediately
-6-
<PAGE>
after such merger or consolidation, or (B) the sale or disposition by the
Company of all or substantially all the Company's assets; or
(iv) The shareholders approve a plan of complete liquidation
of the Company.
(c) Involuntary Termination. "Involuntary Termination" shall
-----------------------
mean without the Optionee's written consent: (i) a termination by the Company of
the Optionee's employment with the Company other than for Cause; (ii) a material
reduction of or variation in the Optionee's duties, authority or
responsibilities, relative to the Optionee's duties, authority or
responsibilities as in effect immediately prior to such reduction or variation;
(iii) a reduction by the Company in the base salary of the Optionee as in effect
immediately prior to such reduction; (iv) a material reduction by the Company in
the kind or level of employee benefits, including bonuses, to which the Optionee
was entitled immediately prior to such reduction, with the result that the
Optionee's overall benefits package is materially reduced; (v) the relocation of
the Optionee to a facility or a location more than thirty (30) miles from the
Optionee's then present location; (vi) the failure of the Company to obtain the
assumption of this Agreement by any successor as required in Section 2(13) or
(vii) any act or set of facts that would under applicable law constitute a
constructive termination of Optionee.
(d) Cause. "Cause" shall mean (i) any willful act of personal
-----
dishonesty, fraud or misrepresentation taken by the Optionee in connection with
his or her responsibilities as an employee which was intended to result in
substantial gain or personal enrichment of the Optionee at the expense of the
Company and was materially and demonstrably injurious to the Company; (ii) the
Optionee's conviction of a felony on account of any act which was materially and
demonstrably injurious to the Company; or (iii) the Optionee's willful and
continued failure to substantially perform his or her principal duties and
obligations of employment including under any written agreements (other than any
such failure resulting from incapacity due to physical or mental illness), which
failure is not remedied in a reasonable period of time after receipt of written
notice from the Company. For the purposes of this Section 12(d), no act or
failure to act shall be considered "willful" unless done or omitted to be done
in bad faith and without reasonable belief that the act or omission was in or
not opposed to the best interests of the Company. Any act or failure to act
based upon authority given pursuant to a resolution duly adopted by the Board of
Directors of the Company or based upon the advice of counsel for the Company
shall be conclusively presumed to be done or omitted to be done in good faith
and in the best interests of the Company.
(e) Voluntary Resignation; Termination For Cause. If the
--------------------------------------------
Optionee terminates employment as a result of an Involuntary Termination, the
Optionee shall be entitled to receive accelerated vesting under Section 12(a)
hereof. If the Optionee's continuous status as an employee of the Company
terminates by reason of the Optionee's voluntary resignation (and not
Involuntary Termination) or if the Optionee's continuous status as an employee
of the Company is
-7-
<PAGE>
terminated for Cause, in either case prior to such time as accelerated vesting
occurs as provided in Section 12(a) hereof, then the Optionee shall not be
entitled to receive accelerated vesting under Section 12(a) hereof.
13. Successors.
----------
Any successor to the Company (whether direct or indirect and
whether by purchase, merger or consolidation) shall assume the obligations under
this Agreement and agree expressly to perform the obligations under this
Agreement in the same manner and to the same extent as the Company would be
required to perform such obligations in the absence of a succession.
The terms of this Agreement and all rights of the Optionee
hereunder shall inure to the benefit of, and be enforceable by, the Optionee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
-8-
<PAGE>
OPTIONEE: COVAD COMMUNICATIONS GROUP, INC.
_______________________________ ________________________________
Signature By
_______________________________ ________________________________
Print Name Title
_______________________________
_______________________________
Residence Address
-9-
<PAGE>
EXHIBIT A
---------
1997 STOCK PLAN
EXERCISE NOTICE
Covad Communications Group, Inc.
3560 Bassett St.
Santa Clara, CA 95054
Attention: Secretary
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Covad Communications
Group, Inc. (the "Company") under and pursuant to the 1997 Stock Plan (the
"Plan") and the Stock Option Agreement dated ________, 19____ (the "Option
Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
--------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE>
Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares upon the first sale of Common Stock of the
Company to the general
-2-
<PAGE>
public pursuant to a registration statement filed with and declared effective by
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
6. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN
THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF
THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL
HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE
EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF
THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL
OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF
FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of
-3-
<PAGE>
this Agreement or (ii) to treat as owner of such Shares or to accord the right
to vote or pay dividends to any purchaser or other transferee to whom such
Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights under
----------------------
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
10. Governing Law; Severability. This Agreement is governed by the
---------------------------
internal substantive laws but not the choice of law rules, of California.
-4-
<PAGE>
11. Entire Agreement. The Plan and Option Agreement are incorporated
----------------
herein by reference. This Agreement, the Plan, the Option Agreement and the
Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
Submitted by: Accepted by:
OPTIONEE: COVAD COMMUNICATIONS GROUP, INC.
_____________________________ ________________________________
Signature By
_____________________________ ________________________________
Print Name Its
Address: Address:
- ------- -------
_____________________________ 3560 Bassett St.
_____________________________ Santa Clara, CA 95054
________________________________
Date Received
-5-
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: COVAD COMMUNICATIONS GROUP, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted
<PAGE>
securities" acquired, directly or indirectly from the issuer thereof, in a non-
public offering subject to the satisfaction of certain conditions. Rule 701
provides that if the issuer qualifies under Rule 701 at the time of the grant of
the Option to the Optionee, the exercise will be exempt from registration under
the Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
ninety (90) days thereafter (or such longer period as any market stand-off
agreement may require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including: (1) the resale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934); and, in the case of
an affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.
Signature of Optionee:
_____________________________________
Date:__________________________, 19__
-2-
<PAGE>
EXHIBIT 10.5
COVAD COMMUNICATIONS GROUP, INC.
SERIES C PREFERRED STOCK AND WARRANT
SUBSCRIPTION AGREEMENT
(HIGH YIELD OFFERING)
DATED AS OF FEBRUARY 20, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
SECTION 1 Authorization and Sale of Preferred Stock and Issuance of Warrants.............. 1
1.1 Authorization.................................................................. 1
1.2 Sale of Shares of Series C Preferred to Intel.................................. 1
1.3 Company Right to Sell to Warburg and Crosspoint................................ 2
1.4 Issuance of Warrants in Consideration of Commitment............................ 3
1.5 Amendment and Restatement of the Stockholder Rights Agreement.................. 3
SECTION 2 Closing Dates; Delivery......................................................... 3
2.1 Closing Dates.................................................................. 3
2.2 Delivery....................................................................... 4
SECTION 3 Representations and Warranties of the Company................................... 4
3.1 Organization of the Company.................................................... 4
3.2 Company Capital Structure...................................................... 5
3.3 Subsidiaries................................................................... 6
3.4 Authority...................................................................... 6
3.5 No Conflict.................................................................... 6
3.6 Consents....................................................................... 7
3.7 Company Financial Statements................................................... 7
3.8 No Undisclosed Liabilities..................................................... 7
3.9 No Changes..................................................................... 7
3.10 Tax Matters.................................................................... 9
3.11 Restrictions on Business Activities............................................10
3.12 Title of Properties; Absence of Liens and Encumbrances.........................10
3.13 Intellectual Property..........................................................10
3.14 Agreements, Contracts and Commitments..........................................11
3.15 Interested Party Transactions..................................................12
3.16 Governmental Authorization.....................................................13
3.17 Litigation.....................................................................13
3.18 Employees; Employee Compensation...............................................13
3.19 Minute Books...................................................................14
3.20 Environmental Matters..........................................................14
3.21 Brokers' and Finders' Fees; Third Party Expenses...............................15
3.22 Registration Rights............................................................15
3.23 No Interference or Conflict....................................................15
3.24 Insurance......................................................................15
3.25 Regulatory Matters.............................................................15
3.26 Complete Copies of Materials...................................................16
3.27 Representations Complete.......................................................16
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 4 Representations and Warranties of the Purchasers.......................... 17
4.1 Investment Representations and Covenants of the Purchasers............... 17
4.2 No Public Market......................................................... 18
4.3 Domicile................................................................. 18
4.4 Authority................................................................ 18
SECTION 5 Conditions to Closing of Purchasers....................................... 19
5.1 Conditions to Closing of Intel........................................... 19
5.2 Conditions to Closing of Warburg and Crosspoint.......................... 19
SECTION 6 Conditions to Closing of Company.......................................... 20
SECTION 7 Miscellaneous............................................................. 20
7.1 Governing Law............................................................ 20
7.2 Survival................................................................. 20
7.3 Successors and Assigns................................................... 21
7.4 Entire Agreement; Amendment.............................................. 21
7.5 Notices, etc............................................................. 21
7.6 Delays or Omissions...................................................... 21
7.7 California Corporate Securities Law...................................... 21
7.8 Expenses................................................................. 22
7.9 Counterparts............................................................. 22
7.10 Severability............................................................. 22
7.11 Gender................................................................... 22
7.12 Confidentiality.......................................................... 22
7.13 Enforceability; Specific Performance; Damages............................ 22
7.14 Jurisdiction and Venue................................................... 22
7.15 Termination.............................................................. 23
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
EXHIBITS
A. Schedule of Purchasers
B. Amended and Restated Certificate of Incorporation
C. Form of Series C Warrant
D. Form of Common Warrant
E. Amended and Restated Stockholder Rights Agreement
F. Exceptions to Representations and Warranties
G. Form of Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
iii
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
This Agreement is made as of February 20, 1998 among Covad Communications
Group, Inc., a Delaware corporation (the "COMPANY"), with its principal office
at 3560 Bassett Street, Santa Clara, California 95054, and Warburg, Pincus
Ventures, L.P. ("WARBURG"), Crosspoint Venture Partners 1996 ("CROSSPOINT") and
Intel Corporation ("INTEL") (individually, a "PURCHASER" and collectively, the
"PURCHASERS").
WHEREAS, the Company intends to make a private offering of units consisting
of senior notes due 2005 and warrants to purchase Common Stock with aggregate
gross proceeds of at least $100,000,000 (the "HIGH YIELD OFFERING"); and
WHEREAS, as a condition to the High Yield Offering the placement agents,
Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated (collectively the
"INITIAL PURCHASERS") have required that the Company obtain from Warburg and
Crosspoint a binding commitment for an investment in Series C Preferred Stock of
the Company in the aggregate amount of $16,000,000 to be made within one year
after the closing of the High Yield Offering; and
WHEREAS, the Company desires to sell, and Intel desires to purchase, an
aggregate of $1 million of shares of Series C Preferred Stock concurrently with
the closing of the High Yield Offering; and
WHEREAS, the Company and the Purchasers wish to set forth the terms and
conditions upon which the Company will sell, and the Purchasers will purchase,
shares of Series C Preferred Stock.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1
Authorization and Sale of Preferred Stock and Issuance of Warrants
------------------------------------------------------------------
1.1 Authorization. The Company has authorized the sale and issuance of
-------------
3,716,429 shares of its Series C Preferred Stock ("SERIES C PREFERRED"),
including 1,675,000 shares issuable upon exercise of the Series C Warrants (as
defined in Section 1.3 below), having the rights, restrictions, privileges and
preferences as set forth in the Company's Amended and Restated Certificate of
Incorporation attached to this Agreement as Exhibit B (the "AMENDED CERTIFICATE
---------
OF INCORPORATION").
1.2 Sale of Shares of Series C Preferred to Intel. Subject to the terms
---------------------------------------------
and conditions hereof, the Company will issue and sell to Intel, and Intel will
buy from the Company, the number of shares (the
<PAGE>
"SHARES") of Series C Preferred and Series C Warrants (as defined below)
specified opposite Intel's name on the Schedule of Purchasers attached hereto as
Exhibit A, for the aggregate purchase price specified opposite its name on the
- ---------
Schedule of Purchasers; provided, that the purchase and sale of such Series C
Warrants to Intel shall be conditioned upon, and the delivery of such Series C
Warrants to Intel shall be made concurrently with, the Second Closing (as
defined below). It is understood that no additional consideration shall be due
with respect to the delivery of the Series C Warrants to Intel at such Second
Closing. The Company's agreement with Intel is separate from its agreements with
the other Purchasers hereunder, and the sale of the Series C Preferred and the
Series C Warrants to Intel is separate from the Company's sale of Series C
Preferred and Series C Warrants to the other Purchasers hereunder.
1.3 Company Right to Sell to Warburg and Crosspoint.
-----------------------------------------------
(a) Subject to the terms and conditions hereof, the Company shall have
the unequivocal right to sell to Warburg and Crosspoint, and Warburg and
Crosspoint shall have the unequivocal obligation to purchase, severally and not
jointly, the number of Shares and the number of warrants to purchase Series C
Preferred (the "SERIES C WARRANTS") specified opposite their respective names on
the Schedule of Purchasers, for the aggregate purchase price specified opposite
their respective names on the Schedule of Purchasers, at any time from and after
the closing of the High Yield Offering to that date which is one year from the
date of the closing of the High Yield Offering (the "FINAL CLOSING DATE"). The
Company may exercise its right at any time by delivering a written notice to
each of Warburg and Crosspoint stating that the Company has exercised its right
to sell the Shares and the Series C Warrants to Warburg and Crosspoint and
setting forth the closing date as provided in Section 2.1 (the "EXERCISE
NOTICE"). The Company's determination to exercise the foregoing right shall be
made in the sole discretion of the independent members of the Board of Directors
of the Company (excluding the directors affiliated with Warburg and Crosspoint)
(the "INDEPENDENT DIRECTORS"). In the event that the Company has not delivered
the Exercise Notice or completed a Replacement Financing (as defined in Section
1.3(b) below) before the Final Closing Date, then the Company shall sell, and
Warburg and Crosspoint shall purchase, the Shares and the Series C Warrants on
the Final Closing Date. The aggregate number of Series C Warrants shall be
1,675,000. The Series C Warrants shall be in the form of Exhibit C.
---------
(b) The Company may in its discretion elect not to exercise its right
to sell Series C Preferred and Series C Warrants to Warburg and Crosspoint and
may complete an alternative equity financing in the aggregate amount of $16
million or greater of Common Stock or Preferred Stock in lieu thereof (the
"REPLACEMENT FINANCING"); provided that (i) if the terms of such Replacement
Financing are at the same or a higher price per share (i.e., valuation) and are
pari passu or more favorable to the Company than the terms of the Series C
Preferred set forth in the Amended Certificate of Incorporation, the
determination as to whether to complete such Replacement Financing shall be in
the sole discretion of the Independent Directors; and (ii) if the terms of such
Replacement Financing are at a lower price per share (i.e., valuation) and are
less favorable to the Company than such Series C Preferred, the determination as
to whether to complete such Replacement Financing shall be made by the unanimous
approval of the whole Board of Directors. Each of Warburg and Crosspoint agrees
that if the Company elects an alternative equity financing pursuant to the
foregoing sentence, it will vote its shares of
-2-
<PAGE>
Series B Preferred Stock as necessary to enable the Company to complete such
financing, provided such action shall not amend the terms of the Series B
Preferred Stock.
1.4 Issuance of Warrants in Consideration of Commitment. In consideration
---------------------------------------------------
of the commitment of each of the Purchasers to purchase Series C Preferred and
Series C Warrants pursuant to this Agreement, the Company shall deliver to the
Purchasers concurrently with the execution of this Agreement warrants to
purchase an aggregate of 600,000 shares of Common Stock, $.001 par value, at a
purchase price of $.01 per share. The warrants shall be in the form of Exhibit
-------
D to this Agreement (the "COMMON WARRANTS") and the number of Common Warrants
- -
delivered to each Purchaser shall be as set forth opposite such Purchaser's name
on the Schedule of Purchasers.
1.5 Amendment and Restatement of the Stockholder Rights Agreement.
-------------------------------------------------------------
Concurrently with the execution and delivery of this Agreement and the issuance
of the Common Warrants, the Company and each of the Purchasers shall execute and
deliver the Amended and Restated Stockholder Rights Agreement in the form
attached hereto as Exhibit E (the "AMENDED AND RESTATED STOCKHOLDER RIGHTS
---------
AGREEMENT").
SECTION 2
Closing Dates; Delivery
-----------------------
2.1 Closing Dates.
-------------
(a) First Closing Date. The closing of the purchase and sale of the
------------------
Series C Preferred to Intel hereunder (the "FIRST CLOSING") shall be held
concurrently with the closing of the High Yield Offering on the date of the
closing of the High Yield Offering (provided that such closing date occurs on or
before April 30, 1998) or on such later date as the Company and Intel may
mutually agree (the "FIRST CLOSING DATE"). The place of the First Closing
(including the place of delivery to Intel by the Company of the certificates
evidencing all shares of Series C Preferred being purchased by Intel and the
place of payment to the Company by Intel of the purchase price therefor) shall
be the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California 94304-1050, or such other place as Intel and the Company may
mutually agree.
(b) Second Closing Date. The closing of the purchase and sale of the
-------------------
Series C Preferred and Series C Warrants hereunder to Warburg and Crosspoint and
the closing of the sale of the Series C Warrants to Intel (the "SECOND CLOSING")
shall be held at 1:00 p.m., California Time, on the fifteenth (15th) day after
delivery of the Exercise Notice (or if such date is not a business day then on
the next business day thereafter) or on such later date as the Company and the
Purchasers may mutually agree to, but in any event no later than the Final
Closing Date (the date of such Closing being referred to as the "SECOND CLOSING
DATE"). The place of the Second Closing (including the place of delivery to
Warburg and Crosspoint by the Company of the certificates evidencing all shares
of Series C Preferred and Series C Warrants being purchased by them and the
place of payment to the Company by Warburg
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<PAGE>
and Crosspoint of the purchase price therefor and the place of delivery to Intel
by the Company of the Series C Warrants being purchased by Intel) shall be the
offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304-1050, or such other place as such Purchasers and the Company
may mutually agree.
2.2 Delivery.
--------
(a) First Closing. At the First Closing, the Company will deliver to
-------------
Intel a certificate or certificates representing the number of Shares designated
on the Schedule of Purchasers to be purchased by Intel, against payment of the
purchase price therefor, by check or wire transfer, in the amount specified on
the Schedule of Purchasers.
(b) Second Closing. At the Second Closing, the Company will deliver
--------------
to each of Warburg and Crosspoint a certificate or certificates representing the
number of Shares and a Series C Warrant evidencing the number of Series C
Warrants designated on the Schedule of Purchasers to be purchased by such
Purchaser, against payment of the purchase price therefor, by check or wire
transfer, in the amount specified on the Schedule of Purchasers. At the Second
Closing, the Company will also deliver to Intel a Series C Warrant evidencing
the number of Series C Warrants designated on the Schedule of Purchasers
purchased by Intel.
SECTION 3
Representations and Warranties of the Company
---------------------------------------------
The Company hereby represents and warrants, subject to such exceptions as
are specifically disclosed in the disclosure letter (referencing the appropriate
section and paragraph numbers) supplied by the Company and attached hereto as
Exhibit F (the "DISCLOSURE LETTER") and dated as of the date hereof, as follows:
- ---------
3.1 Organization of the Company. Each of the Company and its wholly-owned
---------------------------
subsidiaries Covad Communications Company, a California corporation, and DIECA
Communications, Inc., a Virginia corporation (collectively, the "SUBSIDIARIES")
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Each of the Company and each of
the Subsidiaries has the corporate power to own its properties and to carry on
its business as now being conducted and as proposed to be conducted and is duly
qualified to do business and in good standing as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, assets (including intangible assets), financial
condition, results of operations or prospects of the Company and the
Subsidiaries, taken as a whole (hereinafter referred to as a "MATERIAL ADVERSE
EFFECT"). The Company has delivered a true and correct copy of its Certificate
of Incorporation and Bylaws, each as amended to date, to the Purchasers.
-4-
<PAGE>
3.2 Company Capital Structure.
-------------------------
(a) The authorized capital stock of the Company consists of 30,000,000
shares of authorized Common Stock, $.001 par value, of which 3,787,068 shares
are issued and outstanding, and 15,000,000 shares of Preferred Stock, $.001 par
value, of which 250,000 shares are designated Series A Preferred Stock, all of
which are outstanding, 5,700,001 shares are designated Series B Preferred, all
of which are outstanding, and 3,716,429 shares are designated Series C
Preferred, none of which are outstanding (collectively, the "COMPANY CAPITAL
STOCK"). All outstanding shares of Company Capital Stock are duly authorized,
validly issued, fully paid and non-assessable, are not subject to preemptive
rights created by statute, the Certificate of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is bound
and have been issued in compliance with federal and state securities laws. The
Company has no other capital stock authorized, issued or outstanding.
(b) The Series C Preferred to be purchased by the Purchasers
hereunder, when issued, sold and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, the Series C Preferred
issuable upon exercise of the Series C Warrants, when issued, sold and delivered
in accordance with the terms of the Series C Warrants for the consideration
expressed therein, and the Common Stock issuable upon exercise of the Common
Warrants when issued, sold and delivered in accordance with the terms of the
Common Warrants for the consideration expressed therein and the Series C
Warrants and the Common Warrants when issued, sold and delivered in accordance
with the terms of the Agreement for the consideration expressed herein, will be
duly and validly issued, fully paid and nonassessable, and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and any Related Agreement (as defined in Section 3.4 hereof) and under
applicable state and federal securities laws. The Common Stock issuable upon
conversion of the Series C Preferred being purchased under this Agreement and
issuable upon exercise of the Series C Warrants and issuable upon exercise of
the Common Warrants has been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Certificate of Incorporation or the
Common Warrants, as applicable, will be duly and validly issued, fully paid and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and any Related Agreement and
under applicable state and federal securities laws.
(c) Except for the Company's 1997 Stock Option Plan (the "OPTION
PLAN"), the Company has never adopted or maintained any stock option plan or
other plan providing for equity compensation of any person. The Company has
reserved 1,756,750 shares of Company Capital Stock for issuance to employees,
directors and consultants pursuant to the Option Plan, 1,531,950 of which are
subject to outstanding options under the Option Plan. Except for the Series C
Warrants, the Common Warrants, and the warrants to purchase Common Stock to be
issued in connection with the High Yield Offering, there are no options,
warrants, calls, rights, commitments or agreements of any character, written or
oral, to which the Company is a party or by which it is bound obligating the
Company to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of the
Company or obligating the Company to grant, extend, accelerate the vesting of,
change the price of, otherwise amend or enter into any such option, warrant,
call, right, commitment or agreement. There are no outstanding or authorized
stock appreciation,
-5-
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phantom stock, profit participation, or other similar rights with respect to the
Company. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting stock of the Company.
3.3 Subsidiaries. The Company does not have, and never has had, any
------------
subsidiaries or affiliated companies other than the Subsidiaries and does not
otherwise own, and has not otherwise owned, any shares in the capital of or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture, limited liability company or other
business entity. The Company owns all outstanding shares of stock of the
Subsidiaries, free and clear of all liens, pledges, charges, claims, restriction
on transfer, mortgages, security interests or other encumbrances of any sort
(collectively, "LIENS"). All outstanding shares of the Subsidiaries are owned
by the Company and are duly authorized, validly issued, fully paid and
nonassessable. There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which any Subsidiary is a party
or by which it is bound obligating such Subsidiary to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of any Subsidiary or obligating any
Subsidiary to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement.
3.4 Authority. The Company has all requisite power and authority to enter
---------
into this Agreement, the Series C Warrants, the Common Warrants, and each of the
Related Agreements to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement,
the Series C Warrants, the Common Warrants and the Related Agreements and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Company, and no
further action is required on the part of the Company or any of their respective
officers, directors, or stockholders to authorize the Agreement, the Series C
Warrants, the Common Warrants, the Related Agreements and the transactions
contemplated hereby and thereby. This Agreement, the Series C Warrants, the
Common Warrants and the Related Agreements have been duly executed and delivered
by the Company and, assuming the due authorization, execution and delivery by
the other parties hereto and thereto, constitute the valid and binding
obligation of the Company, enforceable in accordance with their respective
terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies. The "RELATED
AGREEMENTS" shall mean all such ancillary agreements required in this Agreement
to be executed and delivered in connection with the transactions contemplated
hereby, including the Amended and Restated Stockholder Rights Agreement.
3.5 No Conflict. The execution and delivery of this Agreement, the Series
-----------
C Warrants, the Common Warrants and the Related Agreements by the Company do
not, and the consummation of the transactions contemplated hereby and thereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "CONFLICT") (i) any provision of
the Certificate or Articles of Incorporation and Bylaws of the Company or any
Subsidiary, (ii) any mortgage, indenture, lease, contract or other agreement
-6-
<PAGE>
or instrument, permit, concession, franchise or license to which the Company or
any Subsidiary or any of their respective properties or assets are subject, or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or the Subsidiaries or their respective properties or
assets.
3.6 Consents. No consent, waiver, approval, order or authorization of, or
--------
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("GOVERNMENTAL ENTITY") or any
third party, including a party to any agreement with the Company or any
Subsidiary (so as not to trigger any Conflict), is required by or with respect
to the Company or any Subsidiary in connection with the execution and delivery
of this Agreement, the Series C Warrants, the Common Warrants and the Related
Agreements or the consummation of the transactions contemplated hereby and
thereby, except for such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
securities laws, which will be timely filed within the applicable periods
therefor. The Company has not offered shares of its Series C Preferred or any
substantially similar securities of the Company for sale to, or solicited any
offers to buy from, or otherwise approached or negotiated in respect thereof
with, any person other than the Purchasers, and the Company will not take any
action that will cause the issuance and delivery of the shares of its Series C
Preferred and Common Stock as contemplated hereby to constitute a violation of
the Securities Act or the California Corporate Securities Law of 1968, as
amended.
3.7 Company Financial Statements. Section 3.7 of the Disclosure Letter
----------------------------
sets forth the Company's balance sheets as of December 31, 1997, (the "CURRENT
BALANCE SHEET") and the related audited statements of income and cash flow for
the twelve-month period ended December 31, 1997, (collectively the "COMPANY
FINANCIALS"). The Company Financials are correct in all material respects and
have been prepared in accordance with U.S. generally accepted accounting
principles consistent with the reporting practices and principles ("GAAP"),
applied on a basis consistent throughout the periods indicated and consistent
with each other. The Company Financials present fairly the financial condition,
operating results and cash flows of the Company as of the dates and during the
periods indicated therein.
3.8 No Undisclosed Liabilities. Except as set forth in Section 3.8 of the
--------------------------
Disclosure Letter, the Company does not have any liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with GAAP),
which individually or in the aggregate (i) has not been reflected in the Current
Balance Sheet, or (ii) has not arisen in the ordinary course of business
consistent with past practices since December 31, 1997.
3.9 No Changes. Except as set forth in Section 3.9 of the Disclosure
----------
Letter or as contemplated by this Agreement, since December 31, 1997, there has
not been, occurred or arisen any:
(a) transaction by the Company or any Subsidiary except in the
ordinary course of business as conducted on that date and consistent with past
practices;
-7-
<PAGE>
(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company or the Articles of Incorporation or Bylaws of any
Subsidiary;
(c) capital expenditure or commitment by the Company or the
Subsidiaries, either individually or in the aggregate, exceeding $50,000.
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company or the Subsidiaries (whether or not covered by
insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company or the
Subsidiaries;
(g) revaluation by the Company or the Subsidiaries of any of their
respective assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company Capital Stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
Common Stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company or the Subsidiaries to any of their respective officers,
directors, employees or advisors, or the declaration, payment or commitment or
obligation of any kind for the payment, by the Company or the Subsidiaries of a
bonus or other additional salary or compensation to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"COMPANY AGREEMENT") or any extension or modification the terms of any Company
Agreement which (i) involves the payment by the Company or the Subsidiaries of
greater than $50,000 per annum or which extends for more than one (1) year, (ii)
involves any payment or obligation to any affiliate of the Company, or (iii)
involves the sale of any material assets of the Company or the Subsidiaries;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company or the Subsidiaries, or any creation of any security
interest in such assets or properties except in the ordinary course of business
as conducted on that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company or any Subsidiary is a party or by which it is
bound;
(m) loan by the Company or any Subsidiary to any person or entity,
incurring by the Company or any Subsidiary of any indebtedness, guaranteeing by
the Company or any Subsidiary of any indebtedness, issuance or sale of any debt
securities of the Company or any Subsidiary or guaranteeing
-8-
<PAGE>
of any debt securities of others, except for advances to employees for travel
and business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company or any
Subsidiary, including any write-off or other compromise of any account
receivable of the Company or such Subsidiary;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against the Company or the Subsidiaries or their
respective affairs;
(p) notice of any claim of ownership by a third party of any
Intellectual Property (as defined in Section 3.13 below) of the Company or the
Subsidiaries or of infringement by the Company or any Subsidiary of any third
party's Intellectual Property rights;
(q) issuance or sale, or contract to issue or sell, by the Company or
any Subsidiary of any of its shares of capital stock, or securities
exchangeable, convertible or exercisable therefor, or of any other of its
securities except pursuant to the Company's incentive stock plans;
(r) change in pricing or royalties set or charged by the Company or
any Subsidiary to their respective customers or licensees or in pricing or
royalties set or charged by persons who have licensed Intellectual Property (as
defined in Section 3.13 below) to the Company or the Subsidiaries;
(s) any event or condition of any character that has had a Material
Adverse Effect on the Company or the Subsidiaries; or
(t) negotiation or agreement by the Company or any Subsidiary or any
officer or employees thereof to do any of the things described in the preceding
clauses (a) through (s) (other than negotiations with the Purchasers and their
representatives regarding the transactions contemplated by this Agreement).
3.10 Tax Matters. Each of the Company and the Subsidiaries has timely
-----------
filed all tax returns and reports (federal, state and local) as required by law.
These returns and reports are true and correct in all material respects. The
Company and the Subsidiary have paid all taxes and other assessments due, except
those contested by them in good faith and which are described in Section 3.10 of
the Disclosure Letter. The provision for taxes of the Company or the
Subsidiaries as shown in the Financial Statements is adequate for taxes due or
accrued as of the date thereof. Neither the Company nor any Subsidiary has
elected pursuant to the Internal Revenue Code of 1986, as amended ("CODE"), to
be treated as an S corporation or a collapsible corporation pursuant to Section
1362(a) or Section 341(f) of the Code, nor have they made any other elections
pursuant to the Code (other than elections that relate solely to methods of
accounting, depreciation, or amortization) that would have a material effect on
the business, properties, prospects, or financial condition of the Company and
the Subsidiaries, taken as a whole. Neither the Company nor the Subsidiaries has
ever had any tax deficiency proposed or assessed against it, nor have they
executed any waiver of any statute of limitations on the assessment or
collection of any
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<PAGE>
tax or governmental charge. None of the Company's or the Subsidiaries' federal
income tax returns and none of their state income or franchise tax or sales or
use tax returns have ever been audited by governmental authorities. Since the
date of the Financial Statements, the Company has made adequate provisions on
its books of account for all taxes, assessments, and governmental charges with
respect to its business, properties, and operations for such period. The Company
and the Subsidiaries have withheld or collected from each payment made to each
of its employees, the amount of all taxes, including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes required to be withheld or collected therefrom, and
have paid the same to the proper tax receiving officers or authorized
depositaries. Neither the Company nor any Subsidiary is a real property holding
corporation within the meaning of Section 897(c)(2) of the Code and any
regulations promulgated thereunder.
3.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompetition or otherwise), commitment, judgment, injunction, order or decree
to which the Company or any Subsidiary is a party or otherwise binding upon the
Company or any Subsidiary that has or may have the effect of prohibiting or
impairing any business practice of the Company or the Subsidiaries, any
acquisition of property (tangible or intangible) by the Company or the
Subsidiaries or the conduct of business by the Company or the Subsidiaries.
Without limiting the foregoing, neither the Company nor any Subsidiary has
entered into any agreement under which the Company or such Subsidiary is
restricted from manufacturing or selling any product or providing services to
customers or potential customers or any class of customers, in any geographic
area, during any period of time or in any segment of the market.
3.12 Title of Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) Neither the Company nor any Subsidiary owns any real property, nor
has either the Company or any Subsidiary ever owned any real property. Section
3.12(a) of the Disclosure Letter sets forth a list of all real property
currently leased by the Company or the Subsidiaries, the name of the lessor, the
date of the lease and each amendment thereto and, with respect to any current
lease, the aggregate annual rental and/or other fees payable under any such
lease. All such current leases are in full force and effect, are valid and
effective in accordance with their respective terms, and there is not, under any
of such leases, any existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a default).
(b) The Company and the Subsidiaries have good and valid title to, or,
in the case of leased properties and assets, valid leasehold interests in, all
of their respective tangible properties and assets, real, personal and mixed,
used or held for use in their respective businesses, free and clear of any
Liens, except as reflected in the Current Balance Sheet and except for liens for
taxes not yet due and payable and such imperfections of title and encumbrances,
if any, which are not material in character, amount or extent, and which do not
detract from the value, or interfere with the present use, of the property
subject thereto or affected thereby.
3.13 Intellectual Property. To the knowledge of the Company, the Company
---------------------
or the Subsidiaries own and possess or are licensed under all patents, patent
applications, licenses, trademarks,
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<PAGE>
trade secrets, trade names, brand names, inventions and copyrights or other
proprietary rights ("INTELLECTUAL PROPERTY") employed in the operation of their
respective businesses as now conducted, and as currently planned to be
conducted, and to the knowledge of the Company, with no infringement of or
conflict with the rights of others respecting any of the same. Section 3.13 of
the Disclosure Letter sets forth all of the patents applied for by the Company
as of the date hereof. Neither the Company nor any Subsidiary has received any
communications alleging that the Company or any Subsidiary has violated any of
the Intellectual Property of any other person or entity, nor is the Company
aware of any basis for the foregoing. Reasonable security measures have been
taken by the Company and the Subsidiaries to protect the secrecy,
confidentiality and value of the Company's and the Subsidiaries' trade secrets,
including their respective know-how, technology, concepts and other technical
data for the development, processing, manufacture and sale of its products. Each
employee of and consultant to the Company or the Subsidiaries has executed an
invention assignment and confidentiality agreement substantially in the form
provided to the Purchasers.
3.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth on Section 3.14(a) of the Disclosure Letter or
the Financial Statements, neither the Company nor any Subsidiary has or is bound
by:
(i) any contract, license or agreement to which the Company or
any Subsidiary is a party (A) with respect to Intellectual Property of the
Company licensed or transferred to any third party or (B) pursuant to which a
third party has licensed or transferred any Intellectual Property to the Company
or any Subsidiary, with a potential value or cost in excess of $50,000;
(ii) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization;
(iii) any agreement or plan, including, without limitation,
any stock option plan, stock appreciation rights plan or stock purchase plan,
any of the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement;
(iv) any fidelity or surety bond or completion bond;
(v) any lease of personal property with fixed annual rental
payments in excess of $50,000;
(vi) any contract, license or agreement between the Company
or any Subsidiary and any third party wherein or whereby the Company or such
Subsidiary has agreed to, or assumed, any obligation or duty to warrant,
indemnify, hold harmless or otherwise assume or incur any
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<PAGE>
obligation or liability with respect to the infringement or misappropriation by
the Company or such Subsidiary or such third party of the Intellectual Property
of any third party;
(vii) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company or any Subsidiary to engage in any
line of business or to compete with any person;
(viii) any agreement, contract or commitment relating to
capital expenditures and involving future payments in excess of $50,000;
(ix) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's or the Subsidiaries' businesses;
(x) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit;
(xi) any purchase order or contract for the purchase of
materials involving $50,000 or more;
(xii) any construction contracts;
(xiii) any distribution, joint marketing or development
agreement; or
(xiv) any other agreement, contract or commitment that
involves $50,000 or more or is not cancelable without penalty within thirty (30)
days.
(b) Each of the Company and each of the Subsidiaries is in compliance
with and has not breached, violated or defaulted under, or received notice that
it has breached, violated or defaulted under, any of the terms or conditions of
any agreement, contract, license or commitment to which it is a party or by
which it is bound (any such agreement, contract, license or commitment, a
"CONTRACT"), and neither the Company nor any Subsidiary is aware of any event
that would constitute such a breach, violation or default with the lapse of
time, giving of notice or both. Each Contract is in full force and effect and,
except as otherwise disclosed in Section 3.14(b) of the Disclosure Letter, to
the knowledge of the Company, all other parties to each Contract are in
compliance with, and have not breached any term of, such Contract. The Company
and the Subsidiaries have obtained, or will obtain prior to the Closing Date,
all necessary consents, waivers and approvals of parties to any Contract as are
required to remain in effect without modification after the Closing.
3.15 Interested Party Transactions. To the knowledge of the Company, no
-----------------------------
officer, director or stockholder of the Company or the Subsidiary (nor any
ancestor, sibling, descendant or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) any interest in any
entity that furnished or sold, or
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<PAGE>
furnishes or sells, services or products that the Company or any Subsidiary
furnishes or sells, or proposes to furnish or sell, or (ii) any interest in any
entity that purchases from or sells or furnishes to the Company or such
Subsidiary any goods or services or (iii) a beneficial interest in any Contract;
provided, however, that ownership of no more than one percent (1%) of the
outstanding voting stock of a publicly traded corporation and no more than five
percent (5%) of the outstanding equity of any other entity shall not be deemed
an "INTEREST IN ANY ENTITY" for purposes of this Section 3.15.
3.16 Governmental Authorization. The Company or one of the Subsidiaries
--------------------------
holds all consents, licenses, permits, grants or other authorizations by a
governmental entity (i) pursuant to which the Company or such Subsidiary
currently operates or holds any interest in any of its properties or (ii) which
is required for the operation of their business or the holding of any such
interest except where the failure to hold such consent, license, permit, grant
or other authorization would not have a Material Adverse Effect on the Company
and its Subsidiaries taken as a whole (herein collectively called "COMPANY
AUTHORIZATIONS"). The Company Authorizations are in full force and effect and
constitute all Company Authorizations required to permit the Company and its
Subsidiaries to operate or conduct their business or hold any interest in their
properties or assets, except where the failure to have such Company
Authorizations would not have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
3.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the knowledge of the Company, threatened against the Company or
any Subsidiary, their respective properties or any of their respective officers
or directors, nor, to the knowledge of the Company, is there any reasonable
basis therefor. There is no investigation pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary, their respective
properties or any of their respective officers or directors (nor, to the
knowledge of the Company, is there any reasonable basis therefor) by or before
any governmental entity. No governmental entity has at any time challenged or
questioned the legal right of the Company or any Subsidiary to conduct their
respective operations as presently or previously conducted.
3.18 Employees; Employee Compensation. To the Company's knowledge, there
--------------------------------
is no strike, labor dispute or union organization activities pending or
threatened between it and its employees. None of the Company's or the
Subsidiaries' employees belongs to any union or collective bargaining unit. To
the Company's knowledge, the Company and the Subsidiaries have complied in all
material respects with all applicable state and federal equal opportunity and
other laws related to employment. To the Company's knowledge, no employee of
the Company or any Subsidiary is or will be in violation of any judgment,
decree, or order, or any term of any employment contract, patent disclosure
agreement, or other contract or agreement relating to the relationship of any
such employee with the Company or such Subsidiary, or any other party because of
the nature of the business conducted or presently proposed to be conducted by
the Company or the Subsidiaries or to the use by the employee of his or her best
efforts with respect to such business. Neither the Company nor any Subsidiary
is a party to or bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement, or other employee compensation agreement. The Company is
not aware that any officer or key employee, or that any group of key employees,
intends to terminate
-13-
<PAGE>
their employment with the Company or a Subsidiary, nor do the Company or any
Subsidiary 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 or the
Subsidiaries is terminable at the will of the Company or any such Subsidiary.
3.19 Minute Books. The minute books of the Company and the Subsidiaries
------------
made available to counsel for Purchasers are the only minutes of the Company and
the Subsidiaries and contain a reasonably accurate summary of all meetings of
the Board of Directors (or committees thereof) of the Company and the
Subsidiaries and their respective stockholders or actions by written consent
since the incorporation of the Company and the Subsidiaries.
3.20 Environmental Matters.
---------------------
(a) Hazardous Material. Neither the Company nor any Subsidiary has:
(i) operated any underground storage tanks at any property that the Company or
such Subsidiary has at any time owned, operated, occupied or leased; or (ii)
illegally released any substance that has been designated by any Governmental
Entity or by applicable federal, state or local law to be radioactive, toxic,
hazardous or otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, and urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and Recovery
Act of 1976, as amended, and the regulations promulgated pursuant to said laws
(a "HAZARDOUS MATERIAL"), but excluding office and janitorial supplies properly
and safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company or any Subsidiary or, to the Company's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that the Company or any Subsidiary has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Neither the Company nor any
Subsidiary has transported, stored, used, manufactured, disposed of, released or
exposed its employees or others to Hazardous Materials in violation of any law
in effect on or before the date hereof, nor has the Company or any Subsidiary
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (any or all of the foregoing being collectively referred to
as "HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, regulation,
treaty or statute promulgated by any Governmental Entity in effect prior to or
as of the date hereof to prohibit, regulate or control Hazardous Materials or
any Hazardous Material Activity.
(c) Permits. The Company or a Subsidiary currently holds all
environmental approvals, permits, licenses, clearances and consents (the
"ENVIRONMENTAL PERMITS") necessary for the conduct of the Company's or the
Subsidiaries' Hazardous Materials Activities and other businesses of the Company
and the Subsidiaries as such activities and businesses are currently being
conducted except where the failure to hold such Environmental Permits would not
have a Material Adverse Effect on the Company and the Subsidiaries taken as a
whole.
-14-
<PAGE>
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company or the Subsidiaries.
The Company is not aware of any fact or circumstance which could involve the
Company or any Subsidiary in any environmental litigation or impose upon the
Company or such Subsidiary any environmental liability.
3.21 Brokers' and Finders' Fees; Third Party Expenses. Neither the Company
------------------------------------------------
nor any Subsidiary has incurred, nor will incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with the Agreement or any transaction contemplated hereby.
3.22 Registration Rights. Other than as granted pursuant to the
-------------------
Stockholder Rights Agreement, the Company has not granted or agreed to grant any
rights to register, as that term is defined in the Stockholder Rights Agreement,
including piggyback registration rights, to any person or entity.
3.23 No Interference or Conflict. To the knowledge of the Company, no
---------------------------
shareholder, officer, employee or consultant of the Company or any Subsidiary is
obligated under any contract or agreement or subject to any judgment, decree or
order of any court or administrative agency, that would interfere with such
person's efforts to promote the interests of the Company or the Subsidiaries or
that would interfere with the Company's or the Subsidiaries' business. Neither
the execution nor delivery of this Agreement, nor the carrying on of the
Company's or the Subsidiaries' business as presently conducted or proposed to be
conducted nor any activity of such officers, directors, employees or consultants
in connection with the carrying on of the Company's or the Subsidiaries'
business as presently conducted or proposed to be conducted, will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract or
agreement under which any of such officers, directors, employees or consultants
are currently bound.
3.24 Insurance. Section 3.24 of the Disclosure Letter lists all insurance
---------
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company and the
Subsidiaries. There is no claim by the Company or the Subsidiary pending under
any of such policies or bonds as to which coverage has been questioned, denied
or disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid, and the Company and
its Affiliates are otherwise in compliance with the terms of such policies and
bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company has no knowledge of any threatened termination of, or
premium increase with respect to, any of such policies.
3.25 Regulatory Matters.
------------------
(a) (i) The execution and delivery of this Agreement by the Company,
the performance of the Company's obligations hereunder, and the consummation of
the transactions contemplated hereby and thereby, do not violate (1) the
Communications Act of 1934 (the
-15-
<PAGE>
"COMMUNICATIONS ACT") or interpreted as of this date, (2) the Telecommunications
Act of 1996 (the "TELECOM ACT OF 1996") or interpreted as of this date, (3) any
rules or regulations of the Federal Communications Commission (the "FCC")
applicable to the Company or the Subsidiary or interpreted as of this date, or
(4) any rules or regulations of the California Public Utilities Commission, New
York Public Service Commission, Massachusetts Department of Public Utilities,
Washington Utilities and Transportation Commission, Illinois Commerce Commission
or the Oregon Public Utilities Commission (the "STATE COMMISSIONS") or
interpreted as of this date, and (ii) no authorization of or filing with the FCC
or any of the State Commissions is necessary for the execution and delivery of
this Agreement by the Company and consummation of the transactions contemplated
hereby in accordance with the terms hereof;
(b) (i) The Company and each Subsidiary in all material respects (1)
have made all reports and filings, and paid all fees, required by the FCC and
any of the State Commissions; and (2) have all certificates, orders, permits,
licenses, authorizations, consents and approvals of and from, and have made all
filings and registrations with, the FCC and any of the State Commissions
necessary to own, lease, license and use their properties and assets and to
conduct their businesses as presently conducted and as proposed to be conducted;
and (ii) neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificates,
orders, permits, licenses, authorizations, consents or approvals, or the
qualification or rejection of any such filing or registration, the effect of
which would have a Material Adverse Effect on the Company and the Subsidiaries
taken as a whole;
(c) To the Company's knowledge, neither the Company nor any Subsidiary
is in violation of, or in default under, the Communications Act, as amended by
the Telecom Act of 1996, the rules or regulations of the FCC, or the rules or
regulations of any of the State Commissions, the effect of which, singly or in
the aggregate, would have a Material Adverse Effect on Company and the
Subsidiaries taken as a whole; and
(d) (i) no decree or order of the FCC or any of the State Commissions
is outstanding against the Company or the Subsidiary and (ii) to the Company's
knowledge, no formal litigation, proceeding, inquiry or investigation has been
commenced or threatened, and no formal notice of violation or order to show
cause has been issued, against the Company or the Subsidiary before the FCC or
any of the State Commissions.
3.26 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by the Purchasers or their counsel.
3.27 Representations Complete. None of the representations or warranties
------------------------
made by the Company (as modified by the Disclosure Letter), nor any statement
made in any schedule or certificate furnished by the Company pursuant to this
Agreement, contains any untrue statement of a material fact, or omits to state
any material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
-16-
<PAGE>
SECTION 4
Representations and Warranties of the Purchasers
------------------------------------------------
Each Purchaser, severally but not jointly, hereby represents and warrants
to the Company with respect to its purchase of the Shares, the Series C Warrants
and the Common Warrants, as follows:
4.1 Investment Representations and Covenants of the Purchasers.
----------------------------------------------------------
(a) This Agreement is made by the Company with each Purchaser in
reliance upon such Purchaser's representations and covenants made in this
Section 4, which by its execution of this Agreement each Purchaser hereby
confirms. Such Purchaser represents that the Shares, the Common Warrants and
the Series C Warrants to be received will be acquired for investment for its own
account, not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, and that it has no present intention of
selling, granting any participation in or otherwise distributing the same.
(b) Such Purchaser understands and acknowledges that the offering of
the Shares, the Common Warrants and the Series C Warrants pursuant to this
Agreement will not, and any issuance of Common Stock on conversion or exercise
thereof may not, be registered under the Securities Act on the ground that the
sale provided for in this Agreement and the issuance of securities hereunder is
exempt pursuant to Section 4(2) of the Securities Act, and that the Company's
reliance on such exemption is predicated on the Purchasers' representations set
forth herein.
(c) Such Purchaser represents that it is experienced in evaluating
companies such as the Company, is able to fend for itself in transactions such
as the one contemplated by this Agreement, has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of its prospective investment in the Company.
(d) Such Purchaser acknowledges and understands that the Shares, the
Common Warrants and the Series C Warrants, and any Common Stock acquired upon
the conversion or exercise thereof, must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available, and that, except as otherwise provided in the Related
Agreements, the Company is under no obligation to register either the Shares,
the Common Warrants and the Series C Warrants or Common Stock issuable upon
conversion or exercise thereof.
(e) Such Purchaser acknowledges that it has received and reviewed a
copy of Rule 144 promulgated under the Securities Act, which permits limited
public resales of securities acquired in a non-public offering, subject to the
satisfaction of certain conditions. Such Purchaser understands that before the
Shares, or any Common Stock issued upon conversion thereof, may be sold under
Rule 144, the following conditions must be fulfilled, except as otherwise
described below: (i) certain public information about the Company must be
available; (ii) the sale must occur at least one year after the later of the
date the Shares were sold by the Company or the date they were sold by an
-17-
<PAGE>
affiliate of the Company; (iii) the sale must be made in a broker's transaction;
and (iv) the number of Shares sold must not exceed certain volume limitations.
If, however, the sale occurs at least two years after the Shares were sold by
the Company or an affiliate of the Company, and if the Purchaser is not an
affiliate of the Company, the foregoing conditions will not apply. The
Purchaser understands that the time period for resale of Shares or Common Stock
issued upon exercise of the Common Warrants or the Series C Warrants does not
begin until the Warrants are exercised unless the net exercise provisions of the
Warrants are used. Such Purchaser understands that the current information
referred to above is not now available and the Company has no present plans to
make such information available.
(f) Such Purchaser acknowledges that in the event the applicable
requirements of Rule 144 are not met, registration under the Securities Act or
compliance with another exemption from registration will be required for any
disposition of its stock. Such Purchaser understands that although Rule 144 is
not exclusive, the Securities and Exchange Commission has expressed its opinion
that persons proposing to sell restricted securities received in a private
offering other than in a registered offering or pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales and that such persons and the brokers who
participate in the transactions do so at their own risk.
(g) Such Purchaser covenants that, in the absence of an effective
registration statement covering the stock in question, it will sell, transfer or
otherwise dispose of the Shares, the Common Warrants, the Common Warrants and
any Common Stock issued on conversion or exercise thereof only in a manner
consistent with its representations and covenants set forth in this Section. In
connection therewith such Purchaser acknowledges that the Company shall make a
notation on its stock books regarding the restrictions on transfer set forth in
this Section and shall transfer shares and warrants on the books of the Company
only to the extent not inconsistent therewith.
(h) Such Purchaser represents that it is an "ACCREDITED INVESTOR" as
such term is defined in Rule 501 under the Securities Act.
4.2 No Public Market. Such Purchaser understands that no public market
----------------
now exists for any of the securities issued by the Company.
4.3 Domicile. Warburg, Pincus Ventures, L.P. is domiciled in the state of
--------
New York. The remainder of the Purchasers are domiciled in the state of
California.
4.4 Authority. Each Purchaser has all requisite power and authority to
---------
enter into this Agreement, the Series C Warrants, the Common Warrants, and each
of the Related Agreements to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement, the Series C Warrants (in the case of Warburg and Crosspoint),
the Common Warrants and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate or partnership action on the part of the Purchaser, and no
further action is required on the part of the Purchaser, or any of Purchaser's
respective officers, directors, stockholders, limited partners or general
partners, to authorize the Agreement, the
-18-
<PAGE>
Series C Warrants, the Common Warrants, the Related Agreements and the
transactions contemplated hereby and thereby. This Agreement and the Related
Agreements have been duly executed and delivered by the Purchaser and, assuming
the due authorization, execution and delivery by the Company, constitute the
valid and binding obligation of the Purchaser, enforceable in accordance with
their respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and to rules of law governing
specific performance, injunctive relief or other equitable remedies.
SECTION 5
Conditions to Closing of Purchasers
-----------------------------------
5.1 Conditions to Closing of Intel. Intel's obligations to purchase the
------------------------------
Shares at the First Closing and, if applicable, the Series C Warrants at the
Second Closing are, at the option of Intel, subject to the fulfillment on or
prior to the First Closing Date of the following conditions:
(a) Opinion of Company's Counsel. Intel shall have received from
----------------------------
counsel to the Company an opinion addressed to it in a form customary for
preferred equity venture financings, dated the First Closing Date, in the form
of Exhibit G-1.
-----------
(b) Blue Sky. The Company shall have obtained all necessary Blue Sky
--------
law permits and qualifications, or secured an exemption therefrom, required by
any state for the offer and sale of the Shares and the Common Stock issuable
upon conversion of the Shares.
(c) Certificate of Incorporation. The Amended Certificate of
----------------------------
Incorporation shall have been filed with the Secretary of State of the State of
Delaware prior to the First Closing.
(d) Stock Certificates. The Company shall have delivered to Intel a
------------------
certificate for the number of shares of Series C Preferred set forth opposite
its name on the Schedule of Purchasers.
(e) High Yield Offering. The Company shall have completed the High
-------------------
Yield Offering on or before April 30, 1998 on terms approved by the Board of
Directors of the Company with aggregate gross proceeds of at least $100,000,000.
(f) Equity Commitment. This Agreement shall not have been terminated
-----------------
by either the Company, Warburg or Crosspoint and the obligations of the Company,
Warburg and Crosspoint hereunder shall continue to be in full force and effect.
5.2 Conditions to Closing of Warburg and Crosspoint. Warburg's and
-----------------------------------------------
Crosspoint's respective obligations to purchase the Shares and the Series C
Warrants at the Second Closing are, at the option of each such Purchaser,
subject to the fulfillment on or prior to the Second Closing Date of the
following conditions:
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<PAGE>
(a) Opinion of Company's Counsel. Such Purchasers shall have received
----------------------------
from counsel to the Company, an opinion addressed to them, dated the Second
Closing Date, in the form of Exhibit G-2.
-----------
(b) Blue Sky. The Company shall have obtained all necessary Blue Sky
--------
law permits and qualifications, or secured an exemption therefrom, required by
any state for the offer and sale of the Shares and the Series C Warrants and the
Common Stock issuable upon conversion of the Shares and the Series C Warrants.
(c) Certificate of Incorporation. The Amended Certificate of
----------------------------
Incorporation shall have been filed with the Secretary of State of the State of
Delaware prior to the Closing.
(d) Stock Certificates and Series C Warrants. The Company shall have
----------------------------------------
delivered to such Purchaser a certificate for the number of shares of Series C
Preferred and a Series C Warrant for the number of Series C Warrants set forth
opposite such Purchaser's name on the Schedule of Purchasers.
(e) High Yield Offering. The Company shall have completed the High
-------------------
Yield Offering on or before April 30, 1998 on terms approved by the Board of
Directors of the Company with aggregate gross proceeds of at least $100,000,000.
SECTION 6
Conditions to Closing of Company
--------------------------------
There shall be no conditions to the Company's obligation to sell and issue
the Series C Preferred to Intel at the First Closing and the Series C Warrants
to Intel at the Second Closing, and there shall be no conditions to the
Company's obligation to sell and issue the Series C Preferred and the Series C
Warrants to Warburg and Crosspoint at the Second Closing if the Company has
delivered the Exercise Notice.
SECTION 7
Miscellaneous
-------------
7.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of California as applied to contracts entered into solely
between residents of and to be performed entirely in such state.
7.2 Survival. The representations, warranties, covenants and agreements
--------
made herein shall survive any investigation made by any Purchaser and the
closing of the transactions contemplated hereby. Each Purchaser hereby agrees
and acknowledges that the representations and warranties of the
-20-
<PAGE>
Company shall only be made as of the date of the Agreement and shall not be made
as of any subsequent date, including but not limited to as of any closing.
7.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto,
provided, however, that the obligations of a Purchaser to purchase Shares and
Series C Warrants shall not be assignable.
7.4 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
7.5 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service or
five days after deposit with the United States mail, by registered or certified
mail, postage prepaid, addressed (a) if to a Purchaser, at such Purchaser's
address set forth in Exhibit A, or at such other address as such Purchaser shall
---------
have furnished to the Company in writing, or (b) if to any other holder of any
Shares or Series C Warrants, at such address as such holder shall have furnished
the Company in writing, or, until any such holder so furnishes an address to the
Company, then to and at the address of the last holder of such Shares or Series
C Warrants who has so furnished an address to the Company, or (c) if to the
Company to its address set forth on the cover page of this Agreement and
addressed to the attention of the Corporate Secretary, or at such other address
as the Company shall have furnished to the Purchasers.
7.6 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any holder of any Shares or Series C Warrants, upon
any breach or default of the Company under this Agreement, shall impair any such
right, power or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiescence therein, or of or in any
similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any holder of any breach or default under
this Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
7.7 California 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 THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL UNLESS AN
-21-
<PAGE>
EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO
THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
OR SUCH EXEMPTION BEING AVAILABLE.
7.8 Expenses. The Company and the Purchasers shall each bear their own
--------
expenses and legal fees with respect to this Agreement and the transactions
contemplated hereby; provided the Company will pay at the execution of this
Agreement the reasonable legal fees and expenses of the Purchasers, including
the reasonable legal fees and expenses of counsel to Intel (up to a maximum of
$20,000).
7.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Purchasers,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
7.10 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
7.11 Gender. The use of the neuter gender herein shall be deemed to
------
include the masculine and the feminine gender, if the context so requires.
7.12 Confidentiality. Each party hereto agrees that, except with the prior
---------------
written permission of the other parties, it shall at all times keep confidential
and not divulge, furnish or make accessible to anyone any confidential
information, knowledge or data concerning or relating to the business or
financial affairs of the other parties to which such party has been or shall
become privy by reason of this Agreement.
7.13 Enforceability; Specific Performance; Damages. Each of the Purchasers
---------------------------------------------
acknowledges that (i) the commitment of the Purchaser to purchase Series C
Preferred and, in the case of Warburg and Crosspoint, Series C Warrants
contained in this Agreement is required for the Company to complete the High
Yield Offering; (ii) the Company has relied on such commitment in completing the
High Yield Offering; and (iii) a breach of any commitment or any other provision
of this Agreement will result in irreparable harm and damages to the Company
which cannot be adequately compensated by a monetary award. Accordingly, it is
expressly agreed that in addition to all other remedies available at law or in
equity, including a remedy for damages, the Company shall be entitled to the
immediate remedy of such other form of injunctive or equitable relief as may be
used by any court of competent jurisdiction to specifically enforce the
provisions hereof.
7.14 Jurisdiction and Venue. Each party agrees that the Federal courts for
----------------------
the Northern District of California [San Jose] shall have the exclusive
jurisdiction and venue for any disputes under this Agreement including the
Company's rights under Section 7.13. Each Purchaser hereby consents to the
personal jurisdiction in such Northern District of California [San Jose]. Each
Purchaser agrees
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<PAGE>
that a judgment in such courts shall be enforceable in any other jurisdiction
where Purchaser may reside or be located.
7.15 Termination. This Agreement may not be terminated by any Purchaser or
-----------
the Company, except that the Company or any Purchaser may terminate this
------ ----
Agreement upon written notice of such party to all other parties (i) at any time
after April 30, 1998, if the High Yield Offering has not been completed by such
date or (ii) solely with respect to the obligations of the Company and Warburg
and Crosspoint with respect to their respective obligations under Section 1.3
hereof, at any time after the closing of the High Yield Offering if the Company
has completed a Replacement Financing.
-23-
<PAGE>
The foregoing Series C Preferred Stock and Warrant Subscription Agreement
is hereby executed as of the date first above written.
"COMPANY" COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By: /s/ Charles J. McMinn
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
PURCHASERS: WARBURG, PINCUS VENTURES, L.P.
By: Warburg Pincus & Co., its General
Partner
By: /s/ Henry Kressel
------------------------------
Partner
CROSSPOINT VENTURE PARTNERS 1996
By: /s/ Rich Shapero
------------------------------------
Name: Rich Shapero
---------------------------------
Title: General Partner
--------------------------------
INTEL CORPORATION
By: /s/ Arvind Sodhani
------------------------------------
Name: Arvind Sodhani
---------------------------------
Title: Treasurer
--------------------------------
-24-
<PAGE>
EXHIBIT A
---------
Schedule of Purchasers
----------------------
High Yield Commitment
<TABLE>
<CAPTION>
Number of Number of
Number of Shares of Series C
Common Stock Series C Preferred Aggregate
Name and Address Warrants Preferred Stock Warrants Purchase Price
- ------------------------------------- ------------ --------------- ---------- --------------
<S> <C> <C> <C> <C>
Warburg, Pincus Ventures, L.P. 451,773 1,537,105 1,261,200 $12,804,084.65
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue
New York, NY 10017-3147
Crosspoint Venture Partners 1996. 112,943 384,276 315,300 $ 3,201,019.08
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062
Intel Corporation 35,284 120,048 98,500 $ 999,999.84
2200 Mission College Boulevard
Mail Stop SC4-210
Santa Clara, CA 95052-8199
Attn: Treasurer
600,000 2,041,429 1,675,000 $17,005,103.57
</TABLE>
-25-
<PAGE>
EXHIBIT B
---------
Amended and Restated Certificate of Incorporation
(See Exhibit 3.1 to the Registration Statement)
<PAGE>
EXHIBIT C
Warrant No. PC-____
THIS WARRANT AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY SET FORTH HEREIN AND IN THE
STOCKHOLDER RIGHTS AGREEMENT, A COPY OF WHICH IS AVAILABLE FROM THE
SECRETARY OF THE COMPANY.
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGIS REGISTRATION IS NOT REQUIRED
UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION.
THE SALE OF THESE SECURITIES 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
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS SUCH SALE OR
TRANSFER IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
WARRANT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED
UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE
COMPANY AND LEGAL COUNSEL FOR THE COMPANY.
Void after _________, 200__
COVAD COMMUNICATIONS GROUP, INC.
WARRANT TO PURCHASE UP TO ____ SHARES OF SERIES C PREFERRED STOCK
__________
THIS CERTIFIES THAT, for value received, ____ is entitled at any time prior
to expiration of this Warrant to subscribe for and purchase up to ____ shares of
the fully paid and nonassessable Series C Preferred Stock of Covad
Communications Group, Inc., a Delaware corporation (hereinafter called the
"COMPANY"), at the price of $8.33 per share (such price and such other price as
shall result, from time to time, from the adjustments specified in paragraph 4
hereof is herein
<PAGE>
referred to as the "WARRANT PRICE"), subject to the provisions and upon the
terms and conditions hereinafter set forth. As used herein, the terms "SERIES C
PREFERRED" and "SHARES" shall mean the Company's presently authorized Series C
Preferred Stock, and any stock into or for which such Series C Preferred Stock
may hereafter be converted or exchanged, and the term "DATE OF GRANT" shall mean
____________, 199__.
1. TERM.
This Warrant is exercisable, in whole or in part, at any time and from
time to time from the Date of Grant through __________, 200__.
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT.
(a) Subject to paragraph 1 hereof, the purchase right represented by
this Warrant may be exercised by the Holder hereof, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
EXHIBIT A duly executed) at the principal office of the Company and (i) by the
payment to the Company, by check, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased,
or (ii) on or after the date on which the Company's Common Stock becomes
publicly traded or in conjunction with a Merger or Consolidation, by surrender
of the right to receive upon exercise hereof a number of Shares equal to the
value (as determined below) of the Shares with respect to which this Warrant is
being exercised, in which case the number of shares to be issued to the Holder
upon such exercise shall be computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common to be issued to the Holder.
Y = the number of shares of Common with respect to which this Warrant
is being exercised.
A = the fair market value of one share of Common.
B = Warrant Price.
As used herein, "MERGER OR CONSOLIDATION" shall mean the merger or
consolidation of the corporation into or with another corporation in which this
corporation shall not survive and the stockholders of this corporation shall own
less than 50% of the voting securities of the surviving corporation or the sale,
transfer or lease (but not including a transfer or lease by pledge or mortgage
to a bona fide lender) of all or substantially all of the assets of the
corporation.
(b) As used herein, "FAIR MARKET VALUE OF ONE SHARE OF COMMON" shall
mean, as of any date, the value of Common Stock determined as follows:
-2-
<PAGE>
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, "fair market
value of one share of Common" shall be the closing sales price for such stock
(or the closing bid, if no sales were reported) as quoted on such exchange or
system for the last market trading day prior to the time of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, "fair market value of one
share of Common" shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable; or
(iii) In conjunction with a Merger or Consolidation, then the
"fair market value of one share of Common" shall be the value received by the
holders of the Company's Common Stock pursuant to such transaction for each
share of Common Stock, and such purchase shall be effective upon the closing of
such transaction, subject to the due, proper and prior surrender of this
Warrant; provided, however, that should such Merger or Consolidation or such
offering not be consummated, the Company shall refund to the holder the Warrant
Price and the Holder may exercise the purchase right represented by this
Warrant, in whole or in part, at any time and from time to time during the
remainder of its term.
(iv) In conjunction with the initial underwritten public offering of
the Company's Common Stock pursuant to a registration statement filed under the
Securities Act of 1933, the "fair market value of one share of Common" shall be
the price at which registered shares are sold to the public in such offering,
and such purchase shall be effective upon the date of such offering, subject to
the due, proper and prior surrender of this Warrant and the closing of the
offering.
(c) In the event of any exercise of the purchase right represented by
this Warrant, certificates for the shares of stock so purchased shall be
delivered to the holder hereof within thirty days of the effective date of such
purchase and, unless this Warrant has been fully exercised or expired, a new
Warrant representing the portion of the Shares, if any, with respect to which
this Warrant shall not then have been exercised shall also be issued to the
holder hereof within such thirty day period. Upon the effective date of such
purchase, the Holder shall be deemed to be the holder of record of the Shares,
notwithstanding that Certificates representing the Shares shall not then be
actually delivered to such Holder or that such Shares are not then set forth on
the stock transfer books of the Company.
3. STOCK FULLY PAID; RESERVATION OF SHARES.
All Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the
-3-
<PAGE>
purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its Series C Preferred to provide for
the exercise of the rights represented by this Warrant and of shares of Common
Stock issuable from time to time upon conversion of such Series C Preferred
Stock.
4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Warrant Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
(a) Reclassification or Merger. In case of any reclassification or
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corporation
(other than a merger with another corporation in which the Company is a
continuing corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company, the
Company shall, as condition precedent to such transaction, execute a new Warrant
or cause such successor or purchasing corporation, as the case may be, to
execute a new Warrant, providing that the holder of this Warrant shall have the
right to exercise such new Warrant and upon such exercise to receive, in lieu of
each share of Series C Preferred theretofore issuable upon exercise of this
Warrant, the kind and amount of shares of stock, other securities, money and
property receivable upon such reclassification, change or merger by a holder of
one share of Series C Preferred. Such new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph 4. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Series C Preferred, the Warrant Price shall be proportionately decreased in
the case of a subdivision or increased in the case of a combination.
(c) Stock Dividends. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend with respect to Series C
Preferred payable in, or make any other distribution with respect to Series C
Preferred (except any distribution specifically provided for in the foregoing
subparagraph (a) and (b)) of, Series C Preferred then the Warrant Price shall be
adjusted, from and after the date of determination of stockholders entitled to
receive such dividend or distribution, to that price determined by multiplying
the Warrant Price in effect immediately prior to such date of determination by a
fraction (a) the numerator of which shall be the total number of shares of
Series C Preferred outstanding immediately prior to such dividend or
distribution, and (b) the denominator of which shall be the total number of
shares of Series C Preferred outstanding immediately after such dividend or
distribution.
-4-
<PAGE>
(d) Adjustment of Number of Shares. Upon each adjustment in the
Warrant Price, the number of Shares of Series C Preferred purchasable hereunder
shall be adjusted, to the nearest whole share, to the product obtained by
multiplying the number of Shares purchasable immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator of which shall be
the Warrant Price immediately prior to such adjustment and the denominator of
which shall be the Warrant Price immediately thereafter.
5. NOTICE OF ADJUSTMENTS.
Whenever any Warrant Price shall be adjusted pursuant to paragraph 4
hereof, the Company shall make a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment was
calculated, and the Warrant Price or Prices after giving effect to such
adjustment, and shall cause copies of such certificate to be mailed (by first
class mail, postage prepaid) to the holder of this Warrant.
6. NOTICE OF CERTAIN ACTIONS. In the event that this corporation shall
propose at any time:
(a) to declare any dividend or distribution upon any class or series
of its stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights;
(c) to effect any reclassification or recapitalization of its Common
Stock outstanding involving a change in the Common Stock; or
(d) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its assets or property, or to
liquidate, dissolve or wind up, whether voluntary or involuntary;
(e) to amend or repeal any provision of, or add any provision to, the
Company's Certificate of Incorporation or Bylaws if such action would alter or
change the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, Series C Preferred or increase or decrease the
number of shares of the Series C Preferred authorized;
(f) to authorize or issue shares of any class or series of stock
having any preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of the Series C Preferred, or
authorize or issue any bonds, debentures, notes or other obligations convertible
into or exchangeable for, or having preferences or priority as to dividends or
assets superior to or on a parity with any such performance or priority of the
Series C Preferred;
-5-
<PAGE>
(g) to reclassify any Common Stock or Series C Preferred into shares
having any preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of the Series C Preferred;
then, in connection with each such event, this Company shall send to the holders
of the Warrants:
(1) at least 10 days' prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (a) and (b) above;
(2) in the case of the matters referred to in (c) through (g)
above, at least 10 days' prior written notice of the date for the determination
of stockholders entitled to vote thereon (and specifying the date on which the
holders of Common Stock shares shall be entitled to exchange their Common Stock
for securities or other property deliverable upon the occurrence of such event);
and
(3) prompt notice of any material change in the terms of the
transactions described in (a) through (g) above.
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Warrants at the
address for each such holder as shown on the books of this corporation.
7. FRACTIONAL SHARES.
No fractional shares of Series C Preferred will be issued in
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Warrant
Price then in effect.
8. COMPLIANCE WITH SECURITIES ACT; NON-TRANSFERABILITY OF WARRANT.
(a) Compliance with Securities Act. The holder of this Warrant, by
acceptance hereof, agrees that this Warrant and the shares of Series C Preferred
to be issued upon exercise hereof are being acquired for investment and that he
will not offer, sell or otherwise dispose of this Warrant or any shares of
Series C Preferred to be issued upon exercise hereof except under circumstances
which will not result in a violation of the Securities Act of 1933, as amended
(the "ACT"). Upon exercise of this Warrant, the holder hereof shall confirm in
writing, in a form of Exhibit B, that the shares of Series C Preferred so
purchased are being acquired for investment and not with a view toward
distribution or resale. In addition, the holder shall provide such additional
information regarding such holder's financial and investment background as the
Company may reasonably request. This Warrant and all shares of Series C
Preferred issued upon exercise of this Warrant (unless registered under the Act)
shall be stamped or imprinted with a legend in substantially the following form:
-6-
<PAGE>
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER INCLUDING A 180-DAY LOCKUP IN CONNECTION WITH
AN INITIAL PUBLIC OFFERING AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE STOCKHOLDER RIGHTS
AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES,
A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.
SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES."
(b) Non-transferability of Warrant. This Warrant and the shares
acquired upon exercise thereof may not be transferred or assigned in whole or in
part except in compliance with (i) the Amended and Restated Stockholder Rights
Agreement between the original Holder and the Company dated February ___, 1998
(the "STOCKHOLDER RIGHTS AGREEMENT") and (ii) applicable federal and state
securities laws.
(c) Stop-Transfer Notices. In order to ensure compliance with the
restrictions referred to herein, the Company may issue appropriate "stop
transfer" instructions to its transfer agent, if any, and, if the Company
transfers its own securities, it may make appropriate notations to the same
effect in its own records.
(d) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books the Warrant or any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Warrant or the
Stockholder Rights Agreement or (ii) to treat as owner of such Shares or to
accord the right to vote or pay dividends to any purchaser or other transferee
to whom such Shares shall have been so transferred.
9. RIGHTS OF STOCKHOLDERS.
No holder of the Warrant or Warrants shall be entitled to vote or
receive dividends or be deemed the holder of Series C Preferred or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the holder of this Warrant, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stock holders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon
-7-
<PAGE>
any recapitalization, issuance of stock, reclassification of stock, change of
par value or change of stock to no par value, consolidation, merger, conveyance,
or otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant or Warrants shall have been
exercised and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein.
10. REGISTRATION AND OTHER RIGHTS.
The shares of Series C Preferred obtained upon exercise of this
Warrant shall have the registration and other rights set forth in the
Stockholder Rights Agreement and, effective as of the Date of Grant, the term
"Registrable Securities" as defined in the Stockholder Rights Agreement shall
include the Common Stock issuable upon conversion of the Series C Preferred
obtained upon exercise of this Warrant.
11. GOVERNING LAW.
The terms and conditions of this Warrant shall be governed by and
construed in accordance with Delaware law.
12. MISCELLANEOUS.
The headings in this Warrant are for purposes of convenience and
reference only, and shall not be deemed to constitute a part hereof. Neither
this Warrant nor any term hereof may be changed, waived, discharged or
terminated orally but only by an instrument in writing signed by the Company and
the registered holder hereof. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first-class registered
or certified mail or recognized commercial courier service, postage prepaid, to
the address furnished to the Company in writing by the last holder of this
Warrant who shall have furnished an address to the Company in writing.
____________, 1998 COVAD COMMUNICATIONS GROUP, INC.
_________________________________
Signature of Authorized Signatory
_________________________________
Print Name and Title
-8-
<PAGE>
EXHIBIT C-A
NOTICE OF EXERCISE
TO: COVAD COMMUNICATIONS GROUP, INC.
1. The undersigned hereby elects to purchase ___________ shares of Series
C Preferred Stock of Covad Communications Group, Inc. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price of such
shares in full, together with all applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
Series C Preferred Stock in the name of the undersigned or in such other name as
is specified below:
_________________________________
(Name)
_________________________________
_________________________________
(Address)
3. The undersigned represents that the aforesaid shares of Series C
Preferred Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of
distributing or reselling such shares. In support thereof, the undersigned has
executed an Investment Representation Statement attached hereto as EXHIBIT B.
______________________________
Name of Warrantholder
______________________________
Signature of Authorized Signatory
______________________________
Print Name and Title
________________________
Date
<PAGE>
EXHIBIT C-B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER : ____
COMPANY : COVAD COMMUNICATIONS GROUP, INC.
SECURITY : SERIES C PREFERRED STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed securities and underlying
Common Stock (the "SECURITIES"), I, the Purchaser, represent to the Company the
following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("SECURITIES ACT").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities except as set forth in
the Stockholder Rights Agreement. In addition, I understand that the
certificate evidencing the Securities will be imprinted with a legend which
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel for the Company.
<PAGE>
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I further understand that at the time I wish to sell the Securities
there may be no public market upon which to make such a sale.
(f) I further understand that in the event all of the requirements of Rule
144 are not satisfied, registration under the Securities Act, compliance with
Regulation A, or some other registration exemption will be required; and that,
notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
_______________________________
Name of Purchaser
_______________________________
Signature of Authorized Signatory
_______________________________
Print Name and Title
_______________________________
Date
-2-
<PAGE>
EXHIBIT D
Warrant No. C-____
THIS WARRANT AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY SET FORTH HEREIN AND IN THE
STOCKHOLDER RIGHTS AGREEMENT, A COPY OF WHICH IS AVAILABLE FROM THE
SECRETARY OF THE COMPANY.
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION.
THE SALE OF THESE SECURITIES 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
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS SUCH SALE OR
TRANSFER IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
WARRANT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED
UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE
COMPANY AND LEGAL COUNSEL FOR THE COMPANY.
Void after February 20, 2003
COVAD COMMUNICATIONS GROUP, INC.
WARRANT TO PURCHASE UP TO ____ SHARES OF COMMON STOCK
__________
THIS CERTIFIES THAT, for value received, 3 is entitled at any time prior to
expiration of this Warrant to subscribe for and purchase up to 2 shares of the
fully paid and nonassessable Common Stock of Covad Communications Group, Inc., a
Delaware corporation (hereinafter called the "COMPANY"), at the price of $0.01
per share (such price and such other price as shall result, from time to time,
from the adjustments specified in paragraph 4 hereof is herein
<PAGE>
referred to as the "WARRANT PRICE"), subject to the provisions and upon the
terms and conditions hereinafter set forth. As used herein, the terms "COMMON
STOCK" and "SHARES" shall mean the Company's presently authorized Common Stock,
and the term "DATE OF GRANT" shall mean February 20, 1998.
1. TERM.
This Warrant is exercisable, in whole or in part, at any time and from
time to time from the Date of Grant through February 20, 2003; provided,
however, that this Warrant must be either exercised or the Warrant terminates
immediately before the closing of a firmly underwritten public offering of
Common Stock or other equity security of the Company; provided that the Company
has given the holder of this Warrant at least fifteen (15) days prior written
notice of such closing.
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT.
(a) Subject to paragraph 1 hereof, the purchase right represented by
this Warrant may be exercised by the Holder hereof, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
EXHIBIT A duly executed) at the principal office of the Company and (i) by the
payment to the Company, by check, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased,
or (ii) on or after the date on which the Company's Common Stock becomes
publicly traded or in conjunction with a Merger or Consolidation, by surrender
of the right to receive upon exercise hereof a number of Shares equal to the
value (as determined below) of the Shares with respect to which this Warrant is
being exercised, in which case the number of shares to be issued to the Holder
upon such exercise shall be computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common to be issued to the Holder.
Y = the number of shares of Common with respect to which this Warrant
is being exercised.
A = the fair market value of one share of Common.
B = Warrant Price.
As used herein, "MERGER OR CONSOLIDATION" shall mean the merger or
consolidation of the corporation into or with another corporation in which this
corporation shall not survive and the stockholders of this corporation shall own
less than 50% of the voting securities of the surviving corporation or the sale,
transfer or lease (but not including a transfer or lease by pledge or mortgage
to a bona fide lender) of all or substantially all of the assets of the
corporation.
-2-
<PAGE>
(b) As used herein, "FAIR MARKET VALUE OF ONE SHARE OF COMMON" shall
mean, as of any date, the value of Common Stock determined as follows:
(i) In conjunction with a Merger or Consolidation, then the "fair
market value of one share of Common" shall be the value received by the holders
of the Company's Common Stock pursuant to such transaction for each share of
Common Stock, and such purchase shall be effective upon the closing of such
transaction, subject to the due, proper and prior surrender of this Warrant;
provided, however, that should such Merger or Consolidation or such offering not
be consummated, the Company shall refund to the holder the Warrant Price and the
Holder may exercise the purchase right represented by this Warrant, in whole or
in part, at any time and from time to time during the remainder of its term.
(ii) In conjunction with the initial underwritten public offering
of the Company's Common Stock pursuant to a registration statement filed under
the Securities Act of 1933, the "fair market value of one share of Common" shall
be the price at which registered shares are sold to the public in such offering,
and such purchase shall be effective upon the date of such offering, subject to
the due, proper and prior surrender of this Warrant and the closing of the
offering.
(c) In the event of any exercise of the purchase right represented by
this Warrant, certificates for the shares of stock so purchased shall be
delivered to the holder hereof within thirty days of the effective date of such
purchase and, unless this Warrant has been fully exercised or expired, a new
Warrant representing the portion of the Shares, if any, with respect to which
this Warrant shall not then have been exercised shall also be issued to the
holder hereof within such thirty day period. Upon the effective date of such
purchase, the Holder shall be deemed to be the holder of record of the Shares,
notwithstanding that Certificates representing the Shares shall not then be
actually delivered to such Holder or that such Shares are not then set forth on
the stock transfer books of the Company.
3. STOCK FULLY PAID; RESERVATION OF SHARES.
All Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its Common Stock to
provide for the exercise of the rights represented by this Warrant.
-3-
<PAGE>
4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Warrant Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
(a) Reclassification or Merger. In case of any reclassification or
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corpora tion
(other than a merger with another corporation in which the Company is a
continuing corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company, the
Company shall, as condition precedent to such transaction, execute a new Warrant
or cause such successor or purchasing corporation, as the case may be, to
execute a new Warrant, providing that the holder of this Warrant shall have the
right to exercise such new Warrant and upon such exercise to receive, in lieu of
each share of Common Stock theretofore issuable upon exercise of this Warrant,
the kind and amount of shares of stock, other securities, money and property
receivable upon such reclassification, change or merger by a holder of one share
of Common Stock. Such new Warrant shall provide for adjustments which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this paragraph 4. The provisions of this subparagraph (a) shall similarly apply
to successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the Warrant Price shall be proportionately decreased in the
case of a subdivision or increased in the case of a combination.
(c) Stock Dividends. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend with respect to Common Stock
payable in, or make any other distribution with respect to Common Stock (except
any distribution specifically provided for in the foregoing subparagraph (a) and
(b)) of, shares of Common Stock, then the Warrant Price shall be adjusted, from
and after the date of determination of stockholders entitled to receive such
dividend or distribution, to that price determined by multiplying the Warrant
Price in effect immediately prior to such date of determination by a fraction
(a) the numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend or distribution, and (b) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
Warrant Price, the number of Shares of Common Stock purchasable hereunder shall
be adjusted, to the nearest whole share, to the product obtained by multiplying
the number of Shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction, the numerator of which shall be the
-4-
<PAGE>
Warrant Price immediately prior to such adjustment and the denominator of which
shall be the Warrant Price immediately thereafter.
5. NOTICE OF ADJUSTMENTS.
Whenever any Warrant Price shall be adjusted pursuant to paragraph 4
hereof, the Company shall make a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment was
calculated, and the Warrant Price or Prices after giving effect to such
adjustment, and shall cause copies of such certificate to be mailed (by first
class mail, postage prepaid) to the holder of this Warrant.
6. NOTICE OF CERTAIN ACTIONS. In the event that this corporation shall
propose at any time:
(a) to declare any dividend or distribution upon any class or series
of its stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(b) to effect any reclassification or recapitalization of its Common
Stock outstanding involving a change in the Common Stock; or
(c) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its assets or property, or to
liquidate, dissolve or wind up, whether voluntary or involuntary;
then, in connection with each such event, this Company shall send to the holders
of the Warrants:
(1) at least 10 days' prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (a) above;
(2) in the case of the matters referred to in (c) above, at least
10 days' prior written notice of the date for the determination of stockholders
entitled to vote thereon (and specifying the date on which the holders of Common
Stock shares shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event); and
(3) prompt notice of any material change in the terms of the
transactions described in (a) through (c) above.
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Warrants at the
address for each such holder as shown on the books of this corporation.
-5-
<PAGE>
7. FRACTIONAL SHARES.
No fractional shares of Common Stock will be issued in connection with
any exercise hereunder, but in lieu of such fractional shares the Company shall
make a cash payment therefor upon the basis of the Warrant Price then in effect.
8. COMPLIANCE WITH SECURITIES ACT; NON-TRANSFERABILITY OF WARRANT.
(a) Compliance with Securities Act. The holder of this Warrant, by
acceptance hereof, agrees that this Warrant and the shares of Common Stock to be
issued upon exercise hereof are being acquired for investment and that he will
not offer, sell or otherwise dispose of this Warrant or any shares of Common
Stock to be issued upon exercise hereof except under circumstances which will
not result in a violation of the Securities Act of 1933, as amended (the "ACT").
Upon exercise of this Warrant, the holder hereof shall confirm in writing, in a
form of Exhibit B, that the shares of Common Stock so purchased are being
acquired for investment and not with a view toward distribution or resale. In
addition, the holder shall provide such additional information regarding such
holder's financial and investment background as the Company may reasonably
request. This Warrant and all shares of Common Stock issued upon exercise of
this Warrant (unless registered under the Act) shall be stamped or imprinted
with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER INCLUDING A 180-DAY LOCKUP IN CONNECTION WITH
AN INITIAL PUBLIC OFFERING AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE STOCKHOLDER RIGHTS
AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES,
A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.
SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES."
(b) Non-transferability of Warrant. This Warrant and the shares
acquired upon exercise thereof may not be transferred or assigned in whole or in
part except in compliance with (i) the Amended and Restated Stockholder Rights
Agreement between the original Holder and the Company dated February 20, 1998
(the "STOCKHOLDER RIGHTS AGREEMENT") and (ii) applicable federal and state
securities laws.
-6-
<PAGE>
(c) Stop-Transfer Notices. In order to ensure compliance with the
restrictions referred to herein, the Company may issue appropriate "stop
transfer" instructions to its transfer agent, if any, and, if the Company
transfers its own securities, it may make appropriate notations to the same
effect in its own records.
(d) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books the Warrant or any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Warrant or the
Stockholder Rights Agreement or (ii) to treat as owner of such Shares or to
accord the right to vote or pay dividends to any purchaser or other transferee
to whom such Shares shall have been so transferred.
9. RIGHTS OF STOCKHOLDERS.
No holder of the Warrant or Warrants shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the holder of this Warrant, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stock holders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until the Warrant or Warrants shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
10. REGISTRATION AND OTHER RIGHTS.
The shares of Common Stock obtained upon exercise of this Warrant
shall have the registration and other rights set forth in the Stockholder Rights
Agreement and, effective as of the Date of Grant, the term "Registrable
Securities" as defined in the Stockholder Rights Agreement shall include the
Common Stock obtained upon exercise of this Warrant.
11. GOVERNING LAW.
The terms and conditions of this Warrant shall be governed by and
construed in accordance with Delaware law.
-7-
<PAGE>
12. MISCELLANEOUS.
The headings in this Warrant are for purposes of convenience and
reference only, and shall not be deemed to constitute a part hereof. Neither
this Warrant nor any term hereof may be changed, waived, discharged or
terminated orally but only by an instrument in writing signed by the Company and
the registered holder hereof. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first-class registered
or certified mail or recognized commercial courier service, postage prepaid, to
the address furnished to the Company in writing by the last holder of this
Warrant who shall have furnished an address to the Company in writing.
February 20, 1998 COVAD COMMUNICATIONS GROUP, INC.
_________________________________
Signature of Authorized Signatory
_________________________________
Print Name and Title
<PAGE>
EXHIBIT D-A
NOTICE OF EXERCISE
TO: COVAD COMMUNICATIONS GROUP, INC.
1. The undersigned hereby elects to purchase ___________ shares of Common
Stock of Covad Communications Group, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full, together with all applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
_________________________________
(Name)
_________________________________
_________________________________
(Address)
3. The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares. In support thereof, the undersigned has executed an Investment
Representation Statement attached hereto as EXHIBIT B.
______________________________
Name of Warrantholder
______________________________
Signature of Authorized Signatory
______________________________
Print Name and Title
________________________
Date
<PAGE>
EXHIBIT D-B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER : ____
COMPANY : COVAD COMMUNICATIONS GROUP, INC.
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed securities (the
"SECURITIES"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("SECURITIES ACT").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities except as set forth in
the Stockholder Rights Agreement. In addition, I understand that the
certificate evidencing the Securities will be imprinted with a legend which
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel for the Company.
<PAGE>
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I further understand that at the time I wish to sell the Securities
there may be no public market upon which to make such a sale.
(f) I further understand that in the event all of the requirements of Rule
144 are not satisfied, registration under the Securities Act, compliance with
Regulation A, or some other registration exemption will be required; and that,
notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
_______________________________
Name of Purchaser
_______________________________
Signature of Authorized Signatory
_______________________________
Print Name and Title
_______________________________
Date
-2-
<PAGE>
EXHIBIT E
---------
COVAD COMMUNICATIONS GROUP, INC.
AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
(Subsequently amended and restated March 11, 1998;
See Exhibit 4.6 to the Registration Statement)
<PAGE>
EXHIBIT F
[COVAD LETTERHEAD]
February 20, 1998
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, NY 10017-3147
Attention: Joseph P. Landy
Crosspoint Venture Partners 1996
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062
Attention: Rich Shapero
Intel Corporation
2200 Mission College Boulevard
Santa Clara, CA 95052-8199
Attention: James W. McCall
Re: Disclosure Letter for the Series C Preferred Stock and Warrant
Subscription Agreement by and among Covad Communications Group,
Inc., Warburg Pincus Ventures, L.P., Crosspoint Venture Partner
1996 and Intel Corporation
Gentlemen:
This Disclosure Letter is provided pursuant to Section 3 of the Series C
Preferred Stock and Warrant Subscription Agreement dated February 20, 1998 (the
"Agreement") by and among Covad Communications Group, Inc. (the "Company"),
Warburg Pincus Ventures, L.P., Crosspoint Venture Partners 1996 and Intel
Corporation. The Section numbers in this Disclosure Letter correspond to the
Section numbers in the Agreement. Any information disclosed under any Section
number of this Disclosure Letter shall be deemed disclosed under and
incorporated into any other Section number under the Agreement where such
disclosure would be appropriate. Any terms defined in the Agreement have the
same meaning when used in this Disclosure Letter unless the context otherwise
requires.
3.2(a) Pursuant to Section 15 of that certain Stockholder Rights Agreement
dated as of July 16, 1997, as amended, the Company has granted the
Investors preemptive rights with respect to the issuance of any new
securities.
3.2(c) 1. The Company has, subject to the achievement of certain subscriber
levels, agreed to provide options to purchase shares of Common
Stock to Bruce Woodrey, for the calendar year 1997-1998, as
follows: 1 share per subscriber for which Subsidiary obtains a
commitment to take the Subsidiary's service by July 1, 1998 for
the first 10,000 California subscribers, 2 shares per subscriber
for which
<PAGE>
Disclosure Letter
February 20, 1998
Page 2
Subsidiary obtains a commitment to take Subsidiary's service by
July 1, 1998 for the next 10,000 California subscribers, and a
10,000 shares bonus upon reaching 20,000 subscribers. For every
subscriber commitment obtained in excess of 20,000 subscribers up
to 50,000 subscribers, 2 shares per subscriber. Shares for
subscribers in excess of 50,000 will be determined by the Board
of Directors if this situation occurs. For the entire plan,
shares will only be provided for subscribers that are "paying
subscribers" - i.e. subscribers for whom Subsidiary receives
payment that is booked as revenues to Subsidiary consistent with
GAAP. One half of these shares vests upon Subsidiary's obtaining
the commitment for such subscribers and the other half of these
shares vests upon the commencement of provision of service to
these subscribers which must occur before December 31, 1998.
2. The Company offered an option to purchase 5,500 shares of Common
Stock in options to Howard Karr & Associates ("Howard Karr") in
the event Howard Karr successfully completes a search for the
Subsidiary's Chief Financial Officer position. Howard Karr did
not identify the CFO hired by the Company, was paid in full, and
the Company does not believe that Howard Karr continues to have a
claim for any shares, and nor does the Company expect Howard Karr
to assert any such claim.
3. The Company has offered and granted an option to purchase 4,000
shares of Common Stock to Tracy Hoyt in consideration for
recruiting engineering personnel.
4. The Company has offered an option to purchase up to a maximum of
5,000 shares of Common Stock to Naren Thapetta, Esq., based on
250 shares to be granted for every patent filed by Mr. Thapetta
in 1998.
5. The Company has offered Heidrick & Struggles ("H&S") up to one-
third of the first year stock options granted to the Chief
Operating Officer of the Company to be hired by the Company as
the result of H&S's efforts.
3.5 The issuance of the shares of Series C Preferred, the Series C
Preferred Warrants and the Common Warrants require the consent of the
Investors and the holders of the outstanding Preferred Stock under the
Stockholder Rights Agreement and the protective provisions of the
Company's Certificate of Incorporation.
3.7 The Company Financials are included in the Preliminary Offering
Memorandum of the Company relating to the High Yield Offering and are
incorporated herein by reference.
<PAGE>
Disclosure Letter
February 20, 1998
Page 3
3.8 On February 5, 1998, the California Subsidiary sent to Pacific Bell a
notice of the California Subsidiary's intent to arbitrate Pacific
Bell's breach of contract because of its failure to timely deliver
operational physical collocation spaces and to challenge its present
physical collocation procedures and practices. The Company plans to
assert numerous claims against Pacific Bell to obtain Pacific Bell's
compliance with the Company's agreement with Pacific Bell, damages and
obtain more favorable collocation procedures, pricing and
availability. The Company is not aware of any plans by Pacific Bell to
assert any counter claims. If this matter proceeds to arbitration, the
prevailing Party will be entitled to recover fees and costs.
3.9(b) On February 11, 1998, the Company amended its Certificate of
Incorporation to increase the number of authorized shares of Series B
Preferred Stock to 5,700,001.
3.9(c) In the ordinary course of business, the Company's California
Subsidiary continues to order physical collocation facilities from
Pacific Bell and GTE, purchase a variety of equipment from Diamond
Lane Communications, Cisco, Pulsecom and have a variety of
installation work performed and transmission lines, loops and services
provided by vendors such as Pacific Bell, GTE, Butler, Chat, MFS,
Brooks Fiber and others. Also in the ordinary course of its business,
the Company has purchased or licensed software and software
development services from such vendors as Oracle Corporation,
Nightfire Software, Object Mart Inc., GeoSystems Global Corporation.
These expenditures in aggregate are well over $100,000 and
individually in many cases exceed $50,000.
3.9(g) On February 19, 1998, the Board of Directors determined that the fair
market value of the Company's Common Stock as of that date was $1.20
per share.
3.90(j) 1. In January 1998, the Board of Directors of the Company authorized
the Company to enter into indemnification agreements with each of
its directors and executive officers. On February 2, 1998, the
Board of Directors authorized the Company to indemnify Dhruv
Khanna, the Company's General Counsel, for liabilities resulting
from Mr. Khanna's opinion to be delivered in connection with the
High Yield Debt Offering.
2. In January 1998, the Board of Directors of the Company authorized
the Company to amend its existing option agreements and
restricted stock agreements to provide for accelerated vesting
under certain circumstances in the event of a change of control
of the Company.
3.9(m) The Company has borrowed $1.0 million under a secured line of credit
agreement which the Company intends to repay and cancel with the
proceeds of the High Yield Offering. The Company has granted a
security interest in its tangible assets in
<PAGE>
Disclosure Letter
February 20, 1998
Page 4
connection with financings under a line of credit agreement with
Charter Financial and Silicon Valley Bank.
3.9(q) The Company issued 33,334 shares of Series B Preferred at $3.00 per
share in February 1998.
3.10 The Subsidiary had no income in 1996 and did not file any tax returns
for that year.The Subsidiary was an S corporation through June 30,
1997.
3.12(a)
3.12.a. Lease Information/1/
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Property Address Lessor Date of Lease Annual Rent Other Fees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3560 Bassett Street Intevac, Inc. 08/15/97 $237,600 None
Santa Clara, CA 95054 (Sublandlord)
- ------------------------------------------------------------------------------------------------------------------------------------
444 Castro Street, Suite 413 The Travelers Insurance 09/01/97 $10,560 None
Mountain View, CA Company
- ------------------------------------------------------------------------------------------------------------------------------------
55 South Market Street, Suite 1430 Market-Post Tower, Inc. 08/30/97 $57,5101 None
San Jose, CA 95113
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3-12(b) The Subsidiary has received numerous items of hardware and software on
a trial basis for evaluation from a variety of xDSL equipment
suppliers and suppliers of routers and other networking equipment
which have not been paid for by the Subsidiary or the Company, and for
which no payment is due and no invoices or demands for payment have
been received to date.
3.13 Neither the Subsidiary nor the Company has applied for any patents as
of the date hereof. A company by the name of Telespeed OPS based in
Flushing NY that sells video broadcast equipment in Eastern Europe has
asserted an ownership interest in the Telespeed name. Matrix
Marketing, a telemarketing and customer service subsidiary of
Cincinnati Bell, has registered the Telespeed name with respect to
telemarketing services.
3.14(a) See exceptions noted in 3.9 above.
The California Subsidiary has entered into material contracts with
Pacific Bell, GTE California, and New York Telephone Company; the
California Subsidiary has also adopted the interconnection agreement
of GTE Northwest with MCI as its own
___________________
/1/ Rent increases approximately 4% per annum
<PAGE>
Disclosure Letter
February 20, 1998
Page 5
agreement ("Interconnection Agreements"). The agreement with New
York Telephone Company is pending approval at the New York Public
Service Commission. The agreement with GTE Northwest is yet to be
submitted to the Washington Utilities and Transportation
Commission. These Interconnection Agreements contain mutual
indemnification provisions, including indemnification for
infringement of intellectual property rights. All employees have
signed confidentiality agreements, including inventions
assignments clauses, with the Company or its California
Subsidiary.
The Company has entered into (i) restricted stock purchase
agreements with Charles J. McMinn, Dhruv Khanna, Charles J. Haas,
Duncan M. Davidson, Daniel Lynch, Rex Cardinale, Timothy Laehy
and Frank Marshall for common stock in the amount of shares set
forth in Exhibit A to the Amended and Restated Stockholder Rights
Agreement; (ii) preferred stock Series A subscription agreements
with Charles J. McMinn, Dhruv Khanna, Charles J. Haas, and Daniel
Lynch for the sale of Series A preferred stock in the amount of
shares set forth in Exhibit A to the Amended and Restated
Stockholder Rights Agreement; and (iii) preferred stock Series B
agreements with Warburg Pincus Ventures, L.P., Crosspoint Venture
Partners 1996 and Intel Corporation in the amount of shares set
forth in Exhibit A to the Amended and Restated Stockholder Rights
Agreement.
The Company has also entered into stock option agreements with
its employees and certain consultants as set forth in Attachment
1 hereto, which is incorporated herein by reference.
The Company and/or its California Subsidiary have also entered
into a number of agreements with a variety of vendors as noted in
3.9(c) above which in aggregate far exceed $100,000 and in many
instances individually exceed $50,000.
The Company has entered into a secured line of credit agreement
with Silicon Valley Bank up to the amount of $1.5 million, and a
sale lease-back equipment financing agreement with Charter
Financial under which the Company is obligated to make aggregate
future payments of $834,000.
The Company has agreed to enter into indemnification agreements
with each of its officers and directors. The Company has agreed
to indemnify Dhruv Khanna, Esq., its General Counsel, against
liabilities arising out of the opinions to be delivered by Mr.
Khanna in connection with the High Yield Offering.
3.14(b) The California Subsidiary has signed an Interconnection Agreement
with GTE California based on a prior agreement GTE entered into
with AT&T for the state of California. Similarly, the Subsidiary
has entered into an agreement with GTE
<PAGE>
Disclosure Letter
February 20, 1998
Page 6
Northwest for Washington based on a prior agreement GTE has
entered into with MCI. It is GTE's legal position that the
Subsidiary's Interconnection Agreements with GTE are subject to
all of the claims and appeals asserted by GTE in Federal District
Court against GTE's interconnection agreement with AT&T in
California and with MCI in Washington as ordered by the CPUC and
the Washington Utilities and Transportation Commission,
respectively. Should the Federal District Courts or further
courts of appeal uphold GTE's positions, the Subsidiary's
Interconnection Agreements with GTE may be correspondingly
affected, and thus subject to further review and revision by the
respective state commissions. In addition, all of the
Subsidiary's Interconnection Agreements may in the interim be
modified by or be subject to modification by rulings by the
respective state regulatory commissions, the Federal
Communications Commission ("FCC") and courts. In addition, the
Interconnection Agreements as well as the Subsidiary's status as
competitive local exchange carrier and its certification as a
telephone company by state regulatory commissions are subject to
ongoing changes in telecommunication laws and regulation. There
is also some uncertainty with respect to the jurisdictional
character of the services the Subsidiary provides which will
affect the surcharges, taxes and other fees that may be levied on
the Subsidiary as well as its costs of regulatory compliance in
the state and federal jurisdictions.
3.15 The Company has a sale-lease back financing arrangement with
Charter Financial, in which Warburg Pincus Ventures, L.P. is
affiliated. (Warburg owns a majority of the stock of Charter
Financial.) The Company is obligated to make future payments of
$834,000 under the sale-lease back transaction. Through December
31, 1997, total lease payments to Charter Financial, including
principal and interest payments, were approximately $26,000. The
Company believes that the terms of the lease financing with
Charter Financial were completed at rates similar to those
available from alternative providers.
The Company purchases equipment from Diamond Lane Communications,
in which Crosspoint Venture Partners 1996 is affiliated.
(Crosspoint owns approximately 12% of the capital stock of
Diamond Lane Communications.) The Company's payments to Diamond
Lane through December 31, 1997 totaled approximately $140,000.
The Company believes that the terms of its transactions with
Diamond Lane were completed at rates similar to those available
from alternative vendors.
The Company sells its TeleSpeed(SM) services to Intel, which has
an ownership interest in the Company.
3.16 The California Subsidiary is certificated telephone company in
the states of California, Washington, New York, Illinois, Oregon
and Massachusetts.The Subsidiary's Interconnection Agreements
with Pacific Bell and GTE California are
<PAGE>
Disclosure Letter
February 20, 1998
Page 7
effective and sufficient for the Subsidiary to provide its
services within Pacific Bell's and GTE's service territory in
California, subject to limitations in the availability Pacific
Bell's and GTE's own facilities and services. The Subsidiary's
Interconnection Agreement with New York Telephone Company is
signed but not yet effective or approved by the New York
commission. The Subsidiary has adopted the GTE Northwest-MCI
agreement for the state of Washington and that agreement is yet to
be submitted to the Washington commission for its approval. Other
than the above-stated states and agreements, the Subsidiary is not
certificated as a telephone company and does not currently have
any interconnection agreement with any other incumbent local
exchange carriers ("ILECs") in California or any other state. The
Virginia Subsidiary has certification applications pending in
Virginia, Maryland, and the District of Columbia. The Subsidiaries
are in negotiations with Ameritech for Illinois and Bell Atlantic
for Massachusetts, among other negotiations.
3.18 1. The Company has entered into employment agreements with Dhruv
Khanna, Rex Cardinale, Tom Regan and Tom Koutsky.
2. The Company maintains a 1997 Stock Plan and has reserved 1,756,750
shares of Common Stock for stock and option grants thereunder.
3. The Company has adopted a bonus plan for its officers based on the
number of end users served by the Subsidiaries.
3.22 The Company expects to grant registration rights in connection
with the High Yield Offering.
3.24 Policy No. 57 UECFH3882. Activity Date 2/15/97-2/15/98. ITT
Hartford Multiflex Policy with Business Liability limits:
<TABLE>
<S> <C>
General Aggregate Limit (Other than Products-Completed Operations) $2,000,000
Products-Completed Operations Aggregate Limit $1,000,000
Each Occurrence Limit $1,000,000
Personal and Advertising injury $1,000,000
Fire Damage Any One Fire $ 300,000
Medical Expense Limit (Any One Person) $ 10,000
Umbrella $4,000,000
</TABLE>
<PAGE>
Disclosure Letter
February 20, 1998
Page 8
Worker's Compensation Insurance meets applicable legal requirements.
Sincerely,
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Dhruv Khanna
-----------------------------------
Dhruv Khanna
Vice President and General Counsel
<PAGE>
Disclosure Letter
February 20, 1998
Page 9
Attachment 1
------------
Name Share Amount
Bruce Woodrey 40,000
Tom J. Regan 80,000
John Reilly 80,000
Richard A. (Dick) Rawson 102,000
Paul Havlik 102,000
Sean L. Walsh 75,000
Rangaswamy Ramachandran 40,000
John Rugo 200,000
Kim Maxwell 4,000
Core Competence, Inc. 4,000
Robert Berger 4,000
William H. Lane 4,000
David Farber 4,000
Frank Marshall 4,000
Dale Hatfield 4,000
Daniel Lynch 4,000
The McKenna Group 3,750
Paul Knopf 2,000
John Hansen 20,000
Louis G. Pelosi 70,000
Laura M'Guinness 7,000
Eric Moyer 1,000
Christian Metcalfe 1,000
Jamie L. Pond 7,500
Blake Alexander 5,000
Noemi Berry 24,000
Ellie Ruiz 50,000
Tom Koutsky 20,000
Brenda Jones 1,000
Marguerite Donaldson 15,000
Vinu Sundaresan 70,000
Mark Hallman 15,000
Mike T. Walsh 20,000
Mike Miscevic 15,000
Erin Dworak 3,500
John Miller 7,500
Jerry Siebenmorgen 7,500
Bill Sans 7,500
<PAGE>
Disclosure Letter
February 20, 1998
Page 10
Rob Heuser 10,000
Dorris Lynn Stevens 12,500
Christopher Perry 10,000
Eric N. Gary 50,000
Donald Brent Chapman 50,000
Daniel Estabrook 15,000
Laura Knapp 2,500
Tracy Hoyt 2,000
Robert Michaelis 7,500
Madie Knight 12,750
Yan Or 20,000
Franklin Gurnee 3,750
Elizabeth Fetter 4,000
Sharon Nelson 4,000
R. Gregory Paquin 3,000
Madhu Gopinathan 20,000
Teresa Y. Shaw 15,000
Shahin Bakshandeh 25,000
Sharon Hearn 15,000
Gillian Tracy 6,100
Curt Johnson 12,000
Dale Mann 30,000
Juliet Settlemier 10,000
Robert Patterson 10,000
David Strohm 4,000
Laura M'Guinness #2 3,000
Blake Alexander #2 5,000
Tom Koutsky #2 10,000
Dorris Lynn Stevens #2 2,500
Monica Garlit 5,000
Mimi Van Son 10,000
Brian Esperson 8,000
Shashank Joshi 15,000
Janet L. O'Brien 2,500
Johan Casier 20,000
Tracy Mattson 1,600
Peter Hitchcock 6,000
Christina D. Kolman 3,000
Tracy Hoyt #2 2,000
<PAGE>
EXHIBIT G1
----------
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 11, 1998
Warburg, Pincus Ventures, L.P.
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue
New York, NY 10017-3147
Crosspoint Venture Partners 1996
1 First Street
Los Altos, CA 94022
RE: COVAD COMMUNICATIONS GROUP, INC.
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
Ladies and Gentlemen:
Reference is made to the Series C Preferred Stock and Warrant Subscription
Agreement dated as of February 20, 1998 (the "Agreement"), complete with all
listed exhibits thereto, by and among Covad Communications Group, Inc., a
Delaware corporation (the "Company"), and the entities listed in Exhibit A to
the Agreement (the "Purchasers"), which provides for, among other things, the
issuance by the Company to the Purchasers of shares of Series C Preferred Stock
of the Company (the "Series C Shares"), warrants to purchase shares of Series C
Preferred Stock (the "Series C Warrants") and warrants to purchase shares of
Common Stock (the "Common Warrants" and together with the Series C Shares and
the Series C Warrants, the "Securities"). This opinion is rendered to you
pursuant to Section 5.1(a) of the Agreement, and all terms used herein have the
meanings defined for them in the Agreement unless otherwise defined herein.
We have acted as counsel for the Company in connection with the negotiation
of the Agreement and the issuance of the Securities. As such counsel, we have
made such legal and factual examinations and inquiries as we have deemed
advisable or necessary for the purpose of rendering this opinion. In addition,
we have examined originals or copies of such corporate records of the Company,
certificates of public officials and such other documents which we consider
necessary or advisable for the purpose of rendering this opinion. In such
examination we have assumed the genuineness of all signatures on original
documents, the legal capacity of all natural persons, the authenticity and
completeness of all documents submitted to us as originals, the conformity to
original documents of all copies submitted to us and the due execution and
delivery of all documents (except as to due execution and delivery by the
Company) where due execution and delivery are a prerequisite to the
effectiveness thereof.
<PAGE>
Warburg, Pincus Ventures, L.P.
Crosspoint Venture Partners 1996
Page 2
As used in this opinion, the expressions "to our knowledge," "known to us"
or similar language with reference to matters of fact mean that, after an
examination of documents made available to us by the Company, and after
inquiries of officers of the Company, but without any further independent
factual investigation, we find no reason to believe that the opinions expressed
herein are factually incorrect. Further, the expressions "to our knowledge",
"known to us" or similar language with reference to matters of fact refer to the
current actual knowledge of the attorneys of this firm who have devoted a
substantial amount of time to matters for the Company. Except to the extent
expressly set forth herein or as we otherwise believe to be necessary to our
opinion, we have not undertaken any independent investigation to determine the
existence or absence of any fact, and no inference as to our knowledge of the
existence or absence of any fact should be drawn from our representation of the
Company or the rendering of the opinion set forth below.
For purposes of this opinion, we are assuming that you have all requisite
power and authority, and have taken any and all necessary corporate action, to
execute and deliver the Agreement, and we are assuming that the representations
and warranties made by the Purchasers in the Agreement are true and correct. We
are also assuming that each Purchaser has purchased its Securities for value, in
good faith and without notice of any adverse claims, and has taken delivery of
its securities, each with an effective endorsement to such Purchaser, all within
the meaning of the California Uniform Commercial Code.
The opinions hereinafter expressed are subject to the following
qualifications:
(a) We express no opinion as to the effect of applicable bankruptcy,
insolvency, reorganization, moratorium or other similar federal or state laws
affecting the rights of creditors;
(b) We express no opinion as to the effect of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity);
(c) We express no opinion as to compliance or non-compliance with the
anti-fraud provisions of applicable securities laws;
(d) We express no opinion as to the enforceability of the
indemnification provisions of Section 10 of the Amended and Restated Stockholder
Rights Agreement dated February 20, 1998 (the "Stockholder Rights Agreement") to
the extent the provisions thereof may be subject to limitations of public policy
and the effect of applicable statutes and judicial decisions;
<PAGE>
Warburg, Pincus Ventures, L.P.
Crosspoint Venture Partners 1996
Page 3
(e) We are members of the Bar of the State of California and we
express no opinion as to any matter relating to the laws of any jurisdiction
other than the federal laws of the United States of America and the laws of the
State of California and the Delaware General Corporation Law. In particular, we
express no opinion as to the state securities or "blue sky" laws of any state
other than California.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing
under, and by virtue of, the laws of the State of Delaware and is in good
standing as a domestic corporation under the law of such state. The Company has
the corporate power and authority to own its property and conduct its business
as currently conducted. The Company is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company on a consolidated basis.
2. The Company has all requisite legal and corporate power and authority
to enter into this Agreement, the Series C Warrants, the Common Warrants and the
Stockholder Rights Agreement, to sell and issue the Securities, to issue the
Common Stock issuable upon conversion of the Series C Shares and the Series C
Preferred issuable upon exercise of the Series C Warrants and upon exercise of
the Common Warrants, to issue the Series C Preferred upon exercise of the Series
C Warrants and to carry out and perform its obligations under the terms of the
Agreement.
3. As of February 15, 1998, the authorized capital stock of the Company
consisted of 30,000,000 shares of authorized Common Stock, $.001 par value, of
which 3,787,068 shares were issued and outstanding, and 15,000,000 shares of
Preferred Stock, $.001 par value, of which 250,000 shares were designated Series
A Preferred Stock, all of which were outstanding, 5,700,001 shares were
designated Series B Preferred, all of which are outstanding, and 3,716,429
shares were designated Series C Preferred, none of which were outstanding. All
outstanding shares of the Company's capital stock were duly authorized, validly
issued, fully paid and non-assessable. The Company had no other capital stock
authorized, issued or outstanding. To our knowledge, except as set forth in the
Agreement (including the Disclosure Letter attached as Exhibit E thereto), there
were no options, warrants, convertible securities or other rights to issue or
purchase any of the Company's authorized but unissued capital stock.
4. The Series C Shares and the Common Warrants issued under the Agreement
are validly issued, fully paid and nonassessable, free of any liens,
encumbrances and preemptive or similar rights contained in the Certificate of
Incorporation or Bylaws of the Company or, to our knowledge, in any
<PAGE>
Warburg, Pincus Ventures, L.P.
Crosspoint Venture Partners 1996
Page 4
agreement to which the Company is a party, except as specifically provided in
the Agreement, the Common Warrants and the Stockholder Rights Agreement. The
Series C Warrants, when issued in accordance with the terms of the Agreement for
the consideration expressed therein, will be duly and validly issued, fully paid
and nonassessable. The Series C Preferred issuable upon exercise of the Series C
Warrants has been duly and validly reserved and, when issued, sold and delivered
in accordance with the terms of the Series C Warrants, will be validly issued,
fully paid and nonassessable. The Common Stock issuable upon exercise of the
Common Warrants and upon conversion of the Series C Shares and the Series C
Preferred issuable upon exercise of the Series C Warrants has been duly and
validly reserved and, when issued, sold and delivered in accordance with the
terms of the Common Warrants or the Company's Certificate of Incorporation, as
the case may be, will be duly and validly issued, fully paid and nonassessable.
5. The certificates representing the Series C Shares are in due and
proper form and the certificates have been duly and validly executed by the
officers of the Company named thereon.
6. All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of the Agreement and the Stockholder Rights Agreement by the
Company, the authorization, sale, issuance and delivery of the Securities (and
the Common Stock or Series C Preferred Stock issuable upon conversion or
exercise thereof) and the performance of the Company's obligations under the
Agreement and the Stockholder Rights Agreement have been taken. The Agreement,
the Common Warrants and the Stockholder Rights Agreement have been duly and
validly executed and delivered by the Company and constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
its terms.
7. The execution, delivery and performance of and compliance with the
Agreement and the Stockholder Rights Agreement, and the issuance of the
Securities and the shares of Series C Preferred or Common Stock issuable upon
conversion thereof, do not conflict with, or constitute a default under any
terms of the Company's Certificate of Incorporation or Bylaws. To our
knowledge, the execution, delivery and performance of and compliance with this
Agreement and the Stockholder Rights Agreement, and the issuance of the
Securities (and the shares of Series C Preferred Stock or Common Stock issuable
upon conversion or exercise thereof), do not materially violate or conflict
with, or constitute a material default under any material contract, agreement,
instrument, judgement or decree binding upon the Company.
8. To our knowledge, there are no actions, suits, proceedings or
investigations pending against the Company or its properties before any court or
governmental agency which would, if adversely determined, have a material
adverse effect on the Company.
<PAGE>
Warburg, Pincus Ventures, L.P.
Crosspoint Venture Partners 1996
Page 5
9. No consent, approval or authorization of, or filing, registration or
qualification with, any governmental or regulatory authority or body is required
in connection with or as a condition to the execution and delivery of the
Agreement, the Common Warrants, the Series C Warrants or the Stockholder Rights
Agreement or the consummation of the transactions contemplated thereby
(including, without limitation, the offer, issuance, sale or delivery of the
Securities), except for (a) filing of the Amended and Restated Certificate of
Incorporation in the Office of the Secretary of State of the State of Delaware
and (b) qualification (or taking such action as may be necessary to secure an
exemption from qualification) under the California Corporate Securities Law and
other applicable blue sky laws of the offer and sale of the Securities (and the
Series C Preferred Stock and Common Stock issuable upon exercise or conversion
thereof). The filing referred to in clause (a) above has been accomplished and
is effective. Our opinion herein is otherwise subject to the timely and proper
completion of all filings and other actions contemplated herein where such
filings and actions are to be undertaken on or after the date hereof.
10. Subject to the accuracy of each Purchaser's representations in Section
4 of the Agreement and its responses (if any) to the Company's inquiries, we are
of the opinion that the offer, sale and issuance of the Securities in conformity
with the terms of the Agreement constitute transactions exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended.
This opinion is furnished to you solely for your benefit in connection with
the purchase of the Securities, and may not be relied upon by any other person
or for any other purpose without our prior written consent. We would expect
any person or entity to whose receipt hereof we consented to be bound by this
paragraph.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
<PAGE>
EXHIBIT G2
----------
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 11, 1998
Intel Corporation
2200 Mission College Boulevard
Santa Clara, CA 95052-8199
Ladies and Gentlemen:
Reference is made to the Series C Preferred Stock and Warrant Subscription
Agreement dated as of February 20, 1998 (the "Agreement"), complete with all
listed exhibits thereto, by and among Covad Communications Group, Inc., a
Delaware corporation (the "Company"), and the entities listed in Exhibit A to
the Agreement (the "Purchasers"), which provides for, among other things, the
issuance by the Company to Intel Corporation ("Intel") of 120,048 shares of
Series C Preferred Stock of the Company (the "Intel Shares"), warrants to
purchase 98,500 shares of Series C Preferred Stock (the "Intel Series C
Warrants") and warrants to purchase 35,284 shares of Common Stock (the "Intel
Common Warrants" and together with the Intel Shares and the Intel Series C
Warrants, the "Intel Securities"). This opinion is rendered to you pursuant to
Section 5.1(a) of the Agreement, and all terms used herein have the meanings
defined for them in the Agreement unless otherwise defined herein.
We have acted as counsel for the Company in connection with the negotiation
of the Agreement and the issuance of the Intel Securities. As such counsel, we
have made such legal and factual examinations and inquiries as we have deemed
advisable or necessary for the purpose of rendering this opinion. In addition,
we have examined originals or copies of such corporate records of the Company,
certificates of public officials and such other documents which we consider
necessary or advisable for the purpose of rendering this opinion. In such
examination we have assumed the genuineness of all signatures on original
documents, the legal capacity of all natural persons, the authenticity and
completeness of all documents submitted to us as originals, the conformity to
original documents of all copies submitted to us and the due execution and
delivery of all documents (except as to due execution and delivery by the
Company) where due execution and delivery are a prerequisite to the
effectiveness thereof.
As used in this opinion, the expressions "to our knowledge," "known to us"
or similar language with reference to matters of fact mean that, after an
examination of documents made available to us by the Company, and after
inquiries of officers of the Company, but without any further independent
factual investigation, we find no reason to believe that the opinions expressed
herein are factually incorrect. Further, the expressions "to our knowledge",
"known to us" or similar language with reference to matters of fact refer to the
current actual knowledge of the attorneys of this firm who have devoted a
substantial
<PAGE>
Intel Corporation
Page 2
amount of time to matters for the Company. Except to the extent expressly set
forth herein or as we otherwise believe to be necessary to our opinion, we have
not undertaken any independent investigation to determine the existence or
absence of any fact, and no inference as to our knowledge of the existence or
absence of any fact should be drawn from our representation of the Company or
the rendering of the opinion set forth below.
For purposes of this opinion, we are assuming that you have all requisite
power and authority, and have taken any and all necessary corporate action, to
execute and deliver the Agreement, and we are assuming that the representations
and warranties made by Intel in the Agreement are true and correct. We are also
assuming that Intel has purchased the Intel Securities for value, in good faith
and without notice of any adverse claims within the meaning of the California
Uniform Commercial Code.
The opinions hereinafter expressed are subject to the following
qualifications:
(a) We express no opinion as to the effect of applicable bankruptcy,
insolvency, reorganization, moratorium or other similar federal or state laws
affecting the rights of creditors;
(b) We express no opinion as to the effect of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity);
(c) We express no opinion as to compliance or non-compliance with the
anti-fraud provisions of applicable securities laws;
(d) We express no opinion as to the enforceability of the
indemnification provisions of Section 10 of the Amended and Restated Stockholder
Rights Agreement dated February 20, 1998 (the "Stockholder Rights Agreement") to
the extent the provisions thereof may be subject to limitations of public policy
and the effect of applicable statutes and judicial decisions;
(e) We are members of the Bar of the State of California and we
express no opinion as to any matter relating to the laws of any jurisdiction
other than the federal laws of the United States of America and the laws of the
State of California and the Delaware General Corporation Law. In particular, we
express no opinion as to the state securities or "blue sky" laws of any state
other than California.
Based upon and subject to the foregoing, we are of the opinion that:
<PAGE>
Intel Corporation
Page 3
1. The Company is a corporation duly organized and validly existing
under, and by virtue of, the laws of the State of Delaware and is in good
standing as a domestic corporation under the law of such state.
2. The Company has all requisite legal and corporate power and authority
to enter into this Agreement, the Series C Warrants, the Common Warrants and the
Stockholder Rights Agreement, to sell and issue the Intel Securities, to issue
the Common Stock issuable upon conversion of the Intel Shares and the Series C
Preferred issuable upon exercise of the Series C Warrants and upon exercise of
the Intel Common Warrants, to issue the Series C Preferred upon exercise of the
Series C Warrants and to carry out and perform its obligations under the terms
of the Agreement.
3. The authorized capital stock of the Company consists of 30,000,000
shares of authorized Common Stock, $.001 par value, of which 3,787,068 shares
are issued and outstanding, and 15,000,000 shares of Preferred Stock, $.001 par
value, of which 250,000 shares are designated Series A Preferred Stock, all of
which are outstanding, 5,700,001 shares are designated Series B Preferred, all
of which are outstanding, and 3,716,429 shares are designated Series C
Preferred, none of which are outstanding. All outstanding shares of the
Company's capital stock are duly authorized, validly issued, fully paid and non-
assessable. The Company has no other capital stock authorized, issued or
outstanding. To our knowledge, except as set forth in the Agreement (including
the Disclosure Letter attached as Exhibit E thereto), there are no options,
warrants, convertible securities or other rights to issue or purchase any of the
Company's authorized but unissued capital stock.
4. The Intel Shares and the Intel Common Warrants issued under the
Agreement are validly issued, fully paid and nonassessable, free of any liens,
encumbrances and preemptive or similar rights contained in the Certificate of
Incorporation or Bylaws of the Company or, to our knowledge, in any agreement to
which the Company is a party, except as specifically provided in the Agreement,
the Intel Common Warrants and the Stockholder Rights Agreement. The Intel
Series C Warrants, when issued in accordance with the terms of the Agreement for
the consideration expressed therein, will be duly and validly issued, fully paid
and nonassessable. The Series C Preferred issuable upon exercise of the Intel
Series C Warrants has been duly and validly reserved and, when issued, sold and
delivered in accordance with the terms of the Intel Series C Warrants, will be
validly issued, fully paid and nonassessable. The Common Stock issuable upon
exercise of the Intel Common Warrants and upon conversion of the Intel Shares
and the Series C Preferred issuable upon exercise of the Intel Series C Warrants
has been duly and validly reserved and, when issued, sold and delivered in
accordance with the terms of the Common Warrants or the Company's Certificate of
Incorporation, as the case may be, will be duly and validly issued, fully paid
and nonassessable.
<PAGE>
Intel Corporation
Page 4
5. The certificates representing the Intel Shares are in due and proper
form and the certificates have been duly and validly executed by the officers of
the Company named thereon.
6. All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of the Agreement and the Stockholder Rights Agreement by the
Company, the authorization, sale, issuance and delivery of the Intel Securities
(and the Common Stock or Series C Preferred Stock issuable upon conversion or
exercise thereof) and the performance of the Company's obligations under the
Agreement and the Stockholder Rights Agreement have been taken. The Agreement,
the Intel Common Warrants and the Stockholder Rights Agreement have been duly
and validly executed and delivered by the Company and constitute valid and
binding obligations of the Company, enforceable against the Company in
accordance with its terms.
7. The execution, delivery and performance of and compliance with the
Agreement and the Stockholder Rights Agreement, and the issuance of the Intel
Securities and the shares of Series C Preferred or Common Stock issuable upon
conversion thereof, do not conflict with, or constitute a default under any
terms of the Company's Certificate of Incorporation or Bylaws. To our
knowledge, the execution, delivery and performance of and compliance with this
Agreement and the Stockholder Rights Agreement, and the issuance of the Intel
Securities (and the shares of Series C Preferred Stock or Common Stock issuable
upon conversion or exercise thereof), do not materially violate or conflict
with, or constitute a material default under any material contract, agreement,
instrument, judgement or decree binding upon the Company.
8. To our knowledge, there are no actions, suits, proceedings or
investigations pending against the Company or its properties before any court or
governmental agency which would, if adversely determined, have a material
adverse effect on the Company.
9. No consent, approval or authorization of, or filing, registration or
qualification with, any governmental or regulatory authority or body is required
in connection with or as a condition to the execution and delivery of the
Agreement, the Intel Common Warrants, the Intel Series C Warrants or the
Stockholder Rights Agreement or the consummation of the transactions
contemplated thereby (including, without limitation, the offer, issuance, sale
or delivery of the Intel Securities), except for (a) filing of the Amended and
Restated Certificate of Incorporation in the Office of the Secretary of State of
the State of Delaware and (b) qualification (or taking such action as may be
necessary to secure an exemption from qualification) under the California
Corporate Securities Law and other applicable blue sky laws of the offer and
sale of the Intel Securities (and the Series C Preferred Stock and Common Stock
issuable upon exercise or conversion thereof). The filing referred to in clause
(a) above has been accomplished and is effective. Our opinion herein is
otherwise subject to the timely and proper
<PAGE>
Intel Corporation
Page 5
completion of all filings and other actions contemplated herein where such
filings and actions are to be undertaken on or after the date hereof.
10. Subject to the accuracy of each Purchaser's representations in Section
4 of the Agreement and its responses (if any) to the Company's inquiries, we are
of the opinion that the offer, sale and issuance of the Intel Securities in
conformity with the terms of the Agreement constitute transactions exempt from
the registration requirements of Section 5 of the Securities Act of 1933, as
amended.
This opinion is furnished to Intel solely for its benefit in connection
with the purchase of the Intel Securities, and may not be relied upon by any
other person or for any other purpose without our prior written consent.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
AND
FIRST AMENDMENT TO SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
This Assignment and Assumption Agreement and First Amendment to Series C
Preferred Stock and Warrant Subscription Agreement is made and entered into this
24th day of April, 1998 by and among Covad Communications Group, Inc., a
Delaware corporation (the "Company"), Warburg, Pincus Ventures L.P. ("Warburg"),
Crosspoint Venture Partners 1996 ("Crosspoint") and Robert Hawk ("Assignee").
Capitalized terms used but not otherwise defined herein shall have their
respective meanings in the Subscription Agreement (as defined below).
RECITALS
WHEREAS, the Company, Warburg and Crosspoint are parties to that certain
Series C Preferred Stock and Warrant Subscription Agreement dated February 20,
1998 (the "Subscription Agreement"), pursuant to which the Company has the
unequivocal right to sell to Warburg and Crosspoint, and Warburg and Crosspoint
have the unequivocal obligation to purchase, severally and not jointly, the
number of Shares and the number of Series C Warrants specified opposite their
respective names on the Schedule of Purchasers attached thereto as Exhibit A
---------
(the "Schedule of Purchasers"), at any time from and after the closing of the
High Yield Offering to that date which is one year from the date of the closing
of the High Yield Offering;
WHEREAS, Warburg and Crosspoint now desire to assign their rights and
obligations with respect to the purchase of an aggregate of $100,000 of the
Shares and Series C Warrants specified opposite their respective names on the
Schedule of Purchaser's and Assignee now desires to assume such obligations and
to purchase $100,000 of such Shares and Series C Warrants. To effect the
foregoing assignment and assumption, the Company, Warburg and Crosspoint desire
to amend the Subscription Agreement to, among other things, (i) amend the
Schedule of Purchasers to reflect the foregoing assignment and assumption and
the purchase of the Shares and Series C Warrants as set forth in the amended
Schedule of Purchasers attached hereto as Exhibit A (the "Amended Scheduled of
Purchasers"), and (ii) to effect the sale and purchase of $100,000 of the Shares
and the Series C Warrants by the Company to Assignee.
NOW, THEREFORE, in consideration of the promises and agreements contained
in the Subscription Agreement and contained herein and the consideration
delivered by the parties hereto and thereto in accordance with this Agreement
and the Subscription Agreement, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
AGREEMENT
---------
1. Assignment and Assumption. Each of Warburg and Crosspoint, severally
-------------------------
and not jointly, assign to Assignee their respective rights and obligations
under Section 1.3 of the Subscription Agreement solely with respect to $100,000
of the Shares and the Series C Warrants as to which the Company has the
unequivocal right to sell to Warburg and Crosspoint and Warburg and Crosspoint
have the unequivocal obligation to purchase, subject to the terms and conditions
thereof. Assignee hereby assumes such rights and obligations to purchase
$100,000 of Shares and the Series C Warrants with respect to which Warburg and
Crosspoint have the obligation to purchase, and the Company shall have the
obligation to sell, shall be reduced to that number specified opposite their
respective names on the Schedule of Purchasers.
2. Sale of Shares of Series C Preferred to Assignee. Subject to the
------------------------------------------------
terms and conditions hereof and the Subscription Agreement, the Company hereby
issues and sells to Assignee, and Assignee hereby purchases from the Company,
the number of Shares of Series C Preferred and Series C Warrants specified
opposite Assignee's name on the Amended Schedule of Purchasers attached hereto
as Exhibit A, for the aggregate purchase price specified opposite his name on
---------
the Amended Schedule of Purchasers; provided, that the purchase and sale of such
Series C Warrants to Assignee shall be conditioned upon, and the delivery of
such Series C Warrants to Assignee shall be made concurrently with, the Second
Closing (as defined in the Subscription Agreement). It is understood that no
additional consideration shall be due with respect to the delivery of the Series
C Warrants to Assignee at such Second Closing. The Company's agreement with
Assignee is separate from its agreements with the other Purchasers under the
Subscription Agreement, and the sale of the Series C Preferred and the Series C
Warrants to Assignee is separate from the Company's sale of Series C Preferred
and Series C Warrants to the other Purchasers under the Subscription Agreement.
3. Amendment to Subscription Agreement.
-----------------------------------
(a) The Subscription Agreement shall be deemed to have been amended
by this Agreement solely (i) to replace the Schedule of Purchasers attached
thereto as Exhibit A with the Amended Schedule of Purchasers to reflect the
assignment and assumption effected hereby, (ii) to provide for the issuance and
sale of the Shares of Series C Preferred and Series C Warrants to Assignee as
provided in Section 2 above, (iii) to deem Assignee to be a "Purchaser"
thereunder, and (iv) as provided in Section 3(b) below. The Company undertakes
no obligation to update its representations and warranties contained in the
Subscription Agreement, which speak only as of the date on which they were
originally made (i.e., February 20, 1998).
(b) Section 7.3 of the Subscription Agreement is hereby amended to
read in its entirety as follows:
"Except as otherwise provided herein, the provisions hereof shall
inure to the benefit of, and be binding upon, the successors, assigns,
heirs, executors and administrators of the
-2-
<PAGE>
parties hereto, provided, however, that the obligations of a Purchaser to
purchase Shares and Series C Warrants shall not be assignable without the
prior written consent of the Company."
(c) Except as set forth in the first sentence of this Section 3, this
Agreement shall not amend or modify any provision of the Subscription
Agreement, which shall remain in full force and effect as amended hereby.
4. Miscellaneous.
-------------
(a) Governing Law. This Agreement and the rights and obligations of
-------------
the parties hereunder shall be construed in accordance with and be governed by
the laws of the State of California.
(b) Entire Agreement. This Agreement and the Subscription Agreement
----------------
and the other documents delivered pursuant hereto and thereto constitute the
full and entire understanding and agreement between the parties with regard to
the subjects hereof and thereof.
(c) Amendment. This Agreement may be modified or amended only by a
---------
written instrument duly executed by all of the parties hereto.
(d) Counterparts. This agreement may be executed simultaneously in
------------
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
(e) Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties and their respective successors and permitted
assigns.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
this 24th day of April, 1998.
COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
WARBURG, PINCUS VENTURES, L.P.
By: Warburg, Pincus & Co.,
its General Partner
By:
------------------------------------
Partner
CROSSPOINT VENTURE PARTNERS 1996
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
ROBERT HAWK
------------------------------------------------
<PAGE>
*** ASSIGNMENT AND ASSUMPTION AGREEMENT SIGNATURE PAGE ***
<PAGE>
EXHIBIT A
---------
Amended Schedule of Purchasers
<TABLE>
<CAPTION>
Number of Number of
Number of Shares of Series C
Common Stock Series C Preferred Aggregate
Name and Address Warrants Preferred Stock Warrants Purchase Price
- ------------------------------------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Warburg, Pincus Ventures, L.P. 451,773 1,527,501 1,253,318 $12,724,083.33
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue
New York, NY 10017-3147
Crosspoint Venture Partners 1996. 112,943 381,875 313,329 $ 3,181,018.75
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062
Intel Corporation 35,284 120,048 98,500 $ 999,999.84
2200 Mission College Boulevard
Mail Stop SC4-210
Santa Clara, CA 95052-8199
Attn: Treasurer
Robert Hawk -- 12,005 9,853 $ 100,001.65
6 Hilton Head Drive
Rancho Mirage, CA 92279
--------------- --------------- --------------- ---------------
600,000 2,041,429 1,675,000 $17,005,103.57
</TABLE>
<PAGE>
EXHIBIT B
---------
Series C Preferred Stock and Warrant Subscription Agreement
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 16, 1998 in the Registration Statement (Form S-
4) and related Prospectus of Covad Communications Group, Inc. for the
registration of $260,000,000 of 13 1/2% Senior Discount Notes due March 15,
2008, Series B.
Walnut Creek, California
April 24, 1998
<PAGE>
Exhibit 23.2
CONSENT OF COUNSEL
Wilson Sonsini Goodrich & Rosati, Professional Corporation consents to (a) the
reproduction of its legal opinion as Exhibit 5.1 to the Registration Statement
and (b) being named in the Prospectus.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,578
<SECURITIES> 0
<RECEIVABLES> 25
<ALLOWANCES> 0
<INVENTORY> 43
<CURRENT-ASSETS> 4,819
<PP&E> 3,084
<DEPRECIATION> 70
<TOTAL-ASSETS> 8,074
<CURRENT-LIABILITIES> 1,022
<BONDS> 0
8
0
<COMMON> 12
<OTHER-SE> 8,795
<TOTAL-LIABILITY-AND-EQUITY> 8,074
<SALES> 26
<TOTAL-REVENUES> 26
<CGS> 0
<TOTAL-COSTS> 2,498
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (2,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,317)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 131,758
<SECURITIES> 0
<RECEIVABLES> 154
<ALLOWANCES> 0
<INVENTORY> 117
<CURRENT-ASSETS> 132,211
<PP&E> 6,886
<DEPRECIATION> 234
<TOTAL-ASSETS> 145,757
<CURRENT-LIABILITIES> 3,124
<BONDS> 132,518
8
0
<COMMON> 12
<OTHER-SE> 8,795
<TOTAL-LIABILITY-AND-EQUITY> 145,757
<SALES> 186
<TOTAL-REVENUES> 186
<CGS> 0
<TOTAL-COSTS> 2,311
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 847
<INCOME-PRETAX> (2,537)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,537)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.4
June 16, 1998
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
RE: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We have acted as counsel to Covad Communications Group, Inc., a Delaware
corporation ("Covad") in connection with its Offer to Exchange its 13 1/2 %
Senior Discount Notes due March 15, 2008, Series B which have been registered
under the Securities Act for any and all outstanding 13 1/2 % Senior Discount
Notes due March 15, 2008, Series A (the "Exchange"). The Exchange is described
in the Registration Statement on Form S-4 (the "Registration Statement") of
Covad.
In connection with this opinion, we have examined and are familiar with the
Exchange, the Registration Statement, and such other presently existing
documents, records and matters of law as we have deemed necessary or appropriate
for purposes of our opinion. In addition, we have assumed that the Exchange
will occur on the terms set forth in, and will be consummated in the manner
contemplated by, and in accordance with, the Registration Statement and other
related documents and that all statements in such documents, are true, accurate
and complete.
Based upon and subject to the limitations contained herein and in the
Registration Statement, the statements contained in the Registration Statement
under the caption "United States Federal Income Tax Considerations," insofar as
such statements constitute a summary of the United States federal tax laws
referred to therein with respect to debt instruments, are accurate and fairly
summarize the matters referred to therein in all material respects.
This opinion merely represents our best judgment and is not binding on the
Internal Revenue Service (the "IRS") or the courts. The IRS is not precluded
from successfully asserting a contrary position. In addition, because this
opinion is being delivered prior to the closing of the Exchange, it must be
considered prospective and dependent on future events (including, without
limitation, the due and effective execution of all relevant agreements,
certificates and other documents). For example, there can be no assurance that
changes in the law or its interpretation will not take place that could affect
the United States Federal income tax consequences of the Exchange.
Nevertheless, we undertake no responsibility to advise you of any new
developments including, without limitation, changes in the application or
interpretation of the United States Federal income tax law.
<PAGE>
Covad Communications Group, Inc.
June 16, 1998
Page 2
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. In giving this consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
thereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Glen Kohl
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
