<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1998
REGISTRATION NUMBER 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
COVAD COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
---------------
<TABLE>
<S> <C> <C>
DELAWARE 1731 77-0461529
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2330 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95050
(408) 844-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROBERT E. KNOWLING, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COVAD COMMUNICATIONS GROUP, INC.
2330 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95050
(408) 844-7500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
BARRY E. TAYLOR, ESQ. GREGORY K. MILLER, ESQ.
ROBERT G. O'CONNOR, ESQ. KAREN E. EBERLE, ESQ.
CECILIA M. DE LEON, ESQ. RICHARD G. CHISHOLM, ESQ.
ANNA ITOI, ESQ. LATHAM & WATKINS
WILSON SONSINI GOODRICH & ROSATI 505 MONTGOMERY STREET, SUITE 1900
PROFESSIONAL CORPORATION SAN FRANCISCO, CALIFORNIA 94111
650 PAGE MILL ROAD, PALO ALTO, CA 94304 (415) 391-0600
(650) 493-9300
</TABLE>
---------------
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 in this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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, please 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(c)
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. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock............................... $143,750,000 $42,406
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
---------------
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 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
SUBJECT TO COMPLETION, DATED SEPTEMBER 21, 1998
SHARES
[LOGO OF COVAD]
COVAD COMMUNICATIONS GROUP, INC.
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Covad
Communications Group, Inc. ("Covad" or the "Company"). Prior to the offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "COVD".
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 8 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- -----------------------------------------------------------------------------
Total(3)............................... $ $ $
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company, estimated
at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of additional shares of Common Stock on the same
terms as the Common Stock offered hereby solely to cover over-allotments,
if any (the "Over-Allotment Option"). If the Over-Allotment Option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the Underwriters, subject to
prior sale, when, as and if accepted by them, subject to certain conditions.
The Underwriters reserve the right to withdraw, cancel or modify such offer and
to reject orders in whole or in part. It is expected that delivery of the
shares will be made on or about , 1998 at the offices of Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York, 10167.
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
The date of this Prospectus is , 1998.
<PAGE>
[DESCRIPTION OF ARTWORK TO BE PROVIDED BY AMENDMENT]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
AND THE IMPOSITION OF PENALTY BIDS. THESE TRANSACTIONS, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
"Covad(TM)," "TeleSpeed(TM)," "The Speed to Work(TM)" 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.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and Consolidated Financial
Statements, including the related Notes thereto, appearing 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. The Company disclaims
any obligation to update information contained in any forward-looking
statement. Unless the context otherwise requires, "Covad" and the "Company"
refer to Covad Communications Group, Inc. and its subsidiaries (the
"Subsidiaries"). The definitions of certain terms used herein are set forth in
the Appendix to this Prospectus. Except as otherwise noted, the information in
this Prospectus (i) assumes no exercise of the Over-Allotment Option, (ii)
reflects the conversion of all outstanding shares of the Company's Preferred
Stock into shares of Common Stock on a one-for-one basis upon completion of
this offering (not giving effect to the payment in shares of Common Stock of
cumulated but unpaid dividends on the Preferred Stock as of the closing of this
offering), (iii) reflects the exercise for cash of warrants to purchase
1,800,000 shares of Common Stock immediately prior to the consummation of this
offering, and (iv) gives effect to a three-for-two stock split effected by the
Company in August 1998.
THE COMPANY
Covad is a leading packet-based Competitive Local Exchange Carrier ("CLEC")
that provides dedicated high-speed digital communication services using Digital
Subscriber Line ("DSL") technology to enterprise and Internet Service Provider
("ISP") customers. Enterprise customers purchase the Company's services to
provide employees with remote access to their Local Area Networks ("LANs") to
improve employee productivity and reduce operating costs. ISPs purchase the
Company's services in order to provide high-speed Internet access to their
business and consumer end-users. The Company believes its services offer a
superior value proposition as compared to currently available remote LAN
("RLAN") and high-speed Internet access alternatives. The Company's services
are provided over standard copper telephone lines at speeds of up to
1.5 Megabits per second ("Mbps"), approximately 25 times the speed available
through a 56.6 Kilobits per second ("Kbps") modem. To date, the Company has
received orders for its services from over enterprise and ISP customers,
including Cisco Systems, Concentric Network, Epoch Networks, Oracle,
PeopleSoft, Sprint, Stanford University, Verio and Whole Earth Networks.
Covad introduced its services in the San Francisco Bay Area in December 1997
and estimates that its operations in this region will generate positive EBITDA
(before allocation of corporate overhead) by . The Company launched its
services in the Los Angeles, New York and Boston metropolitan areas in August
1998 and expects to introduce its services in the Seattle and Washington, D.C.
metropolitan areas in the first quarter of 1999. In March 1998, the Company
raised approximately $135 million through the issuance of its Senior Discount
Notes (as defined) to fund the deployment of its networks in these initial six
metropolitan areas (the "Initial Regions"). As a result of the strong market
demand for high-speed digital communication services, the Company has decided
to increase to 22 the number of regions in which it plans to build its networks
and offer its services. The Company estimates that, when complete, its networks
in these 22 regions will enable the Company to provide service to over
28 million homes and businesses in 28 of the top 50 metropolitan statistical
areas ("MSAs") in the United States.
MARKET OPPORTUNITY
Covad was formed to capitalize on the substantial business opportunity
created by the growing demand for high-speed digital communication, the
commercial availability of low cost DSL technology and the passage of the
Telecommunications Act of 1996 (the "1996 Act"). The Company's principal equity
investors include Warburg, Pincus Ventures, L.P., Crosspoint Venture Partners
1996 and Intel Corporation.
Growing Market Demand for High-Speed Digital Communications Bandwidth. As
businesses increase their use of the Internet, intranets and extranets, the
Company expects the market size for both RLAN access and small- and medium-
sized business Internet access to continue to grow rapidly. Industry analysts
estimate
3
<PAGE>
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%. According to International Data Corporation
("IDC"), the number of Internet users worldwide reached approximately 69
million in 1997 and will grow to approximately 320 million by 2002. In
addition, industry analysts estimate that the value of goods and services sold
by businesses through the Internet will increase from $2.6 billion in 1997 to
$37.5 billion in 2002. High-speed digital connections are becoming increasingly
important to businesses and consumers as more high bandwidth information and
applications become available on the Internet.
Emergence of DSL Technology. The full potential of RLAN and Internet
applications cannot be realized without removing the performance bottlenecks of
the existing public switched telephone network. DSL technology removes these
performance bottlenecks by increasing the data carrying capacity of the copper
telephone lines from analog modem speeds of 56.6 Kbps and ISDN speeds of 128
Kbps to DSL speeds of up to 6 Mbps. Because DSL technology reuses the existing
copper plant, DSL technology is significantly less expensive to deploy on a
broad scale than existing alternative high-speed digital communication
technologies, such as cable modems, wireless data and satellite data. As a
result, a significant portion of the investment in a DSL network is success-
based, as such networks require a comparatively lower initial fixed investment,
and the subsequent variable investments in DSL electronics are directly related
to the number of paying subscribers.
Telecommunications Act of 1996. The passage of the 1996 Act created a legal
framework for CLECs, such as the Company, to provide local analog and digital
communication services in competition with the Incumbent Local Exchange
Carriers ("ILECs"). The 1996 Act eliminated a substantial barrier to entry for
CLECs by enabling them to leverage the existing infrastructure built by the
ILECs, which required a $200 billion investment by ILECs and ILEC ratepayers,
rather than constructing a competing infrastructure at significant cost. The
1996 Act in particular emphasized the need for competition-driven innovations
in the deployment of advanced telecommunications services, such as the
Company's DSL services.
THE COVAD SOLUTION
Covad's objective is to become the leading provider of DSL-based high-speed
digital communication services in each region that it enters. Key aspects of
the Company's solution to provide high-speed digital communication services
include:
Attractive Value Proposition. The Company offers higher bandwidth digital
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 in each region it serves is designed to ensure that
the Company's services are available to the vast majority of its customers'
end-users. The Company's networks provide 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 reduce the risk of unauthorized access.
Experienced Management Team. The Company's management team includes
individuals with extensive experience in the data communications,
telecommunications and personal computer industries. In July 1998, the Company
hired as its Chief Executive Officer Robert Knowling, Jr., who formerly served
as the Executive Vice President of Operations and Technologies at U S WEST
Communications and as Vice President of Network Operations at Ameritech. The
Company has also hired Regional General Managers to cover 14 of its announced
22 regions who collectively have over 150 years of telecommunications service
experience.
4
<PAGE>
BUSINESS STRATEGY
The key elements of the Company's strategy are (i) to secure CLEC status and
sign interconnection agreements for the top U.S. markets, (ii) to roll out its
service rapidly to maintain its first-mover advantage, (iii) to provide blanket
coverage in each of its 22 targeted regions, (iv) to focus on packet data
services, (v) to concentrate its sales efforts on enterprise and ISP customers
that can provide a large number of end-users, (vi) to leverage the success-
based economics of DSL technology, (vii) to establish relationships with
leading ISPs, systems integrators and Interexchange Carriers ("IXCs") to expand
its distribution channels, and (viii) to provide a superior and comprehensive
product and service solution that includes line installation, equipment sale
and configuration and RLAN design.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" beginning on page 8 hereof.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.........
Common Stock to be outstanding after this
offering................................... (1)
Use of proceeds............................. For capital expenditures to expand the
Company's networks and for working capital
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol...... COVD
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding as of September
1, 1998. Excludes (i) an aggregate of 13,970,250 shares of Common Stock
reserved for issuance under the Company's 1997 Stock Plan, of which
11,356,931 shares were subject to outstanding options at September 1, 1998,
(ii) an aggregate of shares of Common Stock reserved for issuance under
the Company's 1998 Employee Stock Purchase Plan, and (iii) an aggregate of
5,188,764 shares of Common Stock issuable upon exercise of outstanding
warrants.
----------------
The address of the Company's principal executive office is 2330 Central
Expressway, Santa Clara, California 95050, and the Company's telephone number
is (408) 844-7500.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE
MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................ $ 26 $ 809 $ 995
Operating expenses:
Network and product costs............. 54 758 961
Sales, marketing, general and
administrative....................... 2,374 4,606 6,550
Amortization of deferred compensation. 295 631 858
Depreciation and amortization......... 70 446 610
----------- ----------- -----------
Total operating expenses............ 2,793 6,441 8,979
----------- ----------- -----------
Income (loss) from operations........... (2,767) (5,632) (7,984)
Net interest income (expense).......... 155 (3,291) (3,720)
----------- ----------- -----------
Net income (loss)....................... $ (2,612) $ (8,923) $ (11,704)
=========== =========== ===========
Net income (loss) per common share...... $ (0.80) $ (1.66) $ (2.31)
Shares used in computing net income
(loss) per share....................... 3,271,546 5,367,181 5,056,334
Pro forma net income (loss) per common
share(1)............................... $ (0.23) $ (0.35) $ (0.48)
Shares used in computing pro forma net
income (loss) per share(1)............. 11,522,916 25,404,240 24,233,326
OTHER DATA:
EBITDA(2)............................... $ (2,402) $ (4,555) $ (6,516)
CONSOLIDATED CASH FLOW DATA:
Provided by (used for) operating
activities............................. $ (1,895) $ (1,398) $ (877)
Provided by (used for) investing
activities............................. (2,494) (8,578) (12,380)
Provided by (used for) financing
activities............................. 8,767 103 130,764
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF JUNE 30, 1998
DECEMBER 31, -----------------------------
1997 ACTUAL AS ADJUSTED(3)
------------ -------------- --------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........... $ 4,378 $121,885 $
Net property and equipment.......... 3,014 14,805
Total assets........................ 8,074 146,541
Long-term obligations, including
current portion.................... 783 133,162
Total stockholders' equity.......... 6,498 8,065
<CAPTION>
AS OF
DECEMBER 31, AS OF JUNE 30,
1997 1998
------------ -----------------------------
(UNAUDITED)
<S> <C> <C> <C>
OTHER OPERATING DATA:
Homes and businesses passed......... 278,000 1,345,000
Lines installed.....................
</TABLE>
- --------
(1) Under the Company's Certificate of Incorporation, all outstanding Preferred
Stock will convert into Common Stock on a one-for-one basis upon the
completion of this offering. The pro forma net loss per share assumes the
conversion of the Preferred Stock and reflects the exercise for cash of
warrants to purchase 1,800,000 shares of Common Stock immediately prior to
the consummation of this offering.
6
<PAGE>
(2) EBITDA consists of net loss excluding net interest, taxes, depreciation and
amortization (including amortization of deferred compensation). 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 (i) as an alternative to operating income (as determined in
accordance with generally accepted accounting principles ("GAAP")) as an
indicator of the Company's operating performance or (ii) as an alternative
to cash flows from operating activities (as determined in accordance with
GAAP) 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.
(3) Adjusted to reflect the receipt of net proceeds of $ from this offering
(after deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company).
7
<PAGE>
RISK FACTORS
An investment in the Common Stock 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 Common Stock offered hereby. This Prospectus also includes
"forward-looking" statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (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 shares of
Common Stock offered hereby pursuant to this Prospectus, although such
provisions are applicable to such statements made in connection with resales
of such shares. The forward-looking statements 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 below, in "Business" 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Forward Looking Statements."
LIMITED OPERATING HISTORY AND EARLY STAGE OF DEPLOYMENT
The Company was incorporated in October 1996 and introduced its service
commercially in the San Francisco Bay Area in December 1997 and in the Los
Angeles, New York City and Boston metropolitan areas in August 1998. As a
result of the Company's limited operating history, and because the issuance of
its 13 1/2% Senior Discount Notes due March 2008 and Warrants (as defined)
(together, the "Senior Discount Notes") and the Company's use of proceeds
therefrom make recent and future operating results not comparable to
historical operating results, the Company has limited historical financial
data upon which an evaluation of the Company or its prospects can be based.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in an early stage of
deployment, particularly those 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 within its
existing and in new regions; increase awareness of the Company's services;
respond to competitive developments; continue to attract, retain and motivate
qualified persons; continue to upgrade its technologies; commercialize its
network services incorporating such technologies; and effectively manage its
expanding operations. 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 and financial condition.
The Company's practice with respect to its enterprise customers has been to
enter into an arrangement for a negotiated price to install the service
initially to a small number of end-users. After a successful initial
implementation, the service would be expanded to a larger group of end-users
and then rolled out on a broader scale. Approximately enterprise customers
have completed their initial phase of deployment and are in the process of
deploying the Company's service. As of , 1998 the Company had
approximately end-user lines in operation with approximately enterprise
and ISP customers. An enterprise customer decides whether to implement a broad
rollout of the Company's services after evaluating the results of the initial
phase of deployment. The Company expects that it will generally take at least
two months to complete the initial deployment of the first end-users from each
enterprise customer and at least three additional months before these
customers evaluate the results to determine whether to proceed to roll out
additional end-users. The Company will not receive significant revenue from
enterprise customers until and unless these rollouts occur. There can be no
assurance as to whether or when the Company will obtain enterprise customers
beyond the evaluation stage or the extent to which such customers will roll
out the Company's services. In addition, such customers could elect to
terminate these arrangements upon short notice. Any continued or ongoing
failure for any reason of enterprise customers to roll out the Company's
services will have a material adverse effect on the Company's business,
prospects, operating results and financial condition. See "--Dependence Upon
Indirect Sales Channels" and "Business--Customers."
8
<PAGE>
HISTORY AND CONTINUATION OF OPERATING LOSSES
The Company has incurred substantial and increasing net operating losses and
experienced negative cash flow each month since its inception. As of June 30,
1998, the Company had an accumulated deficit of approximately $14.3 million.
The Company currently intends to increase significantly its capital
expenditures and operating expenses in order to expand its networks 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 net operating
losses and substantial negative cash flow for at least the next several years.
In addition, the Company raised approximately $135 million through the
issuance of the Senior Discount Notes in March 1998, which accrete to $260
million by March 2003. The Company expects that annual interest and
amortization charges relating to the Senior Discount Notes will be
approximately $16.0 million during the year ending December 31, 1998, and will
increase to approximately $36.9 million for the year ending December 31, 2004
and will remain at that level through maturity of the Senior Discount Notes in
March 2008. Accordingly, the Company's operating losses will increase
significantly as a result of the interest and amortization charges related to
the Senior Discount Notes. In addition, the Company expects to incur
substantial additional debt in the future. Any additional debt would increase
the Company's interest and amortization charges. See "--Substantial Future
Capital Requirements."
The Company believes that it will generate positive EBITDA (before
allocation of corporate overhead) in the San Francisco Bay Area by .
However, the achievement of positive EBITDA in that time frame will depend
upon a number of factors, including the Company's ability to continue to
generate new line orders, the Company's ability to install ordered lines on a
timely basis, the extent of customer order cancellations, the Company's
ability to sustain price levels and the overall performance of the Company's
network and services. There can be no assurance that the Company will generate
positive EBITDA in the San Francisco Bay Area by or at all. In
addition, the Company's ability to generate positive EBITDA will vary from
region to region and could take as long as 48 months for certain regions, if
at all. The Company's performance in the San Francisco Bay Area should not be
considered indicative of the future performance of other regions. Furthermore,
EBITDA should not be construed (i) as an alternative to operating income (as
determined in accordance with GAAP) as an indicator of the Company's operating
performance, or (ii) as an alternative to cash flows from operating activities
(as determined in accordance with GAAP) as a measure of liquidity. EBITDA as
calculated by the Company may be calculated differently than EBITDA for other
companies. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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 and ability of ILECs to provide and construct the
required central office ("CO") collocation facilities, the rate at which
customers subscribe to the Company's services, 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 enterprise and ISP
customers and on levels of subscriber churn, which can vary due to a variety
of factors, 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 or subscriber
churn as a result of customers or subscribers discontinuing the use of its
services or switching to an alternative service provider. Further factors that
may add to volatility in the Company's annual or quarterly 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 requiring the
Company to reduce its prices, technical difficulties or network downtime,
general economic conditions and economic conditions specific to the Company's
industry, among other factors. There can be delays in the commencement and
recognition of revenue because the installation of telecommunication lines to
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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 and financial condition. As a
result of all of the foregoing factors, it is likely that in some future
quarter the Company's operating results will be below the expectations of
securities analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected. Fluctuations in
operating results may also result in volatility in the price of the Company's
Common Stock.
UNPROVEN BUSINESS MODEL
The Company believes that it was the first packet-based CLEC to provide
high-speed digital communication services using DSL technology. As such, the
Company's business strategy is unproven. 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 principal services and have only been launched in
the San Francisco Bay Area and the Los Angeles, New York City and Boston
metropolitan areas. There can be no assurance that the Company's services will
achieve broad commercial acceptance. The prices the Company charges for
certain services are in some cases higher than those charged by its
competitors for the same services. There can be no assurance that a sufficient
number of end-users will be willing to pay the prices charged by the Company
for its TeleSpeed services. Additionally, prices for digital communication
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 of the Company's services could result in a material adverse
effect on the Company's business, prospects, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Business Strategy."
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
experienced initial rejections of its applications to obtain collocation space
from Pacific Bell. The Company has also experienced similar rejections in
certain COs in the Los Angeles region from both Pacific Bell and GTE
Corporation ("GTE") and in Massachusetts, Virginia and in other states from
Bell Atlantic and other ILECs. The Company expects that as it proceeds with
its deployment, it will submit applications for collocation space and it will
face additional rejections, which may be material in number, for COs in its
other target markets. Although certain CO applications that were initially
rejected by Pacific Bell have been subsequently accepted, there can be no
assurance that the Company will continue to be successful in reversing CO
rejections in other regions. The Company cannot predict the extent of these
rejections or their impact on its ability to provide broad service
availability in its target markets. The rejection of the Company's
applications for collocation space has in the past resulted, and could in the
future result, in delays in, or increased expenses associated with, the
rollout of its services in its target markets, which could result in a
material adverse effect on its business, prospects, operating results and
financial condition.
Broad service availability is important for the Company's enterprise and ISP
customers that 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.
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In this regard, the Company is in arbitration proceedings with multiple ILECs
regarding certain collocation spaces which have adversely affected and, in the
future, may continue to adversely affect the Company's ability to deploy its
network, provide service to customers, and enter into additional
interconnection agreements with the ILECs in other states. 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. 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 legal
actions to resolve situations where ILECs assert that certain COs lack
sufficient space for physical collocation by the Company. The Federal
Communications Commission (the "FCC") is reviewing the collocation policies
and practices of the ILECs with the goal of facilitating the efforts of CLECs
such as the Company to obtain collocation space more easily and on more
favorable terms. There is no guarantee that the FCC's review will result in
fewer ILEC rejections of the Company's physical collocation applications or
collocation availability on more favorable terms for the Company. There can be
no assurance that the Company's legal and regulatory 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.
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, would
no longer be barred from entry into this market. The December 31, 1997 Ruling
declared that the portions of the 1996 Act subjecting RBOCs to a prior FCC
approval process in order to provide interLATA services within their
respective incumbent service regions are unconstitutional. Under the December
31, 1997 Ruling, RBOCs would no longer be 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. On September 8, 1998, the United States Appeals
Court for the Fifth Circuit reversed the December 31, 1997 Ruling. This
decision itself is likely to be appealed to the United States Supreme Court.
If the December 31, 1997 Ruling is reinstated by the United States Supreme
Court, 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 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 FCC has commenced a review of the manner
in which ILECs provision DSL-capable lines to CLECs, including the Company,
with the goal of increasing CLECs' access to such lines. For instance, the FCC
is examining the imposition of additional obligations on the ILECs to allow
CLECs such as the Company to provide higher speed DSL services through local
loops that involve digital loop carrier ("DLC") systems. 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
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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 PROVISION COPPER
LINES
The Company interconnects with and uses ILECs' networks 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
availability and reliability of transmission and other telecommunication
services from other CLECs is limited. The Company is also dependent to some
extent on cooperation from the ILECs, including the provision and repair of
transmission facilities. For example, the Company depends on the ILECs to
provide the Company's DSL service through DLC systems. The ILECs in turn rely
significantly on unionized labor. Labor-related issues and actions on the part
of the ILECs have in the past, and in the future may, adversely affect the
ILEC's provision of services and network components ordered by the Company.
The Company's dependence on the ILECs could cause the Company to encounter
delays in establishing its network and providing higher speed DSL services.
Any such delays could adversely affect the Company's relationships with its
customers, result in harm to the Company's reputation or could otherwise have
a material adverse effect on the Company's business, prospects, operating
results and financial condition.
In particular, the Company has not yet established a history of ordering and
obtaining the provisioning and repair of very large volumes of DSL-capable
lines from any ILEC. For example, the Company is not certain whether it can
successfully deploy higher speed DSL services through the growing number of
copper lines provided through DLC systems. 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,
and any failure to do so could have a material adverse effect on the Company's
business, prospects, operating results and financial condition. Further, the
Company does not have an established history of addressing the billing
practices of the different ILECs. As the Company's geographic and customer
base grows, the Company may encounter billing disputes with the ILECs that
could have a material adverse effect on the Company's business, prospects,
operating results and financial condition.
DEPENDENCE ON INTERCONNECTION AGREEMENTS WITH ILECS
The success of the Company's strategy is dependent upon the Company's
ability to enter into and implement interconnection agreements in each of its
target markets with the appropriate 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 differences in interpretation
may arise that cannot be resolved on favorable terms to the Company. For
example, the Company is in arbitration proceedings with multiple ILECs under
the dispute resolution clauses of the Company's interconnection agreements.
These disputes have adversely affected and, in the future, may continue to
adversely affect the Company's ability to deploy its network, provide service
to customers, and enter into additional interconnection agreements with the
ILECs in other states. Finally, the interconnection agreements are subject to
state commission, FCC and judicial oversight. There can be no assurance that
modification to the terms, conditions or prices of the Company's
interconnection agreements by these governmental bodies, or that disputes with
ILECs over the terms of the interconnection agreements generally, will not
have a material adverse affect on the Company's business, prospects, operating
results and financial condition. See "Business--Interconnection Agreements
with ILECs."
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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 at rates, terms and conditions
satisfactory to the Company, and the failure to obtain such services and
satisfactory rates, terms and conditions would have a material adverse effect
on the Company's business, prospects, operating results and financial
condition.
INTENSE COMPETITION
The markets for RLAN access and business and consumer Internet access
services are intensely competitive, and the Company expects that such markets
will become increasingly competitive in the future. The Company's most
immediate competitors are the ILECs, Cable Modem Service Providers ("CMSPs"),
IXCs, Fiber-Based CLECs ("FCLECs"), ISPs, Online 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 directly compete with some or all of the Company's high-speed
digital services. Such technologies include ISDN, DSL, wireless data and cable
modems. The principal 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 respect to such factors as, 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, U S WEST Communications,
Inc. is offering commercial DSL services in certain areas in its 14-state
region. Ameritech Corporation has announced such services in Michigan and
Illinois. Bell Atlantic has announced such services in the Washington, D.C.
metropolitan area and in Pennsylvania. In addition, Pacific Bell (a subsidiary
of SBC Communications) announced its commercial DSL services in 1998. Both
BellSouth and GTE have announced their intention to offer commercial DSL
services by December 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; as 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. Certain of the ILECs have aggressively priced
their consumer asymmetric digital subscriber line ("ADSL") services as low as
$30-$40 per month, placing pricing pressure on the Company's TeleSpeed
services. 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, which provides the ILECs with a potential competitive
advantage compared with the Company. Accordingly, the Company may be unable to
compete successfully against the ILECs, and any failure to do so would
materially and adversely affect the Company's business, prospects, operating
results and financial condition.
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
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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 and financial condition.
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, business, prospects, operating results and financial
condition 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 MANAGEMENT OF SUBSTANTIAL GROWTH IN OPERATIONS
The Company's strategy is to significantly expand its network within its
existing regions and to deploy networks in a total of 22 regions by . The
development and expansion of the Company's operations will depend upon, among
other things, the Company's ability to identify and access key COs within
existing and target regions, 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), enter into and renew interconnection agreements with the
appropriate ILECs on satisfactory terms and conditions, and raise additional
capital to fund the completion of the deployment of its networks. To grow at
its desired pace, the Company must, among other things, (i) market to and
acquire a substantial number of 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. There can be no assurance that the Company will deploy
its networks as scheduled, will gain enterprise and ISP customers as expected,
or will otherwise achieve the operational growth necessary to achieve its
business strategy, and any material or ongoing failure to do so may adversely
affect the price of the Company's Common Stock in the public market.
The Company is currently experiencing a period of rapid and substantial
growth, and it expects to continue to experience substantial growth as the
Company executes its strategy of expanding its networks into 22 regions and
providing blanket coverage within each region. This growth has placed, and is
expected to place, a significant strain on the Company's management and
operational resources. The Company has increased its employees from 42 at
December 31, 1997, to at , 1998, and expects to continue to increase
significantly its employee base to support the deployment of its networks. In
addition, 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 networks,
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 and financial condition 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 networks. As of June
30, 1998, the Company had approximately $121.9 million in cash and cash
equivalents. From inception until June 30, 1998, the Company had made
approximately $15.5 million in capital expenditures and had incurred operating
expenses of approximately $11.8 million in the development of its business,
the development of technology and operating support systems, the conduct of
sales and marketing activities and the establishment of its management team.
In addition, the Company has made and expects to continue to make significant
capital outlays in order to continue to commercially deploy its networks. The
Company believes its current capital resources, including the proceeds of this
offering, will be sufficient to fund the Company's aggregate capital
expenditures and working capital requirements, including operating losses,
through the . The Company will require substantial additional
financing to support its operations after that date, including funding the
significant capital expenditures and working capital requirements necessary
for the Company to provide services in its 22 regional networks. The Company
could also require additional financing before the to meet higher-
than-expected subscription rates for its services or to respond to
competition. 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 targeted regions. There
can be no assurance that the Company will be able to raise the additional
capital necessary to implement its rollout strategy in a timely fashion, if at
all.
In addition, the Company's ability to fund the commercial deployment and
expansion of its network should also be considered in light of the Company's
significant interest and amortization charges relating to the Senior Discount
Notes. Although no cash interest is payable on the Senior Discount Notes until
September 2003, the Senior Discount Notes accrete to $260 million until March
2003. Thereafter, the Company expects interest and amortization charges
relating to the Senior Discount Notes to accrue at a rate of $36.9 million for
the year ending December 31, 2004 and to remain at that level through the
maturity of the Senior Discount Notes in March 2008. Such interest and
amortization charges may require the Company to obtain additional financing
earlier than expected or on terms less favorable than the Company would
otherwise agree.
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. The Company expects to seek to raise additional capital prior to
the through additional debt and possibly equity financing. Such a
financing may be dilutive to existing stockholders. The indenture governing
the Senior Discount Notes (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. If the Company is unable to obtain such
additional capital or is required to obtain it on terms less satisfactory than
desired by the Company, the Company will be required to delay the expansion of
its business or take or forego actions, any or all of which would materially
adversely affect the Company's business, prospects, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON GROWTH IN DEMAND FOR DSL-BASED SERVICES
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 digital communication
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 digital communication 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,
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ease and cost of access and quality of service, remain unresolved and may
impact the growth of such services. If the markets for the services offered by
the Company, including Internet access, fail to develop, grow more slowly than
anticipated or become saturated with competitors, the Company's business,
prospects, operating results and financial condition could be materially
adversely affected. See "Business--Industry Background."
DEPENDENCE UPON INDIRECT SALES CHANNELS
The Company markets its Internet access services to ISPs for resale to their
business and consumer end-users. Although the Company believes that its RLAN
services will ultimately generate a significant portion of the Company's
revenues in the future, to date ISPs have accounted for a majority of the
Company's revenues, and the Company expects that its ISP customers will
generate a significant portion of its future revenue growth and market
penetration. The Company plans to build relationships with numerous ISP
customers in order to gain access and provide its services to as many ISP
business and residential end-users as possible. The Company's agreements with
its ISP customers are generally non-exclusive, and many of the Company's ISP
customers also resell services offered by the Company's competitors. If the
number of business and residential end-users of the Company's services
provided through the ISP channel is significantly lower than the Company's
forecast for any reason, 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, prospects, operating results and
financial condition would be materially adversely affected. The Company also
intends to market its products through value added resellers and systems
integrators and to enter into strategic marketing relationships with leading
IXCs, which the Company believes will enable it to penetrate its markets and
gain market acceptance more rapidly. No assurance can be given that the
Company will establish strategic relationships with these third parties or, if
it does, that such relationships will improve the Company's business,
prospects, operating results or financial condition. See "Business--Customers"
and "--Sales and Marketing."
SUBSTANTIAL AND INCREASING LEVERAGE
The Company is highly leveraged. At June 30, 1998, the Company and its
Subsidiaries had approximately $132.9 million of long-term obligations. The
Company's indebtedness should be considered in light of expected annual
interest and amortization charges relating to the Senior Discount Notes, which
the Company expects will be approximately $16.0 million during the year ending
December 31, 1998 to $36.9 million for the year ending December 31, 2004 and
will remain at that level through the maturity of the Senior Discount Notes in
March 2008. The Company plans to incur substantial additional indebtedness to
finance the continued development, commercial deployment and expansion of its
networks for funding operating losses and working capital. The degree to which
the Company is leveraged could have important consequences to the holders of
the Common Stock, 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 on the Senior Discount Notes beginning in March 2003 or
other indebtedness that the Company incurs in the future; and (iii) 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 Senior Discount Notes, and the substantial additional
indebtedness the Company plans to incur. The Senior Discount Notes accrete to
$260 million by March 2003. The Company
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must begin paying cash interest on the Senior Discount Notes in September
2003, and the Company expects that annual interest and amortization charges
relating to the Senior Discount Notes will be approximately $36.9 million for
the year ending December 31, 2004 and will remain at that level through the
maturity of the Senior Discount Notes in March 2008. The ability of the
Company to make scheduled payments with respect to indebtedness, including the
Senior Discount 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 Senior
Discount Notes, it may have to reduce or delay network deployments,
restructure or refinance its indebtedness or seek additional equity capital.
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 Senior Discount Notes. Any failure
by the Company to satisfy its obligations with respect to the Senior Discount
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. The inability of the Company to service its current and
future indebtedness would have a material adverse effect on the Company's
business, prospectus, operating results and financial condition and the price
of the Common Stock.
UNPROVEN NETWORK SCALABILITY AND SPEED
Due to the limited deployment of the Company's services, the ability of the
Company's DSL networks 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 networks are 1.5 Mbps downstream,
the actual data transmission speeds over the Company's networks 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 networks 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 and financial condition. See "Business--Network Architecture
and Technology."
DIGITAL COMMUNICATION 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. Further, 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
17
<PAGE>
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. Pacific Bell,
among other ILECs, has provided indications that it is prepared to and appears
to be acting unilaterally and preemptively to ostensibly prevent degradation
of its network services. If the Company's TeleSpeed services cause widespread
network degradation or are perceived to cause such interference then
responsive actions by the ILECs or state or federal regulators could have a
material adverse effect on the Company's reputation, brand image, service
quality, and customer satisfaction and retention. Any such, network
interference or network interference perceived by the ILECs or state or
federal regulators could have a material adverse effect on the Company's
business, prospects, operating results and financial condition.
RISK OF SYSTEM FAILURE
The Company's operations are dependent upon its ability to support its
highly complex network infrastructure and avoid damage 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 and
financial condition. See "Business--Network Architecture and Technology."
SECURITY RISK IN THE NETWORK
Despite the implementation of security measures, the Company's networks 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 new 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 and financial
condition. See "Business--Network Architecture and Technology."
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
18
<PAGE>
technologies and substitute their technologies into the Company's networks.
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 and financial condition. See "Business--Network Architecture
and Technology."
DEPENDENCE UPON AND NEED TO HIRE ADDITIONAL KEY PERSONNEL
The Company's performance is dependent on the performance of its executive
officers and key employees. In particular, the Company's senior management has
significant experience in the data communications, telecommunications and
personal computer industries, and the loss of any one of the Company's
executive officers could have a material adverse effect of the Company's
ability to execute its business strategy effectively. In addition, the Company
is dependent upon the regional general managers for each region the Company
has entered and prepares to enter. Regional general managers have direct
responsibility for sales, service and market development efforts in their
respective regions, and the loss of one could disrupt significantly the
operations in the region. Additionally, 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 in connection with its expansion within its
existing regions and the deployment and marketing of its network into targeted
regions. 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 and financial condition. See "Business--Employees" and
"Management."
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
19
<PAGE>
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 and financial condition.
In August 1998, the FCC promulgated new rules that would allow ILECs to
provide their own DSL services free from ILEC regulation through a separate
affiliate. The FCC has also simultaneously proposed additional rules requiring
ILECs to provide collocation and loops to CLECs such as the Company on more
favorable terms to the CLECs than previously prescribed by the FCC. The FCC's
August 1998 ruling and its actions thereunder may be appealed or reconsidered,
and it is uncertain whether the FCC will in fact order more favorable
collocation and loop availability for CLECs. The provision of DSL services by
an affiliate of an ILEC not subject to ILEC regulation could have a material
adverse effect on the Company's business, prospects, operating results and
financial condition.
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 and financial
condition. See "Business--Government Regulations" and "--Legal Proceedings."
RISKS ASSOCIATED WITH POTENTIAL GENERAL ECONOMIC DOWNTURN
In the last few years the general health of the economy, particularly the
California economy, has been relatively strong and growing, a consequence of
which has been increasing capital spending by individuals and growing
companies to keep pace with rapid technological advances. To the extent the
general economic health of the United States or of California declines from
recent historically high levels, or to the extent individuals or companies
fear such a decline is imminent, such individuals and companies may reduce, in
the near term, expenditures such as those for the services offered by the
Company. Any such decline or concern about an imminent decline could delay
decisions among certain of the Company's customers to roll-out the Company's
services or could delay decisions by prospective customers to make initial
evaluations of the Company's services. Such delays would have a material
adverse effect on the Company's business, prospects, operating results and
financial condition.
CONTROL BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The Company's executive officers and directors and principal stockholders
together will beneficially own over % of the outstanding Common Stock
after completion of this offering ( % if the Over-Allotment Option is
exercised in full). 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 or otherwise discouraging a potential
acquirer from attempting to obtain control of the Company, which in turn could
have a material adverse effect on the market price of the Common Stock or
prevent the Company's stockholders from realizing a premium over the then
prevailing market prices for their shares of Common Stock. See "Management"
and "Principal Stockholders."
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need
to distinguish 21st century dates from 20th century dates and, as a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements. The Company
has reviewed its internally developed information technology systems and
programs and believes that its systems are Year 2000 compliant and that there
are no significant Year 2000 issues within the Company's systems or services.
The Company has not reviewed its non-information technology systems for Year
2000 issues relating to embedded microprocessors. To the extent that such
issues exist, these systems may
20
<PAGE>
need to be replaced or upgraded to become Year 2000 compliant. The Company
believes that its non-information technology systems will not present any
significant Year 2000 issues, although there can be no assurance in this
regard. In addition, the Company utilizes third-party equipment and software
that may not be Year 2000 compliant. Failure of such third-party equipment or
software to operate properly with regard to the year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business,
prospects, operating results and financial condition. Furthermore, the
purchasing patterns of the Company's enterprise and ISP customers may be
affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available for the Company's services, which could have
a material adverse effect on the Company's business, prospects, operating
results and financial condition. The Company, to date, has not made any
assessment of the Year 2000 risks associated with its third-party equipment or
software or with its enterprise and ISP customers and has not made any
contingency plans to address such risks. However, the Company may devise a
Year 2000 contingency plan in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Issues."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY
OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering. The initial
public offering price will be determined by negotiation between the Company
and the Underwriters based upon several factors and may not be indicative of
the market price of the Common Stock after the offering. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The trading price of the Common Stock could be subject
to wide fluctuations in response to factors such as actual or anticipated
variations in quarterly operating results, the addition or loss of customers
or subscribers, announcements of technological innovations, new products or
services by the Company or its competitors, changes in financial estimates or
recommendations by securities analysts, conditions or trends in the
telecommunications industry, growth of the Internet and online commerce
industries, announcements by the Company of significant acquisitions,
strategic partnerships, joint ventures or capital commitments, additions or
departures of key personnel, future equity or debt financings, general market
and general economic conditions and other events or factors, many of which are
beyond the Company's control. In addition, in recent years the stock market
has experienced extreme price and volume fluctuations. These fluctuations have
had a substantial effect on the market prices for many emerging growth
companies, often unrelated to the operating performance of the specific
companies. Such market fluctuations could adversely affect the price of the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following this offering, or the appearance that such shares are available for
sale, could adversely affect the market price for the Company's Common Stock.
The number of shares of Common Stock available for sale in the public market
is limited by restrictions under the Securities Act and lock-up agreements
under which the holders of all of the Company's outstanding shares of Common
Stock and options and warrants to purchase Common Stock have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days
after the date of this Prospectus without the prior written consent of Bear,
Stearns & Co. Inc. However, Bear, Stearns & Co. Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. Based on shares of Common Stock,
options and warrants outstanding as of September 1, 1998, the following shares
of Common Stock will be eligible for future sale. On the date of this
Prospectus, the shares offered hereby will be eligible for sale in the
public market without restriction. An additional 29,814,304 shares will be
eligible for sale without restriction 180 days after the date of this
Prospectus, except that shares held by "affiliates" of the Company within the
meaning of Rule 144 under the Securities Act are subject to certain volume
limitations thereunder and registration rights. An additional 1,800,000 shares
of Common Stock will be eligible for sale without restriction one year after
the closing of the offering subject to volume limitations pursuant to Rule 144
and the exercise of registration rights. In addition, the Company had
13,970,250 shares of Common Stock reserved for issuance pursuant to options
under its 1997 Stock Plan, of which 11,356,931 were subject to outstanding
options at September 1, 1998, and the Company had 5,188,764 shares underlying
outstanding warrants.
21
<PAGE>
The Company intends to register, following the effective date of this
offering, a total of 13,970,250 shares of Common Stock reserved for issuance
under the Company's 1997 Stock Plan and shares of Common Stock reserved
for issuance under its 1998 Employee Stock Purchase Plan. Further, upon
expiration of the lock-up agreements referred to above, holders of
approximately 31,529,866 shares of Common Stock will be entitled to certain
registration rights with respect to such shares. In addition, there are
5,188,764 shares underlying outstanding warrants, including 5,053,764 shares
issuable upon exercise of the Warrants that will be eligible for resale upon
expiration of their respective one-year holding periods under Rule 144,
subject to the exercise of registration rights. If such holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, such sales could have a material adverse effect on
the market price for the Company's Common Stock. See "Description of Capital
Stock--Registration Rights" and "Shares Eligible for Future Sale."
ANTITAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no current
plans to issue shares of Preferred Stock. The Company's charter and bylaws
provide for the establishment of a classified Board of Directors, limitations
on the ability of stockholders to call special meetings, the lack of
cumulative voting for directors and procedures for advance notification of
stockholder nominations and proposals. These provisions of the Company's
charter and bylaws, as well as Section 203 under the Delaware General
Corporation Law to which the Company is subject, could discourage potential
acquisition proposals and could delay or prevent a change of control of the
Company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. The Indenture provides that in the
event of certain changes in control of the Company, each holder will have the
right to require the Company to repurchase such holder's Senior Discount Notes
at a premium over the accreted value of such debt. The provisions in the
charter and bylaws and the Indenture could have the effect of discouraging
others from making tender offers for the Company's shares and, as a
consequence, they also may inhibit increases in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the
management of the Company. See "Description of Capital Stock--Anti-takeover
Effects of Certain Provisions of Covad's Charter, Bylaws and Delaware Law."
DILUTION
Investors participating in this offering will incur immediate, substantial
dilution. To the extent outstanding warrants and options to purchase the
Company's Common Stock are exercised, there will be further dilution. In
addition, to the extent the Company issues additional equity securities to
fund future capital expenditures and working capital needs, investors
participating in this offering may experience further dilution. See "--
Substantial Future Capital Needs" and "Dilution."
ABSENCE OF DIVIDENDS
The Company has not declared or paid any dividends since its inception. The
Company currently anticipates that it will retain all of its future earnings
for use in the expansion and operation of its business and does not anticipate
paying any cash dividends in the foreseeable future. In addition, the
Company's existing financing arrangements restrict the payment of any
dividends. See "Dividend Policy."
22
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $ million ($ million if
the Over-Allotment Option is exercised in full) assuming an initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and offering expenses.
The Company anticipates that the net proceeds of this offering will be used
to fund capital expenditures to be incurred in the deployment of the Company's
networks in existing and new 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, through . 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 intends to invest
such funds in short-term, interest-bearing, investment-grade securities. See
"Risk Factors--Substantial Future Capital Requirements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DIVIDEND POLICY
The Company has not declared or paid any dividends since its inception. The
Company currently anticipates that it will retain all of its future earnings
for use in the expansion and operation of its business and does not anticipate
paying any cash dividends in the foreseeable future. The Company's future
dividend policy will be determined by its Board of Directors. The Company's
existing financing arrangements restrict the payment of any dividends. The
Company anticipates that it and its Subsidiaries will incur substantial
additional indebtedness, which is likely to be subject to additional
restrictions on dividends.
23
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
June 30, 1998, (ii) the pro forma capitalization of the Company after giving
effect to the automatic conversion of all outstanding shares of Preferred
Stock into Common Stock upon the closing of this offering (not giving effect
to the payment of cumulated dividends on Preferred Stock in shares of Common
Stock immediately prior to the closing of this offering), and (iii) the as
adjusted capitalization of the Company to reflect the receipt of the estimated
net proceeds from the sale of the Common Stock in the offering at the
estimated initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-----------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents........................ $121,885 $121,891 $
======== ========
LONG-TERM OBLIGATIONS:
Capital lease obligations (including current
portion)........................................ 695 695 695
13 1/2% Senior Discount Notes due 2008, net...... 132,467 132,467 132,467
-------- -------- --------
Total long-term obligations (including current
portion)...................................... 133,162 133,162 133,162
STOCKHOLDERS' EQUITY(1):
Preferred Stock, $0.001 par value; 5,000,000
shares authorized pro forma and as adjusted, no
shares issued and outstanding pro forma and as
adjusted........................................ -- -- --
Convertible Preferred Stock, $0.001 par value;
30,000,000 shares authorized actual, 18,246,162
shares issued and outstanding actual; no shares
issued and outstanding pro forma and as
adjusted........................................ 18 -- --
Common Stock, $0.001 par value; 65,000,000 shares
authorized; 11,479,767 shares issued and
outstanding actual; 150,000,000 shares
authorized and 31,525,929 shares issued and
outstanding pro forma and shares issued and
outstanding as adjusted(2)...................... 11 31
Additional paid-in capital....................... 26,036 26,040
Deferred compensation............................ (3,684) (3,684) (3,684)
Accumulated deficit.............................. (14,316) (14,316) (14,316)
-------- -------- --------
Total stockholders' equity..................... 8,065 8,071
-------- -------- --------
Total capitalization........................... $141,227 $141,233 $
======== ======== ========
</TABLE>
- --------
(1) Shares reflect an amendment and restatement of the Certificate of
Incorporation filed August 28, 1998 which gave effect to a three-for-two
stock split for issued and outstanding shares and increased authorized
shares of Common Stock and Preferred Stock to 65,000,000 and 30,000,000,
respectively.
(2) Excludes (i) an aggregate of 13,970,250 shares of Common Stock reserved
for issuance under the Company's 1997 Stock Plan, of which 11,356,931
shares were subject to outstanding options at September 1, 1998 at a
weighted average exercise price of $1.25 per share, (ii) an aggregate of
shares of Common Stock reserved for issuance under the Company's 1998
Employee Stock Purchase Plan, and (iii) an aggregate of 5,188,764 shares
of Common Stock issuable upon exercise of outstanding warrants at
September 1, 1998 at a weighted average exercise price of $0.029 per
share. The pro forma and the as adjusted figures include 1,800,000 shares
of Common Stock to be issued upon exercise for cash of outstanding
warrants immediately prior to the closing of this offering. See
"Description of Capital Stock."
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<PAGE>
DILUTION
The pro forma deficit in net tangible book value (deficit) of the Company as
of June 30, 1998 was $(123,000) or $(.004) per share of outstanding Common
Stock after giving effect to the conversion of the Company's outstanding
Preferred Stock and the exercise for cash of warrants to purchase 1,800,000
shares of Common Stock immediately prior to the consummation of this offering.
The pro forma deficit in net tangible book value per share represents the
Company's total tangible assets less total liabilities, divided by the number
of shares of Common Stock outstanding (assuming conversion of the Preferred
Stock). Dilution per share represents the difference between the amount per
share paid by investors in this offering and the pro forma deficit in net
tangible book value per share after the offering. After giving effect to this
offering at an assumed initial public offering price of $ per share
resulting in estimated net proceeds to the Company of approximately $
(after deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company), the as adjusted pro forma deficit in net
tangible book value of the Company at June 30, 1998 would have been $ or
$ per share. This represents an immediate decrease in the deficit in net
tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to new investors
purchasing shares at the assumed initial public offering price. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value (deficit) per share as of June
30, 1998......................................................... $(.004)
Increase per share attributable to new investors..................
------
As adjusted pro forma net tangible book value (deficit) per share
after the offering.................................................
---
Dilution per share to new investors................................. $
===
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the difference between the existing stockholders and new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid at an
assumed initial public offering price of $ per share (before deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company):
<TABLE>
<CAPTION>
WEIGHTED
SHARES TOTAL AVERAGE
PURCHASED CONSIDERATION PRICE
-------------- -------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- --------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... % $ % $
New investors............................
--- --- --- ---
Total.................................. 100% $ 100%
=== === === ===
</TABLE>
The foregoing table assumes no exercise of the Over-Allotment Option and no
exercise of stock options or warrants outstanding at September 1, 1998, other
than the exercise for cash of warrants to purchase 1,800,000 shares of Common
Stock immediately prior to the consummation of this offering. At September 1,
1998, there were options and warrants outstanding to purchase 16,545,695
shares of Common Stock at a weighted average exercise price of $0.87 per
share. To the extent outstanding options and warrants are exercised, there
will be further dilution to new investors. See "Management."
25
<PAGE>
SELECTED CONSOLIDATED 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 and the consolidated cash flow 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 and the consolidated
cash flow data for the three and six months ended June 30, 1998, and the
consolidated balance sheet data at June 30, 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 and six months
ended June 30, 1998 are not necessarily indicative of future results. For the
six months ended June 30, 1997, the Company had no revenues and total expenses
were not significant.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED SIX MONTHS
DECEMBER 31, JUNE 30, ENDED
1997 1998 JUNE 30, 1998
------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................... $ 26 $ 809 $ 995
Operating expenses:
Network and product costs............ 54 758 961
Sales, marketing, general and
administrative...................... 2,374 4,606 6,550
Amortization of deferred
compensation........................ 295 631 858
Depreciation and amortization........ 70 446 610
----------- ----------- -----------
Total operating expenses........... 2,793 6,441 8,979
----------- ----------- -----------
Income (loss) from operations.......... (2,767) (5,632) (7,984)
Net interest income (expense)........ 155 (3,291) (3,720)
----------- ----------- -----------
Net income (loss)...................... $ (2,612) $ (8,923) $ (11,704)
=========== =========== ===========
Net income (loss) per common share..... $ (0.80) $ (1.66) $ (2.31)
Shares used in computing net income
(loss) per share....................... 3,271,546 5,367,181 5,056,334
Pro forma net income (loss) per common
share(1).............................. $ (0.23) $ (0.35) $ (0.48)
Shares used in computing pro forma net
income (loss) per share............... 11,522,916 25,404,240 24,233,326
OTHER FINANCIAL DATA:
EBITDA(2).............................. $ (2,402) $ (4,555) $ (6,516)
CONSOLIDATED CASH FLOW DATA:
Provided by (used for) operating
activities............................ $ (1,895) $ (1,398) $ (877)
Provided by (used for) investing
activities............................ (2,494) (8,578) (12,380)
Provided by (used for) financing
activities............................ 8,767 103 130,764
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF JUNE 30, 1998
DECEMBER 31, -----------------------------
1997 ACTUAL AS ADJUSTED(3)
------------ ------------- --------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents........... $4,378 $121,885
Net property and equipment.......... 3,014 14,805
Total assets........................ 8,074 146,541
Long-term obligations, including
current portion.................... 783 133,162
Total stockholders' equity.......... 6,498 8,065
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30, 1998
1997 (UNAUDITED)
------------ -------------
<S> <C> <C>
OTHER OPERATING DATA:
Homes and businesses passed.......................... 278,000 1,345,000
Lines installed......................................
</TABLE>
- --------
(1) Under the Company's Certificate of Incorporation, all outstanding
Preferred Stock will convert into Common Stock on a one-for-one basis upon
the completion of this offering. The pro forma net loss per share assumes
the conversion of the Preferred Stock and reflects the exercise for cash
of warrants to purchase 1,800,000 shares of Common Stock immediately prior
to the consummation of this offering.
(2) EBITDA consists of net loss excluding net interest, taxes, depreciation
and amortization (including amortization of deferred compensation). 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 (i) as an alternative to operating income (as determined in
accordance with GAAP) as an indicator of the Company's operating
performance or (ii) as an alternative to cash flows from operating
activities (as determined in accordance with GAAP) 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.
(3) Adjusted to reflect the receipt of net proceeds of $ from this offering
(after deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company).
27
<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. See "--Forward Looking Statements."
OVERVIEW
Covad is a leading packet-based CLEC that provides dedicated high-speed
digital communication services using DSL technology to enterprise and ISP
customers. The Company introduced its services in the San Francisco Bay Area
in December 1997 and estimates that its operations in the San Francisco Bay
Area will generate positive EBITDA (before allocation of corporate overhead)
by , although there can be no assurance in this regard. The Company
launched its services in the Los Angeles, New York and Boston metropolitan
areas in August 1998 and expects to introduce its services in the Seattle and
Washington, D.C. metropolitan areas in the first quarter of 1999. In March
1998, the Company raised approximately $135 million through the issuance of
the Senior Discount Notes to fund the deployment of its networks in the
Initial Regions. As a result of the strong market demand for high-speed
digital communication services, the Company has decided to increase to 22 the
number of regions in which it plans to build a network and offer its services.
See "Risk Factors--Dependence Upon Growth in Demand For DSL-Based Services."
During 1998, the Company expanded its network in the San Francisco Bay Area
and increased its sales and marketing efforts in that region, which resulted
in higher revenue in each successive month in 1998. As of June 30, 1998, the
Company's network passed over 1.3 million homes and businesses, including
million in the San Francisco Bay Area. In addition, as of , 1998, the
Company had installed over lines.
In connection with the Company's expansion within existing regions and into
new regions, it expects to significantly increase its capital expenditures, as
well as its sales and marketing expenditures, to deploy its networks and
support additional subscribers in those regions. Accordingly, the Company
expects to incur substantial and increasing net losses for at least the next
several years. See "Risk Factors--Limited Operating History and Early Stage of
Deployment" and "--History and Continuation of Operating Losses."
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. Using the approach described below,
the Company has estimated the size of the addressable portion of these market
segments in its existing and targeted regions. No assurance can be given as to
the accuracy of the Company's estimates regarding the size of its addressable
market segments. See "Risk Factors--Dependence on Growth in Demand for DSL-
Based Services."
To determine the overall potential market, Covad specifically identified
each service area in which it plans to offer service and each CO within these
service areas. This determination was based primarily upon both business and
population demographics as well as Covad's desire to be in most COs in order
to provide blanket coverage in a region. To estimate the addressable market
for each market segment from the overall potential market, Covad analyzed the
demographics in the following manner:
RLAN Addressable Market: Based on an estimate of the number of households
served by the local CO with employees working for large enterprises and a
third party estimate for the entire U.S. of the percentage of households
that will purchase high-speed connectivity.
28
<PAGE>
Business Internet Addressable Market: Based on an estimate of the number
of small businesses served by the local CO and a third party estimate of
the number of small businesses expected to be online and the percentage of
such small businesses that will purchase high-speed connectivity.
Consumer Internet Addressable Market: Based on an estimate of the number
of online households (excluding RLAN households) served by the local CO
that will be heavy online users and an estimate of the percentage of such
households that will purchase high-speed connectivity.
A key determinant of the Company's revenues will be its service penetration
into the addressable portion of these market segments. The market for DSL
communications services is nascent and estimates of penetration are
necessarily highly speculative. Notwithstanding the above, the Company
believes it can achieve its economic goals at market penetration rates of less
than 10% in its RLAN and business Internet markets and less than 4% in the
consumer Internet market. No assurance can be given that the Company will meet
its penetration estimates. See "Risk Factors--Dependence on Growth in Demand
for DSL-Based Services" and "--Intense Competition."
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 Company intends to sell and
install CPE at prices that will provide the Company with positive margins on
such sales and installations. 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. To date, the Company has not
entered into any agreements for volume discounts which are material to its
financial results. The Company expects prices for the major components of both
recurring and non-recurring charges to decrease each year. The Company
believes its revenues from the sale of CPE will decline over time as CPE
becomes more generally available. The Company expects that the prices it
charges 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 and among 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 believes its regions will generate positive EBITDA (before
allocation of corporate overhead), on average, within 24 months of launching
service, based on the Company's current expectations regarding operating
expenses, customer subscription and retention rates and service pricing.
However, there can be no assurances in this regard, and the Company expects
that financial performance will vary from region to region and that the time
it will take for a region to generate positive EBITDA will range from months
to 48 months, depending upon region-specific characteristics. Such
characteristics include the size of the addressable markets in a region and
competitive dynamics including, among other things, pricing, 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. Although the Company
believes its San Francisco Bay Area region will achieve positive EBITDA
(before allocation of corporate overhead) by , the Company expects that
most of its other existing and target regions will not achieve positive EBITDA
as rapidly as the San Francisco Bay Area, and no assurance can be given that
any of the Company's regions, including the San Francisco Bay Area, will
achieve positive EBITDA in the time frame the Company expects or at all. As
the Company continues to develop its network within its targeted 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. See "Risk Factors--History and Continuation of Operating Losses."
29
<PAGE>
The development and expansion of the Company's business will require
significant expenditures. The principal capital expenditures incurred during
the buildup phase of any region involve 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. The average capital cost to deploy the
Company's facilities in a CO, excluding subscriber line cards, is expected to
average approximately $125,000 per CO collocation facility. 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. The Company expects that the average cost of such line cards will
decline over the next several years. 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 the
net proceeds of this offering together with its existing capital resources
will be sufficient to fund the Company's aggregate capital expenditures and
working capital requirements, including operating losses, through . See
"Risk Factors--Substantial Future Capital Requirements."
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 before a customer's telecommunications manager will allow 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.
RESULTS OF OPERATIONS
The Company's operations from inception in October 1996 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. In particular, the Company's
expenditure levels during the year ended December 31, 1997 do not reflect the
issuance of the Senior Discount Notes in March 1998 and the related interest
and amortization charges, which the Company expects will be approximately
$16.0 million during the year ending December 31, 1998 and will increase
annually thereafter up to $36.9 million for the year ending December 31, 2004
and to remain at that level through the maturity of the Senior Discount Notes
in March 2008. See "Risk Factors--Limited Operating History and Early Stage of
Deployment." The Company did not have any revenue until the fourth quarter of
1997. As a result, any comparison of the six month period ended June 30, 1998
with the six month period June 30, 1997 is not meaningful.
Revenues
Revenues were $26,000 for the year ended December 31, 1997 and were $995,000
for the six months ended June 30, 1998. This increase was attributable to the
expansion of the Company's network in the San Francisco Bay Area and the
Company's increased sales and marketing efforts in that region. As of June 30,
1998, the Company had an installed base of end-user lines with a network
that passed approximately 1.3 million homes and businesses. The Company
expects revenues to increase in future periods as the Company expands its
network within its existing regions, deploys networks in new regions and
increases its sales and marketing efforts in all of its target regions.
Network and Product Costs
Total network and product costs were approximately $54,000 for the year
ended December 31, 1997 and approximately $961,000 for the six months ended
June 30, 1998. This increase is attributable to the expansion of the Company's
network and increased orders resulting from the Company's sales and marketing
efforts. The Company expects aggregate line costs to increase significantly in
future periods due to increased sales activity and expected revenue growth.
30
<PAGE>
Sales, Marketing, General and Administrative Expenses
Sales, marketing, general and administrative expenses consist primarily of
salaries, expenses for the development of the Company's business, the
development of corporate identification, promotional and advertising
materials, expenses for the establishment of its management team, and sales
commissions. These expenses increased from $2.4 million for the year ended
December 31, 1997 to $6.6 million for the six months ended June 30, 1998, as a
result of increased headcount in all areas as the Company expanded its sales
and marketing efforts, expanded the deployment of its network and built
operational infrastructure. Sales, marketing, general and administrative
expenses are expected to increase significantly as the Company continues to
expand its business.
Deferred Compensation
Through June 30, 1998, the Company had recorded a total of $4.8 million of
deferred compensation, with an unamortized balance of $3.7 million on its
balance sheet as of June 30, 1998. This deferred compensation arose as a
result of the granting of stock options to employees with exercise prices per
share subsequently determined to be below the fair values per share for
accounting purposes of the Company's Common Stock at the dates of grant. The
deferred compensation is being amortized over the vesting period of the
applicable options, and resulted in a charge to operations of $295,000 during
the year ended December 31, 1997 and $858,000 during the six months ended June
30, 1998. As a result of additional stock option grants through July 1998, the
Company will record additional deferred compensation on its balance sheet of
approximately $4.1 million. The total charge to operations during the year
ending December 31, 1998 for amortization of the deferred compensation
associated with the options granted through July 31, 1998 will approximate
$3.8 million.
Depreciation and Amortization
Depreciation and amortization includes: (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 and (iv) amortization of capitalized
software costs. Depreciation and amortization was approximately $70,000 for
the year ended December 31, 1997 and approximately $610,000 for the six months
ended June 30, 1998. The increase was due to the increase in equipment and
facilities placed in service throughout the period. The Company expects
depreciation and amortization to increase significantly as the Company
increases its capital expenditures to expand its network.
Net Interest Income and Expense
Net 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 the year ended December 31, 1997, net interest income was
approximately $155,000, which was primarily attributable to the interest
income earned from the proceeds raised in the Company's Preferred Stock
financing in July 1997. Interest income for the six months ended June 30, 1998
was approximately $2.1 million, resulting primarily from investing the
proceeds from the Company's Senior Discount Notes. Interest expense for the
six months ended June 30, 1998 was approximately $5.9 million and consisted
primarily of interest on the Senior Discount Notes and capital lease
obligations. The Company expects interest expense to increase significantly as
a result of the issuance of the Senior Discount Notes. The Senior Discount
Notes accrete to $260 million by March 15, 2003, and as a result, the Company
expects that annual interest charges (which includes amortization of debt
discount and debt issuance costs) relating to the accretion of the Senior
Discount Notes will be approximately $16.0 million during the year ending
December 31, 1998, will increase to approximately $22.3 million for the year
ending December 31, 1999 and will increase to approximately $32.7 million for
the year ending December 31, 2002. Thereafter, the Company expects that
interest expense attributable to the Senior Discount Notes (including
amortization of debt discount, debt issuance costs and capitalized financing
costs) will increase to approximately $36.9 million for the year ending
December 31, 2004 and will remain at that level through maturity of the Senior
Discount Notes in March 2008.
31
<PAGE>
Income Taxes
Income taxes 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 six months ended June 30,
1998.
Certain Pro Forma Financial Information
Giving pro forma effect to the issuance of the Senior Discount Notes as if
it had been consummated on January 1, 1997 and the related interest and
amortization charges relating to the Senior Discount Notes accruing from such
date through June 30, 1998, the Company's interest expense would have been
approximately $20.3 million and $11.1 million, net loss would have been
approximately $22.9 million and $17.0 million, and net loss per Common Share
would have been $(7.00) and $(3.36) for the year ended December 31, 1997 and
the six months ended June 30, 1998, respectively. For purposes of such pro
forma calculation, the Company has assumed (i) no correlating additional
interest income attributable to interest earned on the cash proceeds of the
issuance of the Senior Discount Notes and (ii) no application of the use of
proceeds from such issuance for the Company's corporate purposes. Therefore,
the interest and amortization charges relating to the Senior Discount Notes
would have had a significant adverse effect on the Company's net loss and net
loss per share had the issuance occurred on January 1, 1997.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain consolidated statements of operations
data for the Company's most recent four quarters. This information has been
derived from the Company's unaudited consolidated financial statements. In
management's opinion, this unaudited information has been prepared on the same
basis as the annual consolidated financial statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented. This
information should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included elsewhere in this Prospectus.
The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
JUNE
SEPTEMBER 30, DECEMBER 31, MARCH 31, 30,
1997 1997 1998 1998
------------- ------------ --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................... $ -- $ 26 $ 186 $ 809
Operating expenses:
Network and product costs... 10 44 203 758
Sales, marketing, general
and administrative......... 783 1,334 1,944 4,606
Amortization of deferred
compensation............... 134 161 227 631
Depreciation and
amortization............... -- 70 164 446
----- ------- ------- -------
Total operating expenses.. 927 1,609 2,538 6,441
----- ------- ------- -------
Income (loss) from operations. (927) (1,583) (2,352) (5,632)
Net interest income (expense). 80 75 (429) (3,291)
----- ------- ------- -------
Net income (loss)........... $(847) $(1,508) $(2,781) $(8,923)
===== ======= ======= =======
</TABLE>
The Company has generated greater revenues in each successive month and
quarter in the last four quarters, reflecting increases in the number of
customers and subscribers. The Company's network and product costs have
increased in every quarter, reflecting costs associated with customer and
subscriber growth and the deployment
32
<PAGE>
of the Company's networks in existing and new regions. The Company's selling,
marketing, general and administrative expenses have increased in every quarter
and reflect sales and marketing costs associated with the acquisition of
customers and subscribers, including sales commissions, and the development of
regional and corporate infrastructure. Depreciation and amortization has
increased in each quarter, primarily reflecting the purchase of equipment
associated with the deployment of the Company's networks. The Company has
experienced increasing net losses on a quarterly basis as it increases its
capital expenditures and operating expenses, and the Company expects to
sustain increasing quarterly losses for at least the next several years. See
"Risk Factors--History and Continuation of Operating Losses."
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 and ability of the ILECs to provide and construct
the required CO collocation facilities, the rate at which customers subscribe
to the Company's services, 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 enterprise and ISP customers and on levels of
subscriber churn, which can vary due to 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 subscriber churn as a result of customers or
subscribers discontinuing the use of its services or switching to an
alternative service provider. Further factors that may add to volatility in
the Company's annual or quarterly 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, among other factors. 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 and financial condition. See "Risk Factors--Potential Fluctuations in
Operating Results."
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
$12.4 million for the first six months of 1998. The Company expects that its
capital expenditures will be substantially higher in future periods 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 $10.1 million of equity securities, $865,000 of lease
financings and $129.6 million in net proceeds raised from the issuance of the
Senior Discount Notes. As of June 30, 1998, the Company had an accumulated
deficit of $14.3 million, and cash and cash equivalents of $121.9 million.
Net cash used in the Company's operating activities was approximately $1.9
million and $877,000 for the year ended December 31, 1997 and the six months
ended June 30, 1998, respectively. The net cash used for operating activities
during these periods was primarily due to net losses and increases in current
assets, offset by noncash expenses, increases in accounts payable and accrued
liabilities. Net cash used by the Company for acquisitions of property and
equipment was $2.3 million during the year ended December 31, 1997 and $12.4
million during the six months ended June 30, 1998. Net cash provided by
financing activities for the year ended December 31, 1997 was $8.8 million and
related to the issuance of Common and Preferred Stock. Net cash provided by
financing activities for the six months ended June 30, 1998 was
$130.8 million, which primarily related to the issuance of the Senior Discount
Notes and Series C Preferred Stock.
33
<PAGE>
The Company believes its current capital resources, including the proceeds
of this offering, will be sufficient to fund the Company's aggregate capital
expenditures and working capital requirements, including operating losses,
through the . The Company will require substantial additional
financing to support its operations after that date, including funding the
significant capital expenditures and working capital requirements necessary
for the Company to provide services in a total of 22 markets. The Company
could also require additional financing before the to meet higher-
than-expected subscription rates for its services or to respond to
competition. 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 targeted regions. The
Company expects to raise additional capital prior to the through the
issuance of debt and possibly equity securities. There can be no assurance as
to the availability of any financing or the terms upon which such financing
might be available. The Company expects to experience substantial negative
cash flow from operating activities and negative free cash flow before
financing activities 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 issues including 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."
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need
to distinguish 21st century dates from 20th century dates and, as a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements. The Company
has reviewed its internally developed information technology systems and
programs and believes that its systems are Year 2000 compliant and that there
are no significant Year 2000 issues within the Company's systems or services.
The Company has not reviewed its non-information technology systems for Year
2000 issues relating to embedded microprocessors. To the extent that such
issues exist, these systems may need to be replaced or upgraded to become Year
2000 compliant. The Company believes that its non-information technology
systems will not present any significant Year 2000 issues, although there can
be no assurance in this regard. In addition, the Company utilizes third-party
equipment and software that may not be Year 2000 compliant. Failure of such
third-party equipment or software to operate properly with regard to the year
2000 and thereafter could require the Company to incur unanticipated expenses
to remedy any problems, which could have a material adverse effect on the
Company's business, prospects, operating results and financial condition.
Furthermore, the purchasing patterns of the Company's enterprise and ISP
customers may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available for the Company's services,
which could have a material adverse effect on the Company's business,
prospects, operating results and financial condition. The Company, to date,
has not made any assessment of the Year 2000 risks associated with its third-
party equipment or software or with its enterprise and ISP customers and has
not made any contingency plans to address such risks. However, the Company may
devise a Year 2000 contingency plan in the future. See "Risk Factors--Year
2000 Issues."
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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 Common Stock offered pursuant to this Prospectus, although
such provisions are applicable to such statements made in connection with the
resales of such shares of Common Stock. 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, estimates regarding the timing of launching its service in new
regions, expectations regarding the extent to which enterprise customers
rollout the Company's service, statements regarding development of the
Company's business, the estimate of market sizes and addressable markets for
the Company's services and products, the estimates of future operating
results, including positive EBITDA in the San Francisco Bay Area and the
estimates of the time needed to achieve positive EBITDA in the Company's other
regions, the Company's anticipated capital expenditures, the effect of
regulatory reform and regulatory litigation, 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, respond to increasing competition, manage
growth of the Company's operations, 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.
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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.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Forward Looking Statements."
OVERVIEW
Covad is a leading packet-based CLEC that provides dedicated high-speed
digital communication services using DSL technology to enterprise and ISP
customers. Enterprise customers purchase the Company's services to provide
employees with remote access to their LANs to improve employee productivity
and reduce operating costs. ISPs purchase the Company's services in order to
provide high speed Internet access to their business and consumer end-users.
The Company believes its services offer a superior value proposition as
compared to currently available RLAN and high-speed Internet access
alternatives. The Company's services are provided over standard copper
telephone lines at speeds of up to 1.5 Mbps, approximately 25 times the speed
available through a 56.6 Kbps modem. To date, the Company has received orders
for its services from over enterprise and ISP customers, including Cisco
Systems, Concentric Network, Epoch Networks, Oracle, PeopleSoft, Sprint,
Stanford University, Verio and Whole Earth Networks.
The Company introduced its services in the San Francisco Bay Area in
December 1997 and estimates that its operations in this region will generate
positive EBITDA (before allocation of corporate overhead) by . The
Company launched its services in the Los Angeles, New York and Boston
metropolitan areas in August 1998 and expects to introduce its services in
Seattle and Washington, D.C. metropolitan areas in the first quarter of 1999.
In March 1998, the Company raised approximately $135 million through the
issuance of the Senior Discount Notes to fund the deployment of its networks
in the Initial Regions. As a result of the strong market demand for high-speed
digital communication services, the Company has decided to increase to 22 the
number of regions in which it plans to build its networks and offer its
services. The Company estimates that when complete, its networks in these 22
regions will enable the Company to provide service to over 28 million homes
and businesses in 28 of the top 50 MSAs in the United States.
The Company believes that its business model offers attractive economics.
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. Accordingly, the Company believes it can achieve
positive EBITDA with fewer customers than companies offering such alternative
technologies. See "Risk Factors--History and Continuation of Operating
Losses."
INDUSTRY BACKGROUND
Growing Market Demand for High-Speed Digital Communications Bandwidth
The demand for high-speed digital communication services is growing rapidly.
Over the past ten years, high-speed LANs have become increasingly important to
enterprises to enable 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.
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High-speed connectivity has also become important to small- and medium-sized
businesses due to the dramatic increase in Internet usage. According to IDC,
the number of Internet users worldwide reached approximately 69 million in
1997 and is forecasted to grow to approximately 320 million by 2002. The
popularity of the Internet with consumers has driven the rapid proliferation
of the Internet as a commercial medium, as businesses establish Web sites and
corporate intranets and extranets to expand their customer reach and improve
their communications efficiency. In addition, industry analysts estimates that
the value of goods and services sold by businesses through the Internet will
increase from $2.6 billion in 1997 to $37.5 billion in 2002. Accordingly, to
remain competitive, small- and medium-sized businesses increasingly need high-
speed Internet connections to maintain complex Web sites, access critical
business information and communicate with employees, customers and business
partners more efficiently. High-speed digital connections are also becoming
increasingly important to businesses and consumers as more high bandwidth
information and applications become available on the Internet.
As businesses continue to increase their use of the Internet, intranets and
extranets, the Company expects the market size for both RLAN access and small-
and medium-sized business Internet access to continue to grow rapidly.
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%.
RLAN access and business and consumer Internet access are creating
increasing demands for high-speed digital 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 56.6 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 technology emerged in 1990 and is 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 56.6 Kbps and ISDN speeds of 128 Kbps to DSL speeds of up 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.
Because DSL technology reuses the existing copper plant, it is significantly
less expensive to deploy on a broad scale than existing alternative high-speed
digital communication technologies, such as cable modems, wireless data and
satellite data. As a result, a significant portion of the investment in a DSL
network is success- based, as such networks require a comparatively lower
initial fixed investment, and the subsequent variable investments in DSL
electronics are directly related to the number of paying customers.
In January 1998, a number of companies, including Intel Corporation
("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.
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An initial draft of the specification was completed in June 1998 and a final
version is expected before the end of this year. The specification will then
be submitted to the International Telecommunications Union (ITU), an
international standards setting body, for review. Aimed at consumers, the so-
called G.lite specification has a maximum data throughput rate of 1.5 Mbps
incoming and 512 Kbps outgoing.
Impact of the Telecommunications Act of 1996
The passage of the 1996 Act created a legal framework for CLECs to provide
local analog and digital communication services in competition with the ILECs.
The 1996 Act eliminated a substantial barrier to entry for CLECs by enabling
them to leverage the existing infrastructure built by the ILECs, rather than
constructing a competing infrastructure at significant cost, which required a
$200 billion investment by ILECs and ILEC ratepayers. 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 access the ILECs' databases. The 1996 Act in particular emphasized
the need for competition-driven innovations in the deployment of advanced
telecommunications services, such as the Company's DSL services.
THE COVAD SOLUTION
Covad was formed to capitalize on the substantial business opportunity
created by the growing demand for high-speed digital communication, 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 digital
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 digital
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 in each region it serves is designed to ensure
that the Company's services are available to the vast majority of its
customers' end-users. 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 reduce the risk of unauthorized access.
Experienced Management Team. The Company's management team includes
individuals with extensive experience in the data communications,
telecommunications and personal computer industries, including Robert Knowling
Jr., President and Chief Executive Officer (former Executive Vice President of
Operations and Technology at U S WEST Communications), founders Charles
McMinn, Chairman of the Board, Charles Haas, Vice President of Sales and
Marketing and Dhruv Khanna, Vice President, General Counsel and Secretary (all
three of whom worked at Intel), Timothy Laehy, Vice President of Finance and
Chief Financial Officer (former Vice President of Corporate Finance and
Treasurer of Leasing Solutions, Inc.), Rex Cardinale, Vice President of
Engineering (former General Manager of the cc:Mail division of Lotus
Development Corporation), Catherine Hemmer, Vice President of Operations
(former Vice President, Network Reliability and Operations at U S WEST
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Communications, Inc., former General Manager, Network Provisioning at
Ameritech Corporation and former Vice President, Network Services at MFS) and
Walter Pienkos, Vice President of Human Resources and Administration (former
Vice President of Administration at Netpower, Inc. and MIPS Computer Systems).
The Company has also hired Regional General Managers to cover 14 of its
announced 22 regions who collectively have over 150 years of
telecommunications service experience.
BUSINESS STRATEGY
Covad's objective is to become the leading provider of DSL-based high-speed
digital communication services in each region it enters. The Company's Initial
Regions consist of San Francisco, Los Angeles, New York, Boston, Seattle and
Washington, D.C. The Company estimates that its operations in the San
Francisco Bay Area will generate positive EBITDA (before allocation of
corporate overhead) by . The Company introduced its services in the
San Francisco Bay Area in December 1997 and in the Los Angeles, New York and
Boston regions in August 1998. The Company expects to introduce its services
in Seattle and Washington, D.C. in the first quarter of 1999. As a result of
the strong market demand for high-speed digital communication services, the
Company has decided to increase to 22 the number of regions in which it plans
to build its networks and offer its services. The key elements of the
Company's strategy which it has deployed in the San Francisco Bay Area and its
other Initial Regions and which it plans to deploy in each additional region
it enters are as follows:
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 is authorized under state law to operate as a CLEC
in 12 states, has pending applications in 10 additional states and intends to
obtain authorization in other states necessary to cover the Company's 22
target regions. In the aggregate, the Company's 22 existing and target regions
represent over 40% of the U.S. population. The Company has entered into
interconnection agreements with ILECs in six states and is negotiating
interconnection agreements with ILECs in the 16 additional states that cover
the Company's target regions. The Company believes it has gained a competitive
advantage by rapidly securing CLEC status and signing interconnection
agreements in multiple regions.
Roll Out Service Rapidly in These Markets. The Company seeks to be the first
company to roll out service broadly in its target regions in order to: (i)
secure CO collocation space prior to competitors; (ii) secure and retain
customers before significant DSL 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.
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 that desire to market their Internet
access services on a region-wide basis. In addition, the Company believes its
presence in 22 markets will allow it to better serve its enterprise and ISP
customers which are increasingly seeking a single supplier in multiple
metropolitan areas.
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 digital service while avoiding
the significant investment that would be required to compete in the 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 enterprises
that it estimates to have over 100 existing ISDN or analog modem-based RLAN
users. The Company offers these customers higher performance and dedicated
services at
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similar or lower prices than those of alternative technologies. The Company
also targets ISPs that can offer their end-users similar cost and performance
advantages for Internet access using the Company's services.
Leverage the Success-Based Economics of DSL. Because it uses DSL technology,
a significant portion of the Company's capital expenditures are success-based.
The Company estimates that approximately 50% of its cumulative capital
expenditures over the next five years will be for DSL equipment that is
directly related to the Company's end-user subscription rate.
Establish Relationships 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 in turn offer high-
speed Internet access using the Company's network. 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.
The Company also believes that it is developing a service offering that will
be increasingly attractive to IXCs and other CLECs. As the Company rolls out
its network in 22 markets nationwide, it can increasingly serve as a single
packet network service provider to other telecommunications service companies
who seek to offer packet based services to their customers. Also, the Company
can carry the traffic of multiple IXC and CLEC partners and potentially
provide these services at price points that are more attractive than any one
other company can provide for itself. These companies are also seeking an
alternative to dealing with each ILEC in every region they would like to offer
service. Finally, since the Company's networks serve predominately small
business and residential end-users these networks are complementary to the
large business focused networks of these IXCs and other CLECs. The Company has
discussed strategic relationships with both IXCs and other CLECs and intends
to continue these discussions as its networks are deployed in its 22 target
markets.
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 digital 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 24 hour, seven days a week ("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 six flat rate digital services under the TeleSpeed brand to
connect its customers' end-users to Covad's RDCs. In addition, enterprise and
ISP customers may purchase 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
conventional copper lines to Covad DSL equipment in their serving CO and from
there to the Covad packet digital network 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.
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The six TeleSpeed services are TeleSpeed 144, TeleSpeed 192, TeleSpeed 384,
TeleSpeed 768, TeleSpeed 1.1 and TeleSpeed 1.5. The chart below compares the
pricing, performance and markets for each of these services as of September
15, 1998. The particular TeleSpeed service available to an end-user depends on
the user's distance to the CO. The Company believes that substantially all of
its potential end-users in its target markets can be served with one of the
Company's services. The Company estimates that approximately 70% of end-users
are within 18,000 feet of a CO and can be served by at least the Company's
TeleSpeed 384 services. The Company also believes at least a majority of
potential end-users will be able to obtain the Company's highest speed service
offering. 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
SPEED TO FROM PRICE* RANGE**
SERVICE END-USER END-USER ($/MONTH) (FEET) MARKET/USAGE
- ------------------------ -------- -------- --------- ------- ------------------------------------
<S> <C> <C> <C> <C> <C>
TeleSpeed 144........... 144 Kbps 144 Kbps $ 90 35,000 ISDN replacement, non-standard lines
TeleSpeed 192........... 192 Kbps 192 Kbps $ 90 18,000 RLAN, business Internet
TeleSpeed 384........... 384 Kbps 384 Kbps $125 16,000 RLAN, business Internet
TeleSpeed 768........... 768 Kbps 768 Kbps $160 13,500 Business Internet
TeleSpeed 1.1........... 1.1 Mbps 1.1 Mbps $195 12,000 Business Internet
TeleSpeed 1.5........... 1.5 Mbps 384 Kbps $195 15,000 High-speed Web access
</TABLE>
- --------
* Current list prices for Boston, Los Angeles, New York and the San Francisco
Bay Area. Prices are lower for high volume customers and may be different
in other regions. See "Risk Factors--Unproven Business Model" for a
discussion of the risks associated with the Company's ability to sustain
current price levels in the future.
**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 copper lines that are
either too long to carry the Company's higher speed services or are served by
DLCs or similar equipment where a continuous copper connection is not
available from the end-user site to the CO.
TeleSpeed 192. This service provides one and a half to three times the
performance of ISDN at similar or lower price points to heavily-used ISDN
lines. The Company expects TeleSpeed 192 to be deployed within the RLAN
market.
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 deployed within the RLAN market.
TeleSpeed 768. This service provides one-half the bandwidth of a T1 data
circuit at substantially less than one-half of the monthly price that the
Company estimates is typical for T1 service. The target market for the
TeleSpeed 768 service is small businesses needing moderate speed access to the
Internet but who 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 1.1. This service provides over two-thirds the bandwidth of a T1
data circuit at substantially less than one-half of the monthly price that the
Company estimates is typical for T1 service. The target market for the
TeleSpeed 1.1 service is small businesses needing T1-level access to the
Internet which 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
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<PAGE>
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 regional network 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.
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 $400 to $550 for higher speed TeleSpeed
services. Fees and charges described herein are subject to change.
COVAD'S REGIONAL ROLLOUT
As part of the Company's strategy to become a leading provider of DSL high-
speed digital communication services in the U.S., the Company intends to build
networks and offer services in 22 regions. The Company introduced its services
in the San Francisco Bay Area in December 1997 and in the Los Angeles, New
York and Boston metropolitan areas in August 1998. The Company expects to
introduce its services in the Seattle and Washington D.C. metropolitan areas
in the first quarter of 1999. As a result of the strong market demand for
high-speed digital communication services, the Company has increased its
target markets to the following 22 regions:
<TABLE>
<CAPTION>
WEST CENTRAL EAST
------------- ----------- ----------------
<S> <C> <C>
Los Angeles Austin Atlanta
Phoenix Chicago Baltimore
Portland Dallas Boston
Sacramento Denver Miami
San Diego Detroit New York
San Francisco Houston Philadelphia
Seattle Minneapolis Raleigh
Washington, D.C.
</TABLE>
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CUSTOMERS
The Company offers its services to enterprises and 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 are in the Company's Initial
Regions and approximately are in all of the Company's 22 targeted regions.
Since commercial introduction of its service in December 1997, Covad has
entered into service agreements with more than enterprise and ISP customers.
The following is a list of selected enterprise and ISP customers:
SELECTED ENTERPRISE CUSTOMERS SELECTED ISP CUSTOMERS
----------------------------- ----------------------
Apple Computer Bay Junction Technology
Cisco Systems Brainstorm Networks
E*Trade Group Concentric Network Corporation
Hewlett Packard Direct Network Access, Ltd. (DNAI)
Inktomi DSL Networks Inc.
Intel Epoch Networks
Oracle Corporation Idiom Internet Services
PeopleSoft Interactive Planet
Sagent Technology Lan Minds, Inc.
Stanford University Slip.Net, Inc.
Tandem Computers TransBay.Net
WebTV Verio Inc.
Whole Earth Networks
As of , 1998, the Company had approximately end-user lines in
operation with approximately enterprise and ISP customers. The Company
estimates that the market potential of its current enterprise customers is
end-user lines if such customers fully roll out the Company's services to the
extent that they have rolled out ISDN to date.
The Company expects that it will generally take at least two months to
complete the initial implementation of the first end-users from each new
enterprise customer and at least three additional months before these customers
evaluate the results to determine whether to proceed to roll out additional
end-users. There can be no assurance as to whether or when the Company will
obtain customers that roll out the service beyond the initial stage of
implementation or that customers who roll out the service will not terminate
its services upon short notice. Any significant or ongoing delays in customers
rolling out the Company's services will have a significant adverse effect on
the Company's business, prospects, operating results and financial condition.
See "Risk Factors--Limited Operating History and Early Stage of Deployment."
The Company's agreements with ISPs generally have terms of 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. See "Risk Factors--Dependence Upon Indirect Sales Channels."
SALES AND MARKETING
Remote LAN. The Company markets its RLAN services to businesses through a
direct sales force, augmented by marketing programs with value added resellers
and IXCs. The direct sales force is organized by region, each managed by a
regional sales director who is responsible for lead generation and sales and
marketing efforts to RLAN customers. The sales force deals directly with the
chief information officer and the telecommunications manager responsible for
remote access within an enterprise. As of , 1998, the Company had more
than sales and marketing personnel in regions, and the Company intends
to expand its direct sales force in future periods to support deployment into
additional regions. The Company augments its sales efforts to its RLAN
customers through partnerships with value added resellers, including systems
integrators that can offer the Company's TeleSpeed service as part of a
complete work-at-home solution to businesses. The Company intends to enter into
strategic partnerships with leading telecommunications companies, including
CLECs and IXCs, in which those companies can resell the Company's TeleSpeed
services to their customers. The Company believes that these indirect sales
channels will enable the Company to penetrate its target markets more rapidly.
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Business and Consumer Internet. For the business and consumer Internet
access markets, the Company sells its service to ISPs that 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. As of , 1998, the
Company had more than ISP customers with sales personnel marketing
Internet services that use the Company's lines.
The Company is also pursuing several types of joint marketing arrangements.
For example, the Company provides its ISP customers with market development
funds when they promote the TeleSpeed service. Certain of the Company's
equipment suppliers, including Cisco Systems, have promoted the Company's
services through seminars to corporate communications managers in the San
Francisco Bay Area. In addition, the Company supports its sales efforts with
marketing efforts that include advertising programs through radio and other
popular media, attendance at trade shows and presentations at industry
conferences. See "Risk Factors--Dependence Upon Indirect Sales Channels."
SERVICE DEPLOYMENT AND OPERATIONS
Corporate communications managers and ISPs typically have had to assemble
their digital communication 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 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 network. 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 has also
developed 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 provides Web-based tools to
allow individual enterprise communications managers and ISPs to monitor their
end-users directly, to place orders for new end-users, to enter trouble
tickets on end-user lines and to communicate with the Company on an ongoing
basis.
Customer Service and Technical Support. The Company provides 24x7 service
and technical support to its enterprise communications manager and ISP
customers. The communications 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.
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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 over 40 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 capacity is added automatically as each new user receives a new
line. The Company also uses Asynchronous Transfer Mode ("ATM") switches in its
networks 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 networks, CO collocation spaces (including DSLAMs),
copper telephone 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 each metropolitan network (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 act as service hubs for each metropolitan area the Company
enters. Data and network management traffic from each CO is collected at the
RDC and switched to the Company's NOC. The Company designs the RDC for high
availability including battery backup power, redundant equipment and active
network monitoring.
Private Metropolitan Network. The Company operates its own private
metropolitan network in each region that it enters. The network consists of
high-speed ATM communications circuits that the Company leases to connect its
RDCs, its equipment in individual COs and its enterprise and ISP customers.
This network operates at a speed of 45 to 155 Mbps.
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 space. The
Company requires access
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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 and expects to deploy 40 to 250 collocation facilities in any
metropolitan area that it enters. As of , 1998, the Company had
CO spaces operational with additional spaces scheduled to become
operational by December 1998.
Copper Telephone Lines. The Company leases the copper telephone lines
running to end-users from the ILEC under terms specified in its
interconnection agreements. The Company leases lines that, in numerous 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. The price
the Company is obligated to pay for these lines currently varies from $3 to
$35 per month per line with additional one-time charges in some cases for
installation, modification or removal of 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.
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. See "Risk Factors--Unproven Network
Scalability and Speed."
COMPETITION
The markets for RLAN access and business and consumer Internet transport
services are intensely competitive and the Company expects that such markets
will become increasingly competitive in the future. The Company's most
immediate potential competitors are the ILECs, CMSPs, IXCs, FCLECs, ISPs,
OSPs, WSDSPs and other CLECs. Many of these competitors are offering, or may
soon offer, technologies and services that directly compete with some or all
of the Company's high-speed digital services. Such technologies include ISDN,
DSL, wireless data and cable modems. The principal 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 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 digital
services. For example, U S WEST Communications, Inc. is offering commercial
DSL services in certain areas in its 14 state region. Ameritech Corporation
has announced such services in Michigan and Illinois. Bell Atlantic has
announced such services in the Washington, D.C. metropolitan area and in
Pennsylvania. In addition, Pacific Bell (a subsidiary of SBC Communications)
announced its commercial DSL services in 1998. Both BellSouth and GTE have
announced their intention to offer commercial DSL services by December 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; as they do so, the ILECs will represent
strong DSL competition in all of the Company's target service areas. The ILECs
have an
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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. Certain of
the ILECs have aggressively priced their ADSL services as low as $30-$40 per
month, placing pricing pressure on the Company's TeleSpeed services. 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,
which provides ILECs with a potential competitive advantage compared with the
Company. See "Risk Factors--Intense Competition."
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 offering a consumer grade of service, which shares 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.
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.
National Long Distance Carriers. IXCs, such as AT&T, Sprint, MCI WorldCom
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 be-
gin to offer competitive DSL services.
Fiber-Based CLECs. Companies such as Teleport Communications Group, Inc.
(TCG) (acquired by AT&T), Brooks Fiber Properties, Inc. (acquired by WorldCom)
and MFS (acquired by WorldCom) 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), UUNET
Technologies (acquired by WorldCom), Earthlink Networks, Concentric Network,
Mindspring Enterprises, Netcom On-Line Communication Services (acquired by
ICG) and PSINet 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., InterAccess and Vitts Corporation 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
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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 recently
auctioned spectrum for LMDS services in all markets. This spectrum is expected
to be used for wireless cable and telephony services, including high-speed
digital services. 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 Communications (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, and the FCC has authorized several of these applicants to
operate their proposed networks.
Other CLECs. Other companies such as Rhythms NetConnections and Northpoint
Communications 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 those 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 network; (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.
To date, the Company has entered into interconnection agreements with five
different major ILECs in six states. 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
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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 in its 22 announced regions which
are necessary before the Company can expand its services into these
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 ways that adversely affect the
Company's business, prospects, operating results and financial condition.
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, IXCs and CLECs such as the Company.
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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 upon meeting certain requirements. 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 each of the RBOCs. The December 31, 1997
Ruling declared that the portions of the 1996 Act subjecting RBOCs to a prior
FCC approval process in order to provide interLATA services within their
respective regions are unconstitutional. On September 8, 1998, the United
States Court of Appeals for the Fifth Circuit affirmed the constitutionality
of the state and FCC approval process for RBOC in-region long distance entry.
This decision may be appealed to the U.S. Supreme Court.
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, under the 1996 Act, the FCC is considering eliminating
certain regulations that apply to the ILEC's 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.
Further, 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.
Finally, the 1996 Act allows the FCC to take explicit regulatory action in
order to encourage the deployment of advanced services to all Americans. In
August 1998 the FCC released an Order and a Notice of Proposed Rulemaking
proposing additional regulations it believes are required to ensure this goal.
These rules would place conditions on the ability of the ILECs to offer DSL
services on an unregulated basis through a separate affiliate. In addition,
the FCC has proposed rules that would provide the Company an enhanced ability
to gain collocation space in ILEC COs. While the Company believes that these
proposed rules are advantageous to the Company, there can be no guarantee that
the actual regulations, when and if implemented, will enhance the Company's
ability to compete.
Any 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 prospects, operating results and financial
condition.
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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 is
authorized under state law to operate as a CLEC in 12 states, has pending
applications in 10 additional states, and intends to obtain authorization in
other states necessary to cover the Company's 22 target regions. The Company
has pending four arbitration petitions in four different Bell Atlantic states
for interconnection arrangements. The Company has concluded three arbitration
proceedings in three states by entering into interconnection agreements 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 Company has participated in UNE
rate proceedings in the states of California and Washington in an effort to
reduce these rates. Any state commission rate determinations to increase UNE
rates could have a material adverse effect on the Company's business,
prospects, operating results and financial condition.
The applicability of the various state regulations on the Company's business
and compliance requirements will be further 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 and financial condition.
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 and financial condition.
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 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 and financial condition. See "Risk
Factors--Uncertain Availability of Collocation Space and Dependence on ILECs
to Provide Collocation Space and Collocation Facilities" and "-- Government
Regulation and Current Industry Litigation."
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
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<PAGE>
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 has two 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 and financial condition.
EMPLOYEES
As of 1998, the Company had 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 September 1, 1998 and their backgrounds.
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 the Presidential Advisory
Committee on Information Technology (PACIT).
ROBERT HAWK is a member of the Company's Board of Directors. For a
description of his professional background, see "Management--Directors and
Executive Officers."
WILLIAM 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."
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<PAGE>
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 headquartered in Santa Clara, California in facilities
consisting of approximately 62,000 square feet pursuant to a lease that will
expire on or before July 14, 2002. The Company also leases office space in
each of its Initial Regions. The Company is in the process of acquiring
additional headquarters space in 1998 to accommodate its needs as its business
expands and is in the process of acquiring office space for regional
headquarters for each of its additional target regions. In addition, the
Company's San Francisco Bay Area 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. 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 also leases
collocation space in COs from the ILEC in each region that it operates or
plans to operate under the terms of its interconnection agreements and
obligations imposed by state public utilities commissions and the FCC. While
the terms of these leases are perpetual, the productive use of the Company's
collocation facilities are subject to the terms of its interconnection
agreements which expire on or before March 2001. 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 engaged in negotiations, arbitration and litigation
proceedings with several ILECs concerning their denial of physical collocation
space to the Company in certain COs. For example, the Company has filed a suit
against Pacific Bell in Federal Court on this issue on antitrust and other
grounds. Since commencement of the suit, Pacific Bell has found space for the
Company in numerous COs where Pacific Bell had previously denied the Company
space. In addition, the Company is asserting breach of contract claims against
Pacific Bell and U S WEST Communications on collocation issues in American
Arbitration Association proceedings in the states of California and
Washington. Failure to resolve these controversies and obtain space in COs
without undue delay or expense could have a material adverse effect on the
Company's business, prospects, operating results and financial condition. In
addition, on August 28, 1998, U S WEST Communications sued the Company and one
of its employees and sought a preliminary injunction in federal court in
connection with such employee's departure from U S WEST Communications to join
the Company and the potential improper disclosure of U S WEST Communications'
alleged trade secrets to the Company. The Company is not currently engaged in
any other legal proceedings that it believes could have a material adverse
effect on the Company's business, prospects, operating results and financial
condition. 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 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 and financial condition.
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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 Chairman, Board of Directors
Robert Knowling, Jr. ... 43 President, Chief Executive Officer and Director
Timothy Laehy........... 41 Chief Financial Officer, Treasurer and Vice President, Finance
Rex Cardinale........... 45 Vice President, Engineering
Charles Haas............ 38 Vice President, Sales and Marketing
Catherine Hemmer........ 40 Vice President, Operations
Dhruv Khanna............ 38 Vice President, General Counsel and Secretary
Walter Pienkos.......... 52 Vice President, Administration
Robert Hawk............. 56 Director
Henry Kressel........... 64 Director
Joseph Landy............ 37 Director
Daniel Lynch............ 56 Director
Frank Marshall.......... 51 Director
Rich Shapero............ 50 Director
</TABLE>
CHARLES MCMINN is a founder of the Company and has been the Chairman of the
Board of Directors since July 1998. He served as the Company's President,
Chief Executive Officer and a member of its Board of Directors from October
1996 to July 1998. 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 President and Chief
Executive Officer of Visioneer Communications, Inc. and from October 1985 to
June 1992 was a general partner at InterWest Partners, a venture capital firm.
Mr. McMinn began his Silicon Valley career as the product manager for the 8086
microprocessor at Intel.
ROBERT KNOWLING, JR. has served as the Company's President, Chief Executive
Officer and a member of the Company's Board of Directors since July 1998. From
October 1997 through July 1998, Mr. Knowling served as the Executive Vice
President of Operations and Technologies at U S WEST Communications, Inc., an
RBOC. In this capacity, Mr. Knowling was responsible for planning, delivering
and maintaining high-quality telecommunications services for more than 25
million customers in 14 western and midwestern states. From March 1996 through
September 1997, he served as Vice President of Network Operations at U S WEST
Communications, Inc. From November 1994 through March 1996, he served as Vice
President of Network Operations for Ameritech Corporation. Mr. Knowling began
his career in 1977 at Indiana Bell and progressed through a variety of
assignments in operations, engineering and marketing. When Indiana Bell became
a part of Ameritech Corporation, Mr. Knowling assumed positions of increasing
responsibility in marketing, product development, large business marketing and
network operations, including service on Ameritech Corporation's re-
engineering breakthrough development team, through November 1994. As lead
architect of the Ameritech Corporation transformation, Mr. Knowling reported
directly to the chairman. Mr. Knowling currently serves on the board of
directors of Shell Oil Company.
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<PAGE>
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.
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).
CATHERINE HEMMER joined the Company in August 1998 as its Vice President,
Operations. From 1996 to August 1998, she was Vice President, Network
Reliability and Operations at U S WEST Communications, Inc., an RBOC. From
1995 to 1996, she served as General Manager, Network provisioning at Ameritech
Services, Inc. a telecommunications company. From 1987 to 1995, she served in
various capacities, including Vice President, Network Services, at MFS
Telecom, Inc., a company responsible for establishing a new competitive
industry in telecommunications. From 1987 to 1988, she served as Senior
Manager, Management Information Systems at Chicago Fiber Optic Corporation
d/b/a Metropolitan Fiber Systems of Chicago, Inc., a start-up venture
developing a market niche for fiber optic local access networks.
DHRUV KHANNA is a founder of the Company and has served as the Company's
Vice President, General Counsel and Secretary since October 1996. He was an
in-house counsel for Intel's communications products division and its Senior
Telecommunications Attorney between 1993 and 1996. Between 1987 and 1993,
Mr. Khanna was an associate at Morrison & Foerster where his clients included
Teleport Communications Group (now AT&T), McCaw Cellular Communications, Inc.
(now AT&T Wireless), and Southern Pacific Telecom (now Qwest). 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.
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 U S 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 U S West Communications,
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<PAGE>
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 optoelectronics,
semiconductors and related software and technologies. Dr. Kressel serves as a
director of Level One Communications, Inc., IA Corporation, 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 E.M. Warburg, Pincus & Co., LLC, 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 InterWest Partners Advisory Committee 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 has been a general partner of Crosspoint Venture
Partners, L.P., 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. Mr. Shapero serves as a member of the board of
directors of Powerwave Corporation.
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
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<PAGE>
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 determining the compensation of the Company's
executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Board or the Compensation
Committee and the board of directors or compensation committee of any other
company, nor has any such interlocking relationship existed in the past.
Messrs. Kressel and Shapero are affiliated with Warburg, Pincus Ventures, L.P.
and Crosspoint Venture Partners L.P., respectively, which are parties along
with the Company to a Series C Preferred Stock and Warrant Subscription
Agreement dated February 23, 1998. See "Certain Relationships and Related
Transactions."
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 member. 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 during the year ended December 31,
1997.
<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 other than the Chief Executive Officer earned
more than $100,000 in total annual salary and bonus during 1997, only the
compensation and option information of the Chief Executive Officer is
listed above and below, respectively. As of September 1, 1998, the
aggregate salary, bonus, options/SARs and other compensation for each
person who acted as Chief Executive Officer during 1998 and the four other
most highly compensated executive officers, each of whom are expected to
receive an aggregate annual compensation of over $100,000 in 1998
(collectively the "Named Executive Officers"), was $431,837, $813,433,
options to purchase 2,100,000 shares of Common Stock and $2,212,
respectively.
(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 year ended December 31, 1997.
Mr. McMinn stepped down as President and Chief Executive Officer in July
1998 and assumed the position of Chairman of the Board.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted by the Company to the Company's Chief
Executive Officer during 1997. As of September 1, 1998, the Company had
granted stock options to purchase an aggregate of 2,100,000 shares of Common
Stock to its Chief Executive Officer. Such options have an exercise price of
$1.00 per share and a term
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<PAGE>
of 8 years. No other Named Executive Officer had received any options as of
September 1, 1998. See "--Employment Agreements and Change in Control
Arrangements."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
There were no exercises of stock options by the Company's Chief Executive
Officer during the year ended December 31, 1997. There also have been no
option exercises by any Named Executive Officer as of September 1, 1998.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company has entered into a written employment agreement with Robert
Knowling, Jr., the Company's Chief Executive Officer (the "Knowling Employment
Agreement"). The employment commencement date for Mr. Knowling was July 7,
1998. Pursuant to the Knowling Employment Agreement, Mr. Knowling receives
compensation in the form of an annual base salary of $400,000 and an annual
minimum bonus of $250,000. Mr. Knowling received (i) a signing bonus of
$1,500,000, one half of which was paid on commencement of employment, and the
remaining half of which will be paid on the earlier of the one year
anniversary of employment or a change of control (as defined in the Knowling
Employment Agreement), and (ii) stock options to purchase 2,100,000 shares of
Common Stock at an exercise price of $1.00 per share. If the Company
terminates Mr. Knowling's employment relationship without Cause (as such term
is defined in the Knowling Employment Agreement), or if Mr. Knowling resigns
for Good Reason (as such term is defined in the Knowling Employment
Agreement), the Company must continue to pay Mr. Knowling's annual base salary
and targeted bonus for a period of two years after the date of termination;
provided Mr. Knowling does not become employed by a direct competitor of the
Company. During the term of his employment, Mr. Knowling agrees to be bound by
customary confidentiality provisions. Pursuant to the Knowling Employment
Agreement, in August 1998 the Company loaned Mr. Knowling $500,000 pursuant to
a secured promissory note that bears no interest during his employment, has
provisions for forgiveness and matures in four years, subject to acceleration
in certain events.
The Company has entered into written employment agreements with Dhruv Khanna
and Rex Cardinale (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 currently receive compensation in the form of
annual base salaries of $160,000 and $160,000, 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
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<PAGE>
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."
1997 STOCK PLAN
The Company's 1997 Stock Plan (the "1997 Stock Plan") was adopted by the
Board of Directors and the stockholders in July 1997 and was amended in
January 1998, April 1998, August 1998 and September 1998. The maximum
aggregate number of shares of Common Stock which may be optioned and sold
under the 1997 Stock Plan is 13,970,250 shares, plus an annual increase to be
added on January 1 of each year beginning in 1999, equal to the lesser of (i)
shares, (ii) % of the outstanding shares on such date, or (iii) an
amount determined by the Board. The annual increase is subject to adjustment
upon changes in capitalization of the Company. 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 (the "Code"), 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 stock
purchase rights ("SPRs"). As of September 1, 1998, options to purchase an
aggregate of 11,356,931 shares were outstanding, 2,556,631 shares remained
available for future grants and 56,688 options were exercised.
The 1997 Stock Plan is administered by the Board of Directors or a committee
appointed by the Board of Directors. The administrator of the 1997 Stock Plan
has the power to determine the terms of the options or SPRs granted, including
the exercise price of the option or SPR, the number of shares subject to each
option or SPR, the exercisability thereof, and the form of consideration
payable upon such exercise. In addition, the administrator has the authority
to amend, suspend or terminate the 1997 Stock Plan, provided that no such
action may affect any share of Company Common Stock previously issued and sold
or any option previously granted under the 1997 Stock Plan. The Company may
grant each optionee a maximum of shares covered by option during a
fiscal year. The Company may grant up to an additional shares
covered by option in connection with an optionee's initial employment with the
Company. The maximum numbers of shares covered by option that an optionee may
be granted an additional shares. Options generally vest at a rate of
12.5% of the shares subject to the option on the date six months following the
grant 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 the Company's directors and
consultants generally vest at a rate of 25% of the shares subject to the
option one year of the individual becomes a director or consultant 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 as a director or
consultant.
Options and SPRs granted under the 1997 Stock Plan are generally not
transferable by the optionee, and each option and SPR is exercisable during
the lifetime of the optionee only by such optionee. Options granted under the
1997 Stock Plan must generally be exercised within thirty days after the end
of optionee's status as an employee, director or consultant of the Company, or
within twelve months after such optionee's termination by death or disability,
but in no event later than the expiration of the option's term.
In the case of SPRs, unless the administrator determines otherwise,
Restricted Stock Purchase Agreements must grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment or consulting relationship with the Company for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to Restricted Stock Purchase Agreements will be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. Repurchase options lapse at a
rate determined by the administrator.
The exercise price of all incentive stock options granted under the 1997
Stock Plan must be at least equal to the fair market value of the Company
Common Stock on the date of grant. The exercise price of nonstatutory stock
options and SPRs granted under the 1997 Stock Plan is determined by the
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the exercise price must be at least equal to the fair
market value of the Company
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Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must be at least equal to 110% of the fair market value on the
grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1997 Stock Plan may not
exceed ten years.
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.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was adopted by the Board of Directors in , 1998, and approved by the
stockholders in 1998. A total of shares of Common Stock has
been reserved for issuance under the 1998 Purchase Plan, plus annual increases
equal to the lesser of (i) shares, or (ii) % of the outstanding
shares on such date. As of the date of this Prospectus, no shares have been
issued under the 1998 Purchase Plan.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, twenty-four month offering
periods. Each offering period includes four six-month purchase periods. The
offering periods generally start on the first trading day on or after June 1
and December 1 of each year, except for the first such offering period which
commences on the first trading day on or after the effective date of this
Offering and ends on the last trading day on or before May 31, 2000.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who (i)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of the Company, or
(ii) whose rights to purchase stock under all employee stock purchase plans of
the Company accrues at a rate which exceeds $25,000 worth of stock for each
calendar year may not be granted an option to purchase stock under the 1998
Purchase Plan. The 1998 Purchase Plan permits participants to purchase Common
Stock through payroll deductions of up to 15% of the participant's
"compensation." Compensation is defined as the participant's base straight
time gross earnings and commissions but excludes payments for overtime, shift
premium, incentive compensation, incentive payments, bonuses and other
compensation. The maximum number of shares a participant may purchase during a
single purchase period is shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the 1998 Purchase Plan is generally 85% of the lower of the
fair market value of the Common Stock (i) at the beginning of the offering
period or (ii) at the end of the purchase period. In the event the fair market
value at the end of a purchase period is less than the fair market value at
the beginning of the offering period, the participants will be withdrawn from
the current offering period following exercise and automatically re-enrolled
in a new offering period. The new offering period will use the lower fair
market value as of the first date of the new offering period to determine the
purchase price for future purchase periods. Participants may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of
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substantially all of the Company's assets, each outstanding option may be
assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date
will be set.
The Board of Directors has the authority to amend or terminate the 1998
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 1998 Purchase Plan, provided that the Board
of Directors may terminate an offering period on any exercise date if the
Board determines that the termination of the 1998 Purchase Plan is in the best
interests of the Company and its stockholders. Notwithstanding anything to the
contrary, the Board of Directors may in its sole discretion amend the 1998
Purchase Plan to the extent necessary and desirable to avoid unfavorable
financial accounting consequences by altering the purchase price for any
offering period, shortening any offering period or allocating remaining shares
among the participants. Unless sooner terminated by the Board of Directors,
the 1998 Purchase Plan will terminate automatically ten years from the
effective date of this Offering.
MANAGEMENT BONUS PLAN
On July 22, 1998, the Company's Board approved its Executive Bonus
Performance Plan. Under the Plan, each officer of the Company receives a cash
bonus up to a designated percentage of their annual base salary depending upon
the extent to which specific performance metrics are achieved.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated 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 in which 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
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
On February 20, 1998, the Company entered into a Series C Preferred Stock
and Warrant Subscription Agreement (the "Subscription Agreement") with Warburg
Pincus Ventures, L.P. ("Warburg") and Crosspoint Venture Partners 1996
("Crosspoint") pursuant to which Warburg and Crosspoint unconditionally agreed
to purchase an aggregate of 5,764,143 shares of Series C Preferred Stock and
warrants to purchase an aggregate of 4,729,500 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 has agreed either to call this 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 $2.7767 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 $2.7767 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
1,694,148 shares of the Company's Common Stock at a purchase price of $0.0033
per share (the "Common Warrants"). The parties have agreed that the offering
contemplated by this Prospectus constitutes an alternate equity financing;
therefore, the Company will not issue and sell the Series C Preferred Stock
and Series C Warrants to Warburg and Crosspoint. Messrs. Henry Kressel and
Joseph Landy, directors of the Company, are affiliated with Warburg, and Mr.
Shapero, also a director of the Company, is affiliated with Crosspoint.
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 36,015 shares of
Series C Preferred Stock and 29,559 Series C Warrants for an aggregate
purchase price of $100,001.65. On the same date, Mr. Hawk purchased 36,015
shares of Series C Preferred Stock at a price per share of $2.7767. 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
5,764,143 shares to 5,728,128 shares and from 4,729,500 shares to 4,699,941
shares, respectively, for an aggregate purchase price of $15.9 million,
reduced from $16.0 million. On the same date, the Amended and Restated
Stockholder Rights Agreement dated March 11, 1998 (the "Stockholder Rights
Agreement") was amended to add Mr. Hawk as a party.
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
$0.0033 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 Warburg, Crosspoint
and Intel to the Common Warrants, the Series C Preferred Stock and the Series
C Warrants issued or issuable to Warburg, Crosspoint and Intel pursuant to the
Subscription Agreement.
THE INTEL STOCK PURCHASE
Pursuant to the Subscription Agreement, Intel purchased 360,144 shares of
Series C Preferred Stock and Series C Warrants to purchase an aggregate of
295,500 shares of Series C Preferred Stock for an aggregate purchase price of
$1,000,000 concurrently with the closing of the issuance of the Senior
Discount Notes; 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 Subscription Agreement.
The parties have agreed that the offering contemplated by this Prospectus
constitutes an alternate equity financing; therefore the Company will not
issue the Series C Warrants to Intel. 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 105,852 shares of
Common Stock at a purchase price of $0.0033 per share.
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TRANSACTIONS IN CONNECTION WITH THE FORMATION OF THE DELAWARE HOLDING COMPANY
The Company originally was incorporated in California as Covad Communication
Company ("Covad California") in October 1996. In July 1997, the Company was
incorporated in Delaware as part of its 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 (the "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.
In connection with the Exchange Agreement, Messrs. McMinn, Khanna and Haas,
officers of the Company, each exchanged 3,000,000 shares of Common Stock of
Covad California, originally purchased for $0.0042 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 144,000 shares of Common Stock of Covad California, originally
purchased for $0.0333 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 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. The Company's repurchase rights lapse 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 15, 1997, the Company issued 1,125,000 shares of Common Stock to Mr.
Cardinale, an officer of the Company, for a purchase price of $0.0333 per
share. On August 30, 1997, the Company issued 345,000 shares of Common Stock
to Mr. Laehy, an officer of the Company, for $0.05 per share. On October 14,
1997, the Company issued 144,000 shares of Common Stock to Mr. Marshall, a
director of the Company, for a purchase price of $0.05 per share. On April 24,
1998, the Company issued 96,000 shares of Common Stock to Mr. Hawk, a director
of the Company, for a purchase price of $0.6667 per share. On August 28, 1998,
the Company issued 40,000 shares of Common Stock to Mr. Hawk for a purchase
price of $5.75 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 150,000 shares of Series A
Preferred Stock, to each of Messrs. McMinn, Khanna and Haas and 300,000 shares
of Series A Preferred Stock to Mr. Lynch for a purchase price of $0.3333 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.
ISSUANCE OF SERIES B PREFERRED STOCK
In July 1997, the Company sold an aggregate of 17,000,001 shares of Series B
Preferred, of which 12,000,000 shares were sold to Warburg, 3,000,000 shares
were sold to Crosspoint and 2,000,001 shares were
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sold to Intel. The purchase price of the Series B Preferred was $0.50 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 100,002 shares of
Series B Preferred at a purchase price of $1.00 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 is obligated to make equipment lease financing payments of
$860,000 through a sale lease-back transaction with Charter Financial, Inc.
("Charter Financial"). Through June 30, 1998, total lease payments to Charter
Financial, including principal and interest payments, were approximately
$187,000. 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. The Company's belief that the
terms of the sale lease-back arrangement are similar to those available from
alternative providers is based on the advice of its officers who reviewed at
least two alternative proposals and who reviewed and negotiated the terms of
the arrangement with Charter Financial.
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 June 30, 1998 totaled approximately $642,000.
The Company believes that the terms of its transactions with Diamond Lane were
completed at rates similar to those available from alternative vendors. This
belief is based on the Company's management team's experience in obtaining
vendors and the fact that the Company sought competitive bidders before
entering into the relationship with Diamond Lane.
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 Stock (after giving effect to the issuance of 1,800,000
shares of Common Stock upon exercise of warrants that will be exercised prior
to the closing of the offering, the conversion of outstanding Preferred Stock
into Common Stock, and excluding Common Stock that will be issued upon the
closing of this offering pursuant to cumulative dividend rights of the
Preferred Stock) as of September 1, 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>
NUMBER OF
SHARES PERCENTAGE BENEFICIALLY OWNED
BENEFICIALLY ------------------------------
BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING
---------------- ------------ --------------- --------------
<S> <C> <C> <C>
Charles McMinn(2).................. 3,150,000 9.96% %
Robert Knowling Jr.(3)............. 393,750 1.23% %
Robert Hawk(4)..................... 173,515 * %
Henry Kressel(5)................... 13,355,319 42.24% %
Joseph Landy(5).................... 13,355,319 42.24% %
Daniel Lynch(6).................... 457,500 1.45% %
Frank Marshall(6).................. 257,502 * %
Rich Shapero(7).................... 3,338,829 10.56% %
Charles Haas....................... 3,150,000 9.96% %
Dhruv Khanna(8).................... 3,150,000 9.96% %
All executive officers and
directors as a group(9)........... 28,896,415 90.20% %
Warburg, Pincus Ventures, L.P.
(10).............................. 13,355,319 42.24% %
Crosspoint Venture Partners 1996
(11).............................. 3,338,829 10.56% %
Intel Corporation (12)............. 2,465,997 7.80% %
</TABLE>
- --------
* Less than 1% of the outstanding voting stock.
(1) Based on 31,614,304 shares of Common Stock outstanding as of September 1,
1998. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange 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
September 1, 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., 2330 Central Expressway,
Santa Clara, CA 95050.
(2) Includes 475,000 shares of Common Stock held by a trust for the benefit
of two members of Mr. McMinn's immediate family, who also serve as co-
trustees. Mr. McMinn disclaims beneficial ownership of the shares of
Common Stock held by such trust.
(3) Consists of 393,750 shares of Common Stock subject to options exercisable
within 60 days of September 1, 1998.
(4) Includes 1,500 shares of Common Stock subject to options exercisable
within 60 days of September 1, 1998.
(5) All of the shares indicated are owned of record by Warburg and are
included because of Mr. Kressel's and Mr. Landy's affiliation with
Warburg. 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.
(6) Includes 13,500 shares of Common Stock subject to options exercisable
within 60 days of September 1, 1998.
(7) 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
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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.
(8) Includes 375,000 shares of Common Stock held by a limited partnership of
which Mr. Khanna is a general partner and a limited partner. Mr. Khanna
disclaims beneficial ownership of the shares of Common Stock held by such
limited partnership except to the extent of his pecuniary interest
therein.
(9) Includes 422,250 shares of Common Stock subject to options exercisable
within 60 days of September 1, 1998.
(10) Includes 1,355,319 shares issued upon exercise of a warrant immediately
prior to the closing of this offering. The sole general partner of
Warburg 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 Warburg. 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 Warburg as a
general partner and also owns approximately 1.3% of the limited
partnership interests in Warburg. 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 Warburg. See Note 5 above.
The address of Warburg is c/o E.M. Warburg, Pincus & Co., LLC, 466
Lexington Avenue, New York, NY 10017-3147.
(11) Includes 338,829 shares issued upon exercise of a warrant immediately
prior to the closing of this offering. 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 7 above. The address of Crosspoint is The
Pioneer Hotel Building, 2925 Woodside Road, Woodside, CA 94062.
(12) Includes 105,852 shares issued upon exercise of a warrant immediately
prior to the closing of this offering. The address of Intel is 2200
Mission College Boulevard, Mail Stop SC4-210, Santa Clara, CA 95052-8199.
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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
which are filed as exhibits to the Registration Statement of which this
Prospectus is a part. The following summary gives effect to the conversion of
all outstanding shares of Preferred Stock into Common Stock upon the closing
of this offering and the amendment and restatement of the Company's Amended
and Restated Certificate of Incorporation immediately following the closing of
this offering.
Upon the closing of this offering, the authorized capital stock of the
Company, after giving effect to the amendment of the Company's Amended and
Restated Certificate of Incorporation, will consist of 150,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. As of September 1, 1998,
there were 21 holders of record of Common Stock. The Common Stock and
Preferred Stock each have a par value of $0.001 per share. As of September 1,
1998, there were 31,614,304 shares of Common Stock outstanding, after giving
effect to the issuance of 1,800,000 shares of Common Stock upon exercise of
warrants that terminate upon the closing of the offering. No shares of
Preferred Stock are currently outstanding. As of September 1, 1998, options to
purchase 11,356,931 shares of Common Stock at a weighted average exercise
price of $1.25 per share were outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding series of Preferred Stock, the holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the board of directors out of funds legally
available for that purpose. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. 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, and the shares of Common Stock offered hereby
will, upon the closing of the offering, be fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
will automatically be converted into 18,246,162 shares of Common Stock. See
Note 6 of Notes to Consolidated Financial Statements for a description of the
currently outstanding Preferred Stock. The Board of Directors has the
authority to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges, and restrictions
granted to or imposed upon such Preferred Stock, including dividend rights,
conversion rights, terms of redemption, liquidation preference, sinking fund
terms and the number of shares constituting any series or the designation of
such series, without any further vote or action by the stockholders. The Board
of Directors, without stockholder approval, can issue additional Preferred
Stock with voting and conversion rights which could adversely affect the
voting power of the holders of Common Stock. The issuance of Preferred Stock
could have the effect of delaying, deferring or preventing a change in control
of the Company. The Company has no present plan to issue any shares of
Preferred Stock.
WARRANTS
In connection with the issuance of the Senior Discount Notes in March 1998,
the Company issued warrants (the "Warrants") to purchase an aggregate of
5,053,764 shares of Common Stock of the Company with exercise prices of
$0.0033 per share. The Warrants became exercisable on September 15, 1998 and
automatically expire on March 15, 2008. The Company also issued to a
consultant a five-year warrant to purchase 135,000 shares with an exercise
price of $1.00 per share. Such warrant is immediately exercisable.
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REGISTRATION RIGHTS
Pursuant to the Stockholder Rights Agreement, holders of 31,529,866 shares
of Common Stock (collectively, the "Rights Holders") are entitled to certain
rights with respect to the registration under the Securities Act of the shares
of Common Stock held by them. 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 shares of Common Stock
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
offering made hereby 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.
Pursuant to the Warrant Registration Rights Agreement dated March 11, 1998,
among the Company and Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated, holders of the Warrants are entitled to certain registration
rights with respect to the shares of Common Stock issuable upon exercise of
the Warrants. The Warrant holders are entitled to demand and "piggy-back"
registration rights, subject to certain limitations and conditions. Like the
Rights Holders, the number of securities that a Warrant holder may request to
be included in a registration involving an exercise of its demand or "piggy-
back" rights is subject to a pro rata reduction based on the number of shares
held by each Warrant 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.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF COVAD'S CHARTER, BYLAWS AND
DELAWARE LAW
As noted above, the Company's Board of Directors, without stockholder
approval, has the authority under the Company's Amended and Restated
Certificate of Incorporation to issue Preferred Stock with rights superior to
the rights of the holders of Common Stock. As a result, Preferred Stock could
be issued quickly and easily, could adversely affect the rights of holders of
Common Stock and could be issued with terms calculated to delay or prevent a
change of control of the Company or make removal of management more difficult.
Election and Removal of Directors. Effective upon the closing of this
offering, the Company's Bylaws provide for the division of the Company's Board
of Directors into three classes, as nearly equal in number as possible, with
the directors in each class serving for a three-year term, and one class being
elected each year by the Company's stockholders. Directors may be removed only
for cause. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company and may maintain the incumbency of the Board of
Directors, as it generally makes it more difficult for stockholders to replace
a majority of directors.
Stockholder Meetings. Under the Company's Bylaws, the stockholders may not
call a special meeting of the stockholders of the Company. Rather, only the
Board of Directors, the Chairman of the Board and the President may call
special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. The Company's Bylaws establish advance notice procedures with
respect to stockholder proposals and the nomination of candidates for election
as directors, other than nominations made by or at the direction of the Board
of Directors or a committee thereof.
Section 203 of the Delaware General Corporation Law. The Company is subject
to Section 203 of the Delaware General Corporation Law ("Section 203"), which
prohibits a publicly held Delaware corporation from
68
<PAGE>
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to such date, the board of
directors of the corporation approves either the business combination or the
transaction that resulted in the stockholder's becoming an interested
stockholder, (ii) upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the interested stockholder
owns at least 85% of the outstanding voting stock, excluding shares held by
directors, officers and certain employee stock plans, or (iii) on or after the
consummation date the business combination is approved by the board of
directors and by the affirmative vote at an annual or special meeting of
stockholders of at least 66 2/3% of the outstanding voting stock that is not
owned by the interested stockholder. For purposes of Section 203, a "business
combination" includes, among other things, a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder,
and an "interested stockholder" is generally a person who, together with
affiliates and associates of such person, (i) owns 15% or more of the
corporation's voting stock or (ii) is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation as any time within the prior three years.
These charter and bylaw provisions and provisions of Delaware law may have
the effect of delaying, deterring or preventing a change of control of the
Company.
TRANSFER AGENT AND REGISTRAR
Boston EquiServe, L.P. is the transfer agent and registrar for the Company's
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Sales of substantial amounts of Common Stock of the Company in the
public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon the completion of this offering, the Company will have shares of
Common Stock outstanding. Of these shares, the shares sold in this
offering will be freely tradable without restriction under the Securities Act,
unless held by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. The remaining 31,614,304 shares of Common Stock
held by existing stockholders were issued and sold by the Company in reliance
on exemptions from the registration requirements of the Securities Act. These
shares may be sold in the public market only if registered, or pursuant to an
exemption from registration such as Rule 144, 144(k) or 701 under the
Securities Act. The Company's directors, executive officers, all other
stockholders and all option and warrant holders, who in the aggregate hold all
of the shares of Common Stock or securities convertible into Common Stock of
the Company outstanding immediately prior to the completion of this offering,
are subject to lock-up agreements under which they have agreed not to directly
or indirectly, offer, sell, contract to sell, grant any option to purchase,
pledge or otherwise dispose of, or, in any manner, transfer all or a portion
of the economic consequences associated with the ownership of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock beneficially owned by them for a period of 180 days after the
date of this Prospectus, without the prior written consent of Bear, Stearns &
Co. Inc. The Company has entered into a similar agreement, except that the
Company may grant options and issue stock under its 1997 Stock Plan and 1998
Purchase Plan and pursuant to other currently outstanding options and
warrants.
Upon expiration of the lock-up agreements, approximately 29,814,304 shares
of Common Stock will become eligible for immediate public resale, subject in
some cases to volume limitations pursuant to Rule 144. The remaining
approximately 1,800,000 shares held by existing stockholders will become
eligible for public resale one year after their date of issuance upon the
exercise of warrants prior to the closing of this offering,
69
<PAGE>
subject to volume limitation pursuant to Rule 144 and the exercise of
registration rights subject to volume limitations pursuant to Rule 144 and the
exercise of registration rights. In addition, 31,529,866 of the shares
outstanding immediately following the completion of this offering will be
entitled to registration rights with respect to such shares upon the release
of lock-up agreements. The number of shares sold in the public market could
increase if such rights are exercised.
As of September 1, 1998, 11,356,931 shares were subject to outstanding
options under the Company's 1997 Stock plan and 5,188,764 shares were subject
to outstanding warrants to purchase Common Stock. All of these shares are
subject to the lock-up agreements described above. The Company also has
adopted its 1998 Purchase Plan and reserved shares for issuance
thereunder. Approximately 90 days after the date of this Prospectus, the
Company intends to file a Registration Statement on Form S-8 covering shares
issuable under the Company's 1998 Purchase Plan and 1997 Stock Plan (including
shares subject to then outstanding options under such plan, thus permitting
the resale of such shares in the public market without restriction under the
Securities Act after expiration of the applicable lock-up agreements. In
addition, the holders of the warrants to purchase 5,053,764 shares of Common
Stock are entitled to certain registration rights with respect to such shares.
See "Description of Capital Stock--Registration Rights."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year (including the holding period of any prior owner, except an
affiliate) is entitled to sell in a "broker's transaction" or to market
makers, within any three-month period commencing 90 days after the date of
this Prospectus, a number of shares that does not exceed the greater of
(i) one percent of the number of shares of Common Stock then outstanding or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to
such sale. Sales under Rule 144 are generally subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell such shares without having to
comply with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Under Rule 701 under the Securities Act,
persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
70
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. .................................
BT Alex. Brown Incorporated...............................
Donaldson, Lufkin & Jenrette Securities Corporation.......
Goldman, Sachs & Co. .....................................
----
Total...................................................
====
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the shares of Common Stock being
sold pursuant to the Underwriting Agreement if any are purchased (excluding
shares covered by the Over-Allotment Option).
The Underwriters have advised the Company that the Underwriters propose to
offer the Common Stock to the public initially at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of not more than $ per share. Additionally, the
Underwriters may allow, and such dealers may reallow, a discount of not more
than $ per share on sales to certain other dealers. After the initial public
offering, the public offering price and other selling terms may be changed by
the Underwriters.
At the Company's request, the Underwriters have reserved for sale at the
initial public offering price up to shares of Common Stock offered hereby
for certain individuals who have expressed an interest in purchasing such
shares of Common Stock in the offering. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the Underwriters to the general public on the same basis as other shares
offered hereby.
The Company has granted to the Underwriters an option to purchase up to
additional shares of Common Stock at the initial public offering price, less
the underwriting discount, set forth on the cover page of this Prospectus,
solely to cover over-allotments, if any. This option may be exercised in whole
or in part at any time within 30 days after the date of this Prospectus. To
the extent that the Underwriters exercise this option, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase a number of
shares of Common Stock proportionate to such Underwriter's purchase
obligations set forth in the foregoing table.
The offering of the shares is made for delivery, when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The officers, directors, stockholders and option holders of the Company, who
in the aggregate own all of the issued and outstanding shares of Common Stock
or securities convertible into Common Stock of the Company outstanding
immediately prior to the completion of this offering, have agreed that they
will not, without the prior written consent of Bear, Stearns & Co. Inc.,
directly or indirectly, offer, sell, contract to sell, grant any option to
purchase, pledge or otherwise dispose of, or, in any manner, transfer all or a
portion of the economic consequences associated with the ownership of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock beneficially owned by them during the 180 day
period following the date of this Prospectus. The Company has agreed that it
will not, without the prior written consent of Bear, Stearns & Co. Inc.,
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of securities exchangeable for or convertible into
shares of Common Stock during the 180 day period following the date of this
Prospectus, except that the Company may issue shares of Common Stock and
options to purchase Common Stock under its 1997 Stock Plan.
71
<PAGE>
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act and to contribute
to payments the Underwriters may be required to make in respect thereof.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company and the Underwriters. Among the factors to be
considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and operating results of the Company,
market valuations of other companies engaged in the telecommunications
industry, estimates of the business potential and prospects of the Company,
the present state of the Company's operations, the Company's management and
other factors deemed relevant. The estimated initial public offering price
range set forth on the cover of this preliminary Prospectus is subject to
change as a result of market conditions and other factors. The negotiated
initial public offering price may bear no relationship to the price at which
the Common Stock trades after the offering. Application has been made for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"COVD".
The Underwriters have advised the Company that, pursuant to Regulation M
promulgated under the Exchange Act, certain persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf
of the Underwriters for the purpose of pegging, fixing or maintaining the
price of the Common Stock. A "syndicate covering transaction" is the bid for
or the purchase of the Common Stock on behalf of the Underwriters to reduce a
short position created in connection with the Offering. The Underwriters may
also cover all or a portion of such short position by exercising the Over-
Allotment Option. A "penalty bid" is an arrangement permitting the
Underwriters to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the Offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Underwriters in a syndicate covering transaction and has therefore not
been effectively placed by such Underwriter or syndicate member. The
Underwriters have advised the Company that such transactions may be effected
on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The Underwriters do not intend to confirm sales for accounts over which they
exercise discretionary authority.
Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated acted as initial
purchasers of the Senior Discount Notes in March 1998, for which Bear, Stearns
& Co. Inc. and BT Alex. Brown Incorporated received usual and customary fees.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Latham & Watkins, San Francisco,
California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and for the year then ended, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
72
<PAGE>
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a registration statement on Form S-1
(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 Shares 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 at 450
Fifth Street, NW, Washington, D.C. 20594, and at the following regional
offices of 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. Copies of such reports and other information may be
obtained from the Public Reference Section of the SEC: 450 Fifth Street, NW,
Washington, D.C. 20549, upon payment of the prescribed fees.
The Company is currently subject to the periodic reporting and other
information requirements of the Exchange Act, and in accordance therewith
files reports and other information with the SEC. Such reports and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, NW, Washington, D.C. 20594, and at
the following regional offices of 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. Copies of such reports and
other information may be obtained from the Public Reference Section of the
SEC: 450 Fifth Street NW, Washington, D.C. 20549, upon payment of the
prescribed fees. The SEC maintains a Web site that contains reports and
information statements and other information regarding registrants that file
electronically with the SEC. Copies of such documents may be obtained from the
SEC's Internet address at HYPERLINK http://www.sec.gov.
73
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998
(unaudited).............................................................. F-3
Consolidated Statements of Operations for the year ended December 31, 1997
and the six months ended June 30, 1997 and 1998 (unaudited).............. F-4
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1997 and the six months ended June 30, 1998 (unaudited)..... F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1997
and the six months ended June 30, 1997 and 1998 (unaudited).............. F-6
Notes to Consolidated Financial Statements................................ F-7
</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.
/s/ Ernst & Young LLP
Walnut Creek, California
January 16, 1998, except for the fourth and
seventh paragraphs of Note 7 as to which
the date is August 6, 1998
F-2
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, JUNE 30, EQUITY
1997 1998 JUNE 30, 1998
------------- ----------- -------------
(RESTATED)(1) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 4,378 $121,885
Accounts receivable, net............... 25 568
Unbilled revenue....................... 4 279
Inventories............................ 43 208
Prepaid expenses....................... 52 327
Other current assets................... 317 21
------- --------
Total current assets................. 4,819 123,288
PROPERTY AND EQUIPMENT:
Networks and communication equipment... 2,185 13,005
Computer equipment..................... 600 2,111
Furniture and fixtures................. 185 205
Leasehold improvements................. 114 164
------- --------
3,084 15,485
Less accumulated depreciation and
amortization.......................... (70) (680)
------- --------
Net property and equipment........... 3,014 14,805
OTHER ASSETS:
Restricted cash........................ 210 210
Deposits............................... 31 44
Deferred debt issuance costs (net)..... -- 8,194
------- --------
Total other assets................... 241 8,448
------- --------
Total assets......................... $ 8,074 $146,541
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................... $ 651 $ 3,982
Unearned revenue....................... 7 113
Accrued network costs.................. 58 557
Other accrued liabilities.............. 77 662
Current portion of capital lease
obligations........................... 229 245
------- --------
Total current liabilities............ 1,022 5,559
Long-term debt (net of discount)....... -- 132,467
Long-term capital lease obligations.... 554 450
------- --------
Total liabilities.................... 1,576 138,476
STOCKHOLDERS' EQUITY:
Preferred stock (.001 par value) (pro
forma--unaudited):
Authorized shares--5,000,000
Issues and outstanding--none.......... -- -- --
Convertible preferred stock (.001 par
value):
Authorized shares--30,000,000 (none
pro forma--unaudited)
Issued and outstanding shares--
17,750,001 and 18,246,162 (unaudited)
at December 31, 1997 and June 30,
1998, respectively (none pro forma--
unaudited)........................... 18 18 --
Common stock (.001 par value):
Authorized shares--65,000,000
(75,000,000 pro forma--unaudited)
Issued and outstanding shares--
11,361,204 and 11,479,767 (unaudited)
at December 31, 1997 and June 30,
1998, respectively (29,725,929 shares
pro forma--unaudited)................ 11 11 29
Additional paid-in capital............. 9,692 26,036 26,036
Deferred compensation.................. (611) (3,684) (3,684)
Retained earnings (deficit)............ (2,612) (14,316) (14,316)
------- -------- -------
Total stockholders' equity............ 6,498 8,065 $ 8,065
------- -------- =======
Total liabilities and stockholders'
equity............................... $ 8,074 $146,541
======= ========
</TABLE>
- --------
(1) See Note 6.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED -----------------------
DECEMBER 31, 1997 1997 1998
----------------- ---------- -----------
(RESTATED)(1) (UNAUDITED)
<S> <C> <C> <C>
Revenues............................ $ 26 $ -- $ 995
Operating expenses:
Network and product costs......... 54 -- 961
Sales, marketing, general and
administrative................... 2,374 257 6,550
Amortization of deferred
compensation..................... 295 -- 858
Depreciation and amortization..... 70 -- 610
----------- ---------- -----------
Total operating expenses........ 2,793 257 8,979
----------- ---------- -----------
Income (loss) from operations....... (2,767) (257) (7,984)
Interest income (expense):
Interest income................... 167 -- 2,147
Interest expense.................. (12) -- (5,867)
----------- ---------- -----------
Net interest income (expense)..... 155 -- (3,720)
----------- ---------- -----------
Net income (loss)................... $ (2,612) $ (257) $ (11,704)
=========== ========== ===========
Net income (loss) per common share.. $ (0.80) $ (0.09) $ (2.31)
Weighted average shares used in
computing net loss per share....... 3,271,546 2,762,267 5,056,334
Pro forma net income (loss) per
common share....................... $ (0.23) $ (0.09) $ (0.48)
Weighted average shares used in
computing pro forma net loss per
share.............................. 11,522,916 2,766,410 24,233,326
</TABLE>
- --------
(1) See Note 6.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(RESTATED)(1)
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------- ------------------ PAID-IN DEFERRED EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) EQUITY
---------- ------ ---------- ------ ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance of
common stock........... -- $-- 12,000,000 $ 12 $ 38 $ -- $ -- $ 50
Repurchase of common
stock.................. -- -- (2,410,296) (3) (7) -- -- (10)
Issuance of common
stock.................. -- -- 1,771,500 2 66 -- -- 68
Issuance of Series A
Preferred Stock........ 750,000 1 -- -- 249 -- -- 250
Issuance of Series B
Preferred Stock (net of
$43 of financing
costs)................. 17,000,001 17 -- -- 8,440 -- -- 8,457
Deferred compensation... -- -- -- -- 906 (906) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 295 -- 295
Net loss................ -- -- -- -- -- -- (2,612) (2,612)
---------- ---- ---------- ---- ------- ------- -------- --------
Balance at December 31,
1997................... 17,750,001 $ 18 11,361,204 $ 11 $ 9,692 $ (611) $ (2,612) $ 6,498
Issuance of common
stock.................. -- -- 118,563 -- 64 -- -- 64
Issuance of Series B
Preferred Stock........ 100,002 -- -- -- 100 -- -- 100
Issuance Series C
Preferred Stock........ 396,159 -- -- -- 1,100 -- -- 1,100
Issuance of common stock
warrants as part of
debt offering issuance
costs.................. -- -- -- -- 2,928 -- -- 2,928
Issuance of common stock
warrants pursuant to
debt offering.......... -- -- -- -- 8,221 -- -- 8,221
Deferred compensation... -- -- -- -- 3,931 (3,931) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 858 -- 858
Net loss................ -- -- -- -- -- -- (11,704) (11,704)
---------- ---- ---------- ---- ------- ------- -------- --------
Balance at June 30,
1998................... 18,246,162 $ 18 11,479,767 $ 11 $26,036 $(3,684) $(14,316) $ 8,065
========== ==== ========== ==== ======= ======= ======== ========
</TABLE>
- --------
(1) See Note 6.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ---------------
1997 1997 1998
------------- ----- --------
(RESTATED)(1) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................ $(2,612) $(257) $(11,704)
Reconciliation of net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization................. 70 -- 610
Amortization of deferred compensation......... 295 -- 858
Accreted interest and amortization of debt
discount and deferred debt issuance costs.... -- -- 5,800
Net changes in current assets and liabilities:
Accounts receivable......................... (25) -- (543)
Inventories................................. (43) -- (165)
Other current assets........................ (373) -- (254)
Accounts payable............................ 651 84 3,331
Unearned revenue............................ 7 -- 106
Other current liabilities................... 135 500 1,084
------- ----- --------
Net cash provided by (used in) operating
activities .................................... (1,895) 327 (877)
INVESTING ACTIVITIES:
Purchase of restricted investment............... (210) -- --
Deposits........................................ (31) -- (13)
Purchase of property and equipment.............. (2,253) (199) (12,367)
------- ----- --------
Net cash used in investing activities .......... (2,494) (199) (12,380)
FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and
warrants....................................... -- -- 129,622
Principal payments under capital lease
obligations.................................... (48) -- (122)
Proceeds from common stock issuance, net of
repurchase..................................... 108 45 64
Proceeds from preferred stock issuance.......... 8,707 250 1,200
------- ----- --------
Net cash provided by financing activities....... 8,767 295 130,764
------- ----- --------
Net increase in cash and cash equivalents....... -- 423 117,507
Cash and cash equivalents at beginning of
period......................................... -- -- 4,378
------- ----- --------
Cash and cash equivalents at end of year........ $ 4,378 $ 423 $121,885
======= ===== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest........ $ 9 $ -- $ 48
======= ===== ========
Supplemental schedule of non-cash investing and
financing activities:
Equipment purchased through capital leases.... $ 831 $ -- $ 34
======= ===== ========
Warrants issued for equity commitment........... -- -- $ 2,928
======= ===== ========
</TABLE>
- --------
(1) See Note 6.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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 that
provides dedicated high-speed digital communication services using Digital
Subscriber Line ("DSL") technology to enterprise and Internet Service Provider
customers. Enterprise customers purchase the Company's services to provide
employees with remote access to their Local Area Networks to improve employee
productivity and reduce operating costs. ISPs purchase the Company's services
in order to provide high-speed Internet access to their business and consumer
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'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 financial statements at June 30, 1998 and six months ended June 30, 1998
and 1997 are unaudited, but include all adjustments (consisting of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of financial position and operating results. Operating results
for the six months ended June 30, 1998 and 1997 are not necessarily indicative
of results that may be expected for any future periods.
The accompanying statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 1997 and the six months ended June 30,
1997 include $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.
F-7
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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
As of December 31, 1997 and June 30, 1998, the Company had $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.
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............ 2 to 5 years
Furniture and fixtures......................... 7 years
Computer equipment............................. 3 years
Office equipment............................... 2 to 5 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. As of December 31, 1997 and
June 30, 1998, total capitalized internal costs were $139,000 and $671,000,
respectively.
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.
F-8
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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 had
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 approximately $2,062,000 at
December 31, 1997, expire in 2012 and 2003, respectively. For the six months
ended June 30, 1998, the Company has incurred additional operating losses
which are expected to generate net operating loss carryforwards for the 1998
tax year. 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.
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 (Loss) 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.
F-9
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
Basic earnings per share is computed by dividing income or loss applicable
to common shareholders by the weighted average number of shares of the
Company's common stock ("Common Stock"), after giving consideration to shares
subject to repurchase, 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 dilutive stock options and warrants using the treasury stock
method and conversion of the Company's convertible preferred stock ("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.
Under the Company's Certificate of Incorporation, all outstanding Preferred
Stock will convert into Common Stock on a one-for-one basis upon the
completion of this offering. The pro forma net loss per share assumes the
conversion of the Preferred Stock.
The consolidated financial statements applicable to the prior periods have
been restated to reflect a two-for-one stock split effective May 1998 and a
three-for-two stock split effective August 1998.
The following table presents the calculation of basic and diluted and pro
forma net income (loss) per share (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net income (loss)........................ $ (2,612) $ (257) $ (11,704)
Basic and diluted:
Weighted average shares of common stock
outstanding........................... 11,021,269 11,079,713 11,404,688
Less: Weighted average shares subject
to repurchase......................... 7,749,723 8,317,447 6,348,354
----------- ----------- -----------
Weighted average shares used in computing
basic and diluted net income (loss) per
share................................... 3,271,546 2,762,267 5,056,334
=========== =========== ===========
Basic and diluted net income (loss) per
share................................... $ (0.80) $ (0.09) $ (2.31)
=========== =========== ===========
Pro forma (unaudited):
Shares used above........................ 3,271,546 2,762,267 5,056,334
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock............. 8,251,370 4,143 18,063,180
----------- ----------- -----------
Shares used in computing pro forma basic
and diluted net income (loss) per common
share................................... 11,522,916 2,766,410 23,119,514
=========== =========== ===========
Pro forma basic and diluted net income
(loss) per share........................ $ (0.23) $ (0.09) $ (0.51)
=========== =========== ===========
</TABLE>
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 19.4376 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.
F-10
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
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 $126.9 million, which
represents the $135.1 million in gross proceeds less the approximate $8.2
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. The debt issuance costs are
also being amortized over the life of the Notes. For the six-month period
ending June 30, 1998, the accretion of the Notes and the amortization of debt
discount and debt issuance costs was $5.8 million and is included in interest
expense in the accompanying consolidated financial statements.
3. CAPITAL LEASES
The Company has 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 as of December
31, 1997 and was equivalent to the fair value of the assets leased.
Future minimum lease payments by year under capital leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<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.
F-11
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
4. OPERATING LEASES
The Company leases vehicles, equipment, and office space under various
operating leases. Future minimum lease payments by year under operating leases
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<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.
5. 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.
6. STOCKHOLDERS' EQUITY
COVAD COMMUNICATIONS GROUP, INC.
Common Stock:
The number of shares of Common Stock authorized for issuance by the Company
is 65,000,000 shares with a par value of $.001 per share. Shares of Common
Stock outstanding at December 31, 1997 and June 30, 1998 were 11,361,204 and
11,479,767 shares, respectively, of which 7,033,107 and 5,900,250 shares,
respectively, remain subject to repurchase provisions which generally lapse
over a four year period from the date of issuance.
Convertible Preferred Stock:
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Authorized shares--30,000,000
Series A preferred stock (.001 par value):
Authorized shares--750,000
Issued and outstanding shares--750,000 at December 31,
1997 and June 30, 1998.................................. $ 1 $ 1
Series B preferred stock (.001 par value):
Authorized shares--17,100,003
Issued and outstanding shares--17,000,001 at December 31,
1997 and 17,100,003 at June 30, 1998.................... 17 17
Series C preferred stock (.001 par value):
Authorized shares--11,149,287
Issued and outstanding shares--None at December 31, 1997
and 396,159 at June 30, 1998............................ -- --
--- ---
$18 $18
=== ===
</TABLE>
F-12
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS 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 5,764,143
shares of Series C Preferred Stock and warrants to purchase an aggregate of
4,729,500 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 1,694,148 shares of the Company's Common Stock at a purchase
price of $0.0033 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 36,015
shares of Series C Preferred Stock and 29,559 Series C Warrants for an
aggregate purchase price of $100,000. On the same date, the director purchased
36,015 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 5,764,143 shares to 5,728,128
shares, and from 4,729,500 shares to 4,699,941 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 $2.7767 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 $0.0033
per share, are immediately exercisable and contain net exercise provisions.
The Stock Purchase
On March 11, 1998, an investor in the Company purchased 360,144 shares of
Series C Preferred Stock and Series C Warrants to purchase an aggregate of
295,500 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 105,852 shares of Common Stock at
a purchase price of $0.0033 per share.
Preferred Stock Attributes
The holders of Series A, Series B and Series C are entitled to receive in
any fiscal year, dividends at the rate of $0.0167 per share, $0.04 per share
and $0.2233 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 $6,250 and $312,000, 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, Series B and Series C is convertible
into one share of Common Stock. Each share of Series A, Series B and Series C
is entitled to the number of votes equal to the number of shares of Common
Stock in which such shares of Series A, Series B and Series C respectively,
could be converted.
F-13
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
In the event of any liquidation or dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A, Series B and Series
C are entitled to receive, in addition to the cumulated and unpaid dividends,
$0.3333, $0.50 and $2.7767 per share, respectively (the "Initial Preference"),
until, with respect to Series A and Series B only, 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, Series C 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 with respect to Series A and Series
B only.
7. 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 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. As of June 30, 1998 the Plan
has reserved 8,270,250 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- NUMBER WEIGHTED-
EXERCISE NUMBER OF AVERAGE AVERAGE OF AVERAGE
PRICE RANGE SHARES LIFE REMAINING EXERCISE PRICE SHARES EXERCISE PRICE
----------- --------- -------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$0.033................. 2,255,250 7.3 years $0.033 269,751 $0.033
$0.05.................. 1,549,500 7.8 years $0.05 1,500 $0.05
--------- -------
3,804,750 7.5 years $0.04 271,251 $0.033
========= =======
</TABLE>
The following table summarizes stock option activity for the year ending
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF OPTION PRICE
COMMON STOCK PER SHARE
------------ --------------
<S> <C> <C>
Balance as of December 31, 1996................. -- N/A
Granted......................................... 3,843,750 $0.033-$0.05
Exercised....................................... (6,000) $ 0.033
Forfeited....................................... (33,000) $0.033-$0.05
--------- --------------
Balance as of December 31, 1997................. 3,804,750 $0.033-$0.05
Granted......................................... 3,405,150 $0.10 -$0.6667
Exercised....................................... (22,563) $0.033-$0.05
Forfeited....................................... (145,237) $0.05 -$0.6667
--------- --------------
Balance as of June 30, 1998..................... 7,042,100 $0.033-$0.6667
========= ==============
</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, compensation expense is
recognized based on the amount by which the fair value of the underlying
common stock exceeds the exercise price of stock options at the date of grant.
As a
F-14
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED)
result of the Company's reassessment during 1998 of the fair values per share
of its common stock, the Company has restated its financial statements for the
year ended December 31, 1997 to record deferred compensation of $906,000 as a
result of granting stock options and issuing restricted stock with exercise or
issue prices per share below the revised fair value per share of the Company's
common stock at the date of grant or issuance. This amount was recorded as
reduction of stockholders' equity and is being amortized as a charge to
operations over the vesting period of the applicable options. Such
amortization was $295,000 for the year ended December 31, 1997. During the six
months ended June 30, 1998, the Company recorded additional deferred
compensation of approximately $3.9 million. Amortization of deferred
compensation during this same period was $858,000.
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>
The weighted average fair value of stock options granted during 1997 was
$0.26 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
$12,000. 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.
8. 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 shop spectral interference
issues, as well as other practices. This lawsuit is pending in federal court.
However, Pacific Bell has, during the course of this litigation, found
physical collocation space in numerous central offices for which it had
previously denied the Company such space.
The Company also litigated U.S. West collocation practices before the
American Arbitration Association in Seattle, Washington. In addition, on
August 28, 1998, U.S. West filed a lawsuit and sought a preliminary injunction
against the Company and one of its employees in Federal Court in connection
with the departure of such employee from U.S. West to the Company and the
potential improper disclosure of U.S. West's alleged trade secrets to the
Company.
9. YEAR 2000 COMPLIANT (UNAUDITED)
The Company is engaged in the development of information systems to manage
various aspects of the Company's operations. Management believes these
information systems are in compliance with year 2000 requirements, although
there can be no assurance in this regard.
F-15
<PAGE>
APPENDIX
COVAD COMMUNICATIONS GROUP, INC.
GLOSSARY OF TERMS
Access Line--A circuit that connects a telephone end-user 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 communication.
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.
DSL--Digital Subscriber Line.
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.
A-1
<PAGE>
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.
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 communication 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 long distance/interLATA
carriers (e.g., AT&T, MCI WorldCom and Sprint), 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.
RBOCs (Regional Bell Operating Companies)--ILECs created by AT&T's
divestiture of its local exchange business. The remaining RBOCs include
BellSouth, Bell Atlantic Corporation, Ameritech Corporation, U S WEST
Communications, 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 IN-
FORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION 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 OFFER
TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION 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>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 23
Dividend Policy........................................................... 23
Capitalization............................................................ 24
Dilution.................................................................. 25
Selected Consolidated Financial Data...................................... 26
Management's Discussion and Analysis of Financial Condition And Results of
Operations............................................................... 28
Business.................................................................. 36
Management................................................................ 54
Certain Relationships and Related Transactions............................ 62
Principal Stockholders.................................................... 65
Description of Capital Stock.............................................. 67
Shares Eligible for Future Sale........................................... 69
Underwriting.............................................................. 71
Legal Matters............................................................. 72
Experts................................................................... 72
Additional Information.................................................... 73
Index to Financial Statements............................................. F-1
Glossary.................................................................. A-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LOGO]
COVAD COMMUNICATIONS GROUP, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 42,406
NASD filing fee.................................................... 14,875
Nasdaq National Market listing fee................................. *
Blue sky fees and expenses......................................... *
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Transfer agent and registrar fees.................................. *
D&O premium increase............................................... *
Miscellaneous...................................................... *
--------
Total............................................................ $ *
========
</TABLE>
- --------
* To be filed by amendment.
The Company will bear all of the foregoing fees and expenses.
ITEM 14. 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 Underwriting Agreement included as Exhibit 1.1 to this Registration
Statement contains provisions for the indemnification of the Underwriters and
the Company's directors and officers from certain liabilities, including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its incorporation in October 1996, the Registrant has issued and sold
unregistered securities as follows:
(1) An aggregate of 12,144,000 shares of Common Stock was issued in a
private placement in November 1996 to Messrs. McMinn, Khanna, Haas,
Davidson and Lynch pursuant to Restricted Stock Purchase Agreements. The
consideration received for such shares was $50,600. The Company repurchased
2,410,296 shares of Common Stock issued to Mr. Davidson in July 1997. See
"Certain Transactions."
(2) An aggregate of 1,125,000 shares of Common Stock was issued in a
private placement in July 1997 to Mr. Cardinale pursuant to a Restricted
Stock Purchase Agreement. The consideration received for such shares was
$37,500.
II-1
<PAGE>
(3) An aggregate of 750,000 shares of Series A Preferred Stock was issued
in a private placement in June 1997 to Messrs. McMinn, Khanna, Haas and
Lynch. The aggregate consideration received for such shares was $249,975.
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.
(4) An aggregate of 17,000,001 shares of Series B Preferred Stock was
issued in a private placement in July 1997 to Warburg, Crosspoint and
Intel. The aggregate consideration received for such shares was
$8,500,000.50, a portion of which was paid by cancellation of a $500,000
demand note issued to Warburg in June 1997.
(5) An aggregate of 345,000 shares of Common Stock was issued in a
private placement in August 1997 to Mr. Laehy pursuant to a Restricted
Stock Purchase Agreement. The consideration received for such shares was
$17,250.
(6) An aggregate of 144,000 shares of Common Stock was issued in a
private placement in October 1997 to Mr. Marshall pursuant to a Restricted
Stock Purchase Agreement. The consideration received for such shares was
$7,200.
(7) An aggregate of 7,500 shares of Common Stock was issued in a private
placement in December 1997 to one investor pursuant to an Assignment,
Transfer and Sale Agreement and a Restricted Stock Purchase Agreement. The
consideration for such shares was receipt of a Mark and Domain Name.
(8) An aggregate of 100,002 shares of Series B Preferred Stock was issued
in a private placement in February 1998 to Mr. Marshall. The consideration
received for such shares was $100,002.
(9) Warrants for the purchase of an aggregate of 1,800,000 shares of
Common Stock with an exercise price of $0.0033 per share were issued in
February 1998 to Warburg, Crosspoint and Intel in connection with a Series
C Preferred Stock and Warrant Subscription Agreement.
(10) An aggregate of 360,144 shares of Series C Preferred Stock was
issued in a private placement in March 1998 to Intel. The consideration
received for such shares was $999,999.84.
(11) An aggregate of 36,015 shares of Series C Preferred Stock was issued
in a private placement in April 1998 to Mr. Hawk. The consideration
received for such shares was $1,000,001.65.
(12) An aggregate of 96,000 shares of Common Stock was issued in a
private placement pursuant to a Restricted Stock Purchase Agreement in
April 1998 to Mr. Hawk. The consideration received for such shares was
$64,000.
(13) A Warrant for the purchase of an aggregate of 135,000 shares of
Common Stock with an exercise price of $1.00 per share was issued in July
1998 to Heidrick & Struggles in connection with the payment of a fee for
executive search services.
(14) An aggregate of 40,000 shares of Common Stock was issued in a
private placement pursuant to a Restricted Stock Purchase Agreement in
August 1998 to Mr. Hawk. The consideration received for such shares was
$230,000.
(15) An aggregate of 9,000 shares of Common Stock was issued in a private
placement pursuant to a Restricted Stock Purchase Agreement in August 1998
to one investor. The consideration received for such shares was $51,750.
(16) From July 1997 through August 1998, the Registrant granted stock
options to purchase an aggregate of 10,266,929 shares of Common Stock to
employees, consultants and directors with exercise prices ranging from
$0.0333 to $5.75 per share pursuant to the Registrant's 1997 Stock Plan.
(17) Warrants for the purchase of an aggregate of 5,053,764 shares of
Common Stock with exercise prices of $0.0033 per share were issued in March
1998 to Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated, as
initial purchasers, in connection with the issuance of the Senior Discount
Notes.
II-2
<PAGE>
No underwriters were used in connection with these sales and issuances
except for the issuance of the Senior Discount Notes and related warrants in
(17) above. The sales and issuances of these securities except for those in
note (17) were exempt from registration under the Securities Act pursuant to
Rule 701 promulgated thereunder on the basis that these options were offered
and sold either pursuant to a written compensatory benefit plan or pursuant to
written contracts relating to consideration, as provided by Rule 701, or
pursuant to Section 4(2) thereof on the basis that the transactions did not
involve a public offering. The sales and issuance in note (17) were exempt
from registration under the Securities Act pursuant to Section 4(2) and, in
connection with the resale by the initial purchasers of the securities
described in note (17), Rule 144A thereunder.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as currently in
effect.
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be effective immediately following the closing of the
offering.
3.3 Bylaws, as currently in effect.
3.4 Form of Bylaws of the Registrant to be effective upon the closing of
the offering.
4.1 Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York, including form of 13 1/2% Senior Discount Note Due
2008.
4.2 Registration Rights Agreement dated as of March 11, 1998 among the
Registrant and Bear, Stearns & Co. Inc. and BT Alex. Brown (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., Crosspoint Venture Partners 1996 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* Employment Agreement dated June 21, 1998 between the Registrant and
Robert E. Knowling, Jr.
10.7 Sublease Agreement dated July 6, 1998 between Auspex Systems, Inc. and
the Registrant with respect to Registrant's facilities in Santa Clara,
California.
10.8* 1998 Employee Stock Purchase Plan and related agreements.
10.9* Note Secured by Deed of Trust dated August 14, 1998 issued by the
Registrant in favor of Robert E. Knowling.
10.10 Form of Warrant to purchase Common Stock issued by the Registrant on
February 20, 1998 to Warburg, Pincus Ventures, L.P., Crosspoint
Venture Partners 1996 and Intel Corporation.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2 Consent of Counsel.
24.1 Power of Attorney (included on page II-6).
27.1 Financial Data Schedules.
</TABLE>
- --------
* To be filed by amendment.
(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 17. UNDERTAKINGS
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:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(b) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus 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.
II-5
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA
CLARA, STATE OF CALIFORNIA ON SEPTEMBER 21, 1998
Covad Communications Group, Inc.
/s/ Timothy Laehy
By: _________________________________
TIMOTHY LAEHY
CHIEF FINANCIAL OFFICER AND VICE
PRESIDENT, FINANCE
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles McMinn, Robert Knowling Jr. and Timothy
Laehy and each of them his attorneys-in-fact, each with the power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto in all documents in connection therewith, with
the SEC, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON SEPTEMBER
21, 1998 IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Charles McMinn Chairman of the Board of Directors
___________________________________________
(CHARLES MCMINN)
/s/ Robert Knowling, Jr. President, Chief Executive Officer and
___________________________________________ Director (Principal Executive Officer)
(ROBERT KNOWLING, JR.)
/s/ Timothy Laehy Chief Financial Officer and Vice President,
___________________________________________ Finance (Principal Financial and
(TIMOTHY LAEHY) Accounting Officer)
/s/ Robert Hawk Director
___________________________________________
(ROBERT HAWK)
/s/ Henry Kressel Director
___________________________________________
(HENRY KRESSEL)
/s/ Joseph Landy Director
___________________________________________
(JOSEPH LANDY)
/s/ Daniel Lynch Director
___________________________________________
(DANIEL LYNCH)
/s/ Frank Marshall Director
___________________________________________
(FRANK MARSHALL)
/s/ Rich Shapero Director
___________________________________________
(RICH SHAPERO)
</TABLE>
II-6
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
REGISTRATION STATEMENT ON FORM S-1
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as currently in
effect.
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be effective immediately following the closing of the
offering.
3.3 Bylaws, as currently in effect.
3.4 Form of Bylaws of the Registrant to be effective upon the closing of
the offering.
4.1 Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York, including form of 13 1/2% Senior Discount Note Due
2008.
4.2 Registration Rights Agreement dated as of March 11, 1998 among the
Registrant and Bear, Stearns & Co. Inc. and BT Alex. Brown (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., Crosspoint Venture Partners 1996 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* Employment Agreement dated June 21, 1998 between the Registrant and
Robert E. Knowling, Jr.
10.7 Sublease Agreement dated July 6, 1998 between Auspex Systems, Inc. and
the Registrant with respect to Registrant's facilities in Santa Clara,
California.
10.8* 1998 Employee Stock Purchase Plan and related agreements.
10.9* Note Secured by Deed of Trust dated August 14, 1998 issued by the
Registrant in favor of Robert E. Knowling.
10.10 Form of Warrant to purchase Common Stock issued by the Registrant on
February 20, 1998 to Warburg, Pincus Ventures, L.P., Crosspoint
Venture Partners 1996 and Intel Corporation.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
</TABLE>
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
REGISTRATION STATEMENT ON FORM S-1
INDEX TO EXHIBITS--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2 Consent of Counsel.
24.1 Power of Attorney (included on page II-6).
27.1 Financial Data Schedules.
</TABLE>
- --------
* To be filed by amendment.
<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 subsequently amended
and restated on February 23, 1998 and on May 20, 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.
<PAGE>
ARTICLE IV
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 two outstanding shares of Common Stock shall be divided into three shares
of Common Stock, and each two outstanding shares of Preferred Stock shall be
divided into three shares of Preferred Stock of the same series. The number of
shares of Common Stock authorized to be issued is Sixty-Five Million
(65,000,000). The number of shares of Preferred Stock authorized to be issued
is Thirty Million (30,000,000), of which Seven Hundred Fifty Thousand (750,000)
shares have been designated as Series A Preferred Stock (the "SERIES A
PREFERRED"), Seventeen Million One Hundred Thousand and Three (17,100,003)
shares have been designated Series B Preferred Stock (the "SERIES B PREFERRED")
and Eleven Million One Hundred Forty-Nine Thousand Two Hundred Eighty-Seven
(11,149,287) 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:
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<PAGE>
1. Dividends.
---------
(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 $0.2233 per
share, $0.0400 per share and $0.0167 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 $0.2233
per share, $0.0400 per share and $0.0167 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
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<PAGE>
by reason of their ownership of such stock, the amount equal to the Initial
Series B Preferred Price (as 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 $2.7767 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 $0.50 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. 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 $0.3333 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 $2.00,
-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
(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.
-5-
<PAGE>
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 $2.7767 by the Series C 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
C Preferred (the "SERIES C CONVERSION PRICE") shall initially be $2.7767 per
share of Common Stock. Such initial Conversion Price shall be subject to
adjustment as hereinafter provided.
-6-
<PAGE>
(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 $0.50 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 $0.50 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 $0.3333 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 $0.3333 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 $2.7767 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, 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
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<PAGE>
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.
-------------------------------
(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.
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<PAGE>
(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 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.
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<PAGE>
(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;
(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
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<PAGE>
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 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
-11-
<PAGE>
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.
(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;
-12-
<PAGE>
(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 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),
-13-
<PAGE>
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 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
-14-
<PAGE>
(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;
(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
-15-
<PAGE>
(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 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;
-16-
<PAGE>
(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
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.
-17-
<PAGE>
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.
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.
-18-
<PAGE>
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by Robert E. Knowling, Jr., 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: August 26, 1998
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ ROBERT E. KNOWLING, JR.
---------------------------
Robert E. Knowling, Jr.
President and Chief Executive Officer
ATTEST:
/s/ DHRUV KHANNA
- -----------------------------
Dhruv Khanna
Secretary
<PAGE>
EXHIBIT 3.2
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 subsequently amended
and restated on February 23, 1998, May 20, 1998 and August 28, 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.
<PAGE>
ARTICLE IV
The Corporation is authorized to issue two classes of shares to be
designated. respectively, "Common Stock" and "Preferred Stock." The number of
shares of Common Stock authorized to be issued is One Hundred Fifty Million
(150,000,000). The number of shares of Preferred Stock authorized to be
issued is Five Million (5,000,000). The Common Stock and the Preferred Stock
shall each have a par value of $.001 per share.
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
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.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
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.
-2-
<PAGE>
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.
Effective upon the closing of the first sale of the corporation's common stock
pursuant to a firmly underwritten registered public offering (the "IPO"), the
directors shall be divided into three classes, with the term of office of the
first class, which class shall initially consist of three (3) directors, to
expire at the first annual meeting of stockholders held after the IPO; the term
of office of the second class, which class shall initially consist of three (3)
directors, to expire at the second annual meeting of stockholders held after the
IPO; the term of office of the third class, which class shall initially consist
of two (2) directors, to expire at the third annual meeting of stockholders held
after the IPO; and thereafter for each such term to expire at each third
succeeding annual meeting of stockholders held after such election.
In the event of an increase in the authorized number of directors, the
newly created directorship shall be assigned to one of the above-referenced
classes in accordance with resolutions adopted by the board of directors. No
decrease in the authorized number of directors shall have the effect of
shortening the term of any incumbent director.
ARTICLE VII
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.
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-
<PAGE>
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.
-4-
<PAGE>
IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by Robert E. Knowling, Jr., 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: ___________ __, 1998
COVAD COMMUNICATIONS GROUP, INC.
By:
---------------------------------------
Robert E. Knowling, Jr.
President and Chief Executive Officer
ATTEST:
- -------------------------------
Dhruv Khanna
Secretary
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
COVAD COMMUNICATIONS GROUP, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I CORPORATE OFFICES........................................ 1
1.1 REGISTERED OFFICE............................................. 1
1.2 OTHER OFFICES................................................. 1
ARTICLE II MEETINGS OF STOCKHOLDERS................................ 1
2.1 PLACE OF MEETINGS............................................. 1
2.2 ANNUAL MEETING................................................ 1
2.3 SPECIAL MEETING............................................... 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............................. 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................. 2
2.6 QUORUM........................................................ 3
2.7 ADJOURNED MEETING; NOTICE..................................... 3
2.8 VOTING........................................................ 3
2.9 WAIVER OF NOTICE.............................................. 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING....... 4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS... 4
2.12 PROXIES....................................................... 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 5
ARTICLE III DIRECTORS.............................................. 5
3.1 POWERS........................................................ 5
3.2 NUMBER OF DIRECTORS........................................... 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS....... 6
3.4 RESIGNATION AND VACANCIES..................................... 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................... 7
3.6 FIRST MEETINGS................................................ 7
3.7 REGULAR MEETINGS.............................................. 8
3.8 SPECIAL MEETINGS; NOTICE...................................... 8
3.9 QUORUM........................................................ 8
3.10 WAIVER OF NOTICE.............................................. 8
3.11 ADJOURNED MEETING; NOTICE..................................... 9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............. 9
3.13 FEES AND COMPENSATION OF DIRECTORS............................ 9
3.14 APPROVAL OF LOANS TO OFFICERS................................. 9
ARTICLE IV COMMITTEES.............................................. 9
4.1 COMMITTEES OF DIRECTORS....................................... 9
4.2 COMMITTEE MINUTES............................................. 10
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
4.3 MEETINGS AND ACTION OF COMMITTEES............................. 10
ARTICLE V OFFICERS................................................. 11
5.1 OFFICERS...................................................... 11
5.2 ELECTION OF OFFICERS.......................................... 11
5.3 SUBORDINATE OFFICERS.......................................... 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS........................... 11
5.5 VACANCIES IN OFFICES.......................................... 11
5.6 AUTHORITY AND DUTIES OF OFFICERS.............................. 12
5.7 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS.................. 12
ARTICLE VI INDEMNITY............................................... 12
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................... 12
6.2 INDEMNIFICATION OF OTHERS..................................... 12
6.3 INSURANCE..................................................... 13
6.4 NON-EXCLUSIVITY OF RIGHTS..................................... 13
6.5 OTHER INDEMNIFICATION......................................... 13
6.6 AMENDMENT OR REPEAL........................................... 13
ARTICLE VII RECORDS AND REPORTS.................................... 14
7.1 MAINTENANCE AND INSPECTION OF RECORDS......................... 14
7.2 INSPECTION BY DIRECTORS....................................... 14
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................ 15
ARTICLE VIII GENERAL MATTERS....................................... 15
8.1 CHECKS........................................................ 15
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.............. 15
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES........................ 15
8.4 SPECIAL DESIGNATION ON CERTIFICATES........................... 16
8.5 LOST CERTIFICATES............................................. 16
8.6 CONSTRUCTION; DEFINITIONS..................................... 16
8.7 DIVIDENDS..................................................... 17
8.8 FISCAL YEAR................................................... 17
8.9 SEAL.......................................................... 17
8.10 TRANSFER OF STOCK............................................. 17
8.11 STOCK TRANSFER AGREEMENTS..................................... 17
8.12 REGISTERED STOCKHOLDERS....................................... 17
ARTICLE IX AMENDMENTS.............................................. 18
ARTICLE X DISSOLUTION.............................................. 18
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<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
ARTICLE XI CUSTODIAN............................................... 19
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES................... 19
11.2 DUTIES OF CUSTODIAN........................................... 19
-iii-
<PAGE>
EXHIBIT 3.3
BYLAWS
------
OF
--
COVAD COMMUNICATIONS GROUP, INC.
--------------------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At the meeting, directors shall be
elected and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
Special meetings of stockholders for any purpose or purposes may be called
at any time by the Board of Directors, by a committee of the Board of Directors
which has been duly designated by the Board of Directors and whose powers and
authority, as expressly provided in a resolution of the Board of Directors,
include the power to call such meetings or by one or more shareholders holding
shares in the aggregate entitled to cast not less than 10% of the votes cast at
that meeting, but such special meetings may not be called by any other person or
persons.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. If mailed, such notice
shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
corporation.
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<PAGE>
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is
present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or
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<PAGE>
special meeting of the stockholders need be specified in any written waiver of
notice unless so required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which
the meeting is held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
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<PAGE>
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be
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<PAGE>
managed and all corporate powers shall be exercised by or under the direction
of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be one (1). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the stock issued and outstanding and entitled to
vote or by resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stock holders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become effec
tive, and each director so chosen shall hold office as provided in this section
in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the
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<PAGE>
directors elected by such class or classes or series thereof then in office,
or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
Any and all directors may be removed without cause if the removal is
approved by the affirmative vote of a majority of the outstanding shares of the
corporation entitled to vote. Such approval shall include the affirmative vote
of a majority of the outstanding shares of each class and series entitled to
vote as a class or series on the subject matter being voted upon and shall also
include the affirmative vote of such greater proportion (including all) of the
outstanding shares of any class or series if such greater proportion is required
by the corporation's certificate of incorporation or by applicable laws.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting,
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<PAGE>
provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly
elected board of directors, or in the event such meeting is not held at the
time and place so fixed by the stockholders, the meeting may be held at such
time and place as shall be specified in a notice given as hereinafter provided
for special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board may be called by the president on three (3)
days' notice to each director, either personally or by mail, telegram, telex, or
telephone; special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of two (2) directors
unless the board consists of only one (1) director, in which case special
meetings shall be called by the president or secretary in like manner and on
like notice on the written request of the sole director.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
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<PAGE>
3.11 ADJOURNED MEETING; NOTICE
-------------------------
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously
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<PAGE>
appoint another member of the board of directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the board of directors or in the bylaws
of the corporation, shall have and may exercise all the powers and authority
of the board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to
all papers that may require it; but no such committee shall have the power or
authority to (i) amend the certificate of incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of
directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other
class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation
Law of Delaware, (iii) recommend to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
(iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the bylaws of the corporation; and,
unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall
have the power or authority to declare a dividend, to authorize the issuance
of stock, or to adopt a certificate of ownership and merger pursuant to
Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
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<PAGE>
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretaries, assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
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5.6 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
5.7 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS
--------------------------------------------
No officer shall take any action, enter into any agreement, make any
representation or, by purposeful inaction, effect any of the actions or
decisions which the Board of Directors is prohibited or restricted from enacting
pursuant to these Bylaws or the certificate of incorporation and their further
amendments.
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of
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the corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was an employee or
agent of a corporation which was a predecessor corporation of the corporation
or of another enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
6.4 NON-EXCLUSIVITY OF RIGHTS
-------------------------
The rights conferred on any person by this Article 6 shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the certificate of incorporation, these by-laws,
agreement, vote of stockholders or disinterested directors or otherwise.
6.5 OTHER INDEMNIFICATION
---------------------
The corporation's obligation, if any, to indemnify any person who was or is
serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or non-profit entity
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, enterprise or non-
profit enterprise.
6.6 AMENDMENT OR REPEAL
-------------------
Any repeal or modification of the foregoing provisions of this Article 6
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
-13-
<PAGE>
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
shareholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
-14-
<PAGE>
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares
-15-
<PAGE>
registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws.
-16-
<PAGE>
Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may have a corporate seal, which shall be adopted and which
may be altered by the Board of Directors, and may use the same by causing it or
a facsimile thereof, to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold
-17-
<PAGE>
liable for calls and assessments the person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of another person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall
-18-
<PAGE>
be attached to and filed with the consent. The consent filed with the
Secretary of State shall have attached to it the affidavit of the secretary or
some other officer of the corporation stating that the consent has been signed
by or on behalf of all the stockholders entitled to vote on a dissolution; in
addition, there shall be attached to the consent a certification by the
secretary or some other officer of the corporation setting forth the names and
residences of the directors and officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
-19-
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
COVAD COMMUNICATIONS GROUP, INC.
Adoption by Incorporator
------------------------
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Covad Communications Group, Inc. hereby adopts the
foregoing bylaws, comprising twenty (20) pages, as the Bylaws of the
corporation.
Executed this 14th day of July 1997.
/s/ DHRUV KHANNA
--------------------------------
Dhruv Khanna, Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Covad Communications Group, Inc. and that the foregoing
Bylaws, comprising twenty (20) pages, were adopted as the Bylaws of the
corporation on July 14, 1997, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this 14th day of July 1997.
/s/ DHRUV KHANNA
--------------------------------
Dhruv Khanna, Secretary
-20-
<PAGE>
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
COVAD COMMUNICATIONS GROUP, INC.
The undersigned, being the Secretary of Covad Commnunications Group,
Inc., hereby certifies that the first paragraph of Section 3.2 of Article III
of the Bylaws of this corporation was amended, effective July 14, 1997, by the
Board of Directors to provide as follows:
ARTICLE III
DIRECTORS
---------
SECTION 3.2 NUMBER OF DIRECTORS
The number of Directors of the corporation shall be not less than four (4)
nor more than seven (7). The exact number of directors shall be seven (7) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the stockholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
certificate of incorporation or by an amendment to this bylaw duly adopted by
the vote or written consent of the holders of a majority of the stock issued and
outstanding and entitled to vote or by resolution of a majority of the board of
directors.
Dated July 14, 1997
/s/ DHRUV KHANNA
----------------------------
Dhruv Khanna, Secretary
<PAGE>
AMENDMENT TO THE
BYLAWS OF
COVAD COMMUNICATIONS GROUP, INC.
EFFECTIVE JULY 22,1998
Article 3.2 of the Bylaws of Covad Communications Group, Inc. is hereby
amended to read as follows:
"3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be not less than five (5) nor
more than (9). The exact number of directors shall be eight (8) until changed,
within the limits specified above, by a bylaw amending this Section 3.2, duly
adopted by the board of directors or by the stockholders. The indefinite number
of directors may be changed, or a definite number may be fixed without provision
for an indefinite number, by a duly adopted amendment to the certificate of
incorporation or by an amendment to this bylaw adopted by the vote or written
consent of the holders of a majority of the stock issued and outstanding and
entitled to vote or by resolution of a majority of the stock issued and
outstanding and entitled to vote or by resolution of a majority of the board of
directors.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires."
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BYLAWS
OF
COVAD COMMUNICATIONS GROUP, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I CORPORATE OFFICES.......................................... 1
1.1 REGISTERED OFFICE........................................... 1
1.2 OTHER OFFICES............................................... 1
ARTICLE II MEETINGS OF STOCKHOLDERS.................................. 1
2.1 PLACE OF MEETINGS........................................... 1
2.2 ANNUAL MEETING.............................................. 1
2.3 SPECIAL MEETING............................................. 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................ 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................ 2
2.6 QUORUM...................................................... 3
2.7 ADJOURNED MEETING; NOTICE................................... 3
2.8 VOTING...................................................... 3
2.9 WAIVER OF NOTICE............................................ 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING..... 4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. 4
2.12 PROXIES..................................................... 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE....................... 5
ARTICLE III DIRECTORS................................................ 5
3.1 POWERS...................................................... 5
3.2 NUMBER OF DIRECTORS......................................... 6
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS.................... 7
3.4 RESIGNATION AND VACANCIES................................... 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................... 8
3.6 FIRST MEETINGS.............................................. 8
3.7 REGULAR MEETINGS............................................ 9
3.8 SPECIAL MEETINGS; NOTICE.................................... 9
3.9 QUORUM...................................................... 9
3.10 WAIVER OF NOTICE............................................ 9
3.11 ADJOURNED MEETING; NOTICE................................... 9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING........... 10
3.13 FEES AND COMPENSATION OF DIRECTORS.......................... 10
3.14 APPROVAL OF LOANS TO OFFICERS............................... 10
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
ARTICLE IV COMMITTEES................................................ 10
4.1 COMMITTEES OF DIRECTORS..................................... 10
4.2 COMMITTEE MINUTES........................................... 11
4.3 MEETINGS AND ACTION OF COMMITTEES........................... 11
ARTICLE V OFFICERS................................................... 11
5.1 OFFICERS.................................................... 11
5.2 ELECTION OF OFFICERS........................................ 12
5.3 SUBORDINATE OFFICERS........................................ 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS......................... 12
5.5 VACANCIES IN OFFICES........................................ 12
5.6 AUTHORITY AND DUTIES OF OFFICERS............................ 12
5.7 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS................ 13
ARTICLE VI INDEMNITY................................................. 13
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 13
6.2 INDEMNIFICATION OF OTHERS................................... 13
6.3 INSURANCE................................................... 13
6.4 NON-EXCLUSIVITY OF RIGHTS................................... 14
6.5 OTHER INDEMNIFICATION....................................... 14
6.6 AMENDMENT OR REPEAL......................................... 14
ARTICLE VII RECORDS AND REPORTS...................................... 14
7.1 MAINTENANCE AND INSPECTION OF RECORDS....................... 14
7.2 INSPECTION BY DIRECTORS..................................... 15
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.............. 15
ARTICLE VIII GENERAL MATTERS......................................... 16
8.1 CHECKS...................................................... 16
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS............ 16
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES...................... 16
8.4 SPECIAL DESIGNATION ON CERTIFICATES......................... 17
8.5 LOST CERTIFICATES........................................... 17
ii
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
8.6 CONSTRUCTION; DEFINITIONS................................... 17
8.7 DIVIDENDS................................................... 17
8.8 FISCAL YEAR................................................. 18
8.9 SEAL........................................................ 18
8.10 TRANSFER OF STOCK........................................... 18
8.11 STOCK TRANSFER AGREEMENTS................................... 18
8.12 REGISTERED STOCKHOLDERS..................................... 18
ARTICLE IX AMENDMENTS................................................ 19
ARTICLE X DISSOLUTION................................................ 19
ARTICLE XI CUSTODIAN................................................. 20
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES................. 20
11.2 DUTIES OF CUSTODIAN......................................... 20
iii
<PAGE>
AMENDED AND RESTATED
--------------------
BYLAWS
------
OF
--
COVAD COMMUNICATIONS GROUP, INC.
--------------------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At the meeting, directors shall be
elected and any other proper business may be transacted.
<PAGE>
To be properly brought before any annual or special meeting, business must
be (a) specified in the notice of meeting (or any supplement thereto) given by
or at the direction of the Board of Directors, (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a stockholder. For business to
be properly brought before the meeting by a stockholder, the secretary of the
corporation must have received notice in writing from the stockholder not less
than thirty (30) days nor more than sixty (60) days prior to the meeting;
provided, however, that if less than thirty-five (35) days' notice of the
meeting is given to stockholders, such notice shall have been received by the
secretary not later than the close of business on the seventh (7th) day
following the day on which the notice of meeting was mailed. Such written
notice to the secretary shall set forth, as to each matter the stockholder
proposes to bring before the annual meeting: (i) a brief description of the
business, (ii) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business, (iii) the number of shares of stock
of the corporation beneficially owned by such stockholder, and (iv) any material
interest of such stockholder in such business. Notwithstanding any provision in
the bylaws to the contrary, no business shall be conducted at any annual or
special meeting except in accordance with the procedures set forth in this
Section 2.2
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called only by the Board of
Directors of the corporation pursuant to a resolution adopted by a majority of
the total number of directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is presented
to the Board for adoption), for the purpose of taking any action permitted to be
taken by the stockholders under the Delaware General Corporation Law and the
Certificate of Incorporation, by a committee of the Board of Directors which has
been duly designated by the Board of Directors and whose powers and authority,
as expressly provided in a resolution of the Board of Directors, include the
power to call such meetings or by the chairman of the board, the president, or
the chief executive officer.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. If mailed, such notice
shall be deemed to be given when
-2-
<PAGE>
deposited in the mail, postage prepaid, directed to the stockholder at his
address as it appears on the records of the corporation.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the
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beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice unless so required by the certificate
of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
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(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be
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managed and all corporate powers shall be exercised by or under the direction of
the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be not less than five (5) nor more
than nine (9). The exact number of directors shall be eight (8) until changed,
within the limits specified above, by a bylaw amending this Section 3.2, duly
adopted by the board of directors or by the stockholders. The indefinite number
of directors may be changed, or a definite number may be fixed without provision
for an indefinite number, by a duly adopted admendment to the certificate of
incorporation or by an amendment to this bylaw adopted by the vote or written
consent of the holders of a majority of the stock issued and outstanding and
entitled to vote or by resolution of a majority of the stock issued and
outstanding and entitled to vote or by resolution of a majority of the board of
directors. Effective upon the closing of the first sale of the corporation's
common stock pursuant to a firmly underwritten registered public offering (the
"IPO"), the directors shall be divided into three classes, with the term of
office of the first class, which class shall initially consist of three (3)
directors, to expire at the first annual meeting of stockholders held after the
IPO; the term of office of the second class, which class shall initially consist
of three (3) directors, to expire at the second annual meeting of stockholders
held after the IPO; the term of office of the third class, which class shall
initially consist of two (2) directors, to expire at the third annual meeting of
stockholders held after the IPO; and thereafter for each such term to expire at
each third succeeding annual meeting of stockholders held after such election.
In the event of an increase in the authorized number of directors, the
newly created directorship shall be assigned to one of the above-referenced
classes in accordance with resolutions adopted by the board of directors. No
decrease in the authorized number of directors shall have the effect of
shortening the term of any incumbent director.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
Nominations for election to the Board of Directors of the corporation at
any annual or special meeting of stockholders may be made by the Board or on
behalf of the Board by a nominating committee appointed by the Board, or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting. Such nominations, other than those made by or on behalf of the
Board, shall be made by notice in writing received by the secretary of the
corporation not less than thirty (30) days nor more than sixty (60) days prior
to the date of the annual meeting; provided, however, that if less than thirty-
five (35) days notice of the meeting is given to stockholders, such nomination
shall have been received by the secretary not later than the close of business
on the seventh (7th) day following the day on which the notice was mailed. Such
notice shall set forth (i) the name and address of the stockholder who intends
to make the nomination; (ii) a representation that the nominating stockholder is
a holder of record of stock of the corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting and nominate the
person or persons specified in the notice; (iii) the number of shares of stock
held beneficially and of record by
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the nominating stockholder; (iv) the name, age, business address and, if known,
residence address of each nominee proposed in such notice; (v) the principal
occupation or employment of each such nominee; (vi) the number of shares of
stock of the corporation beneficially owned by each such nominee; (vii) a
description of all arrangements or understandings between the nominating
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the nominating stockholder; (viii) any other information concerning each nominee
that must be disclosed of nominees in proxy solicitations pursuant to Regulation
14A under the Securities Exchange Act of 1934; and (ix) the consent of each such
nominee to serve as a director of the corporation if so elected.
The chairman of the annual or special meeting may, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure. If such determination and declaration
is made, the defective nomination shall be disregarded.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office as provided in
Section 3.2 of these bylaws. Each director, including a director elected or
appointed to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become effec
tive, and each director so chosen shall hold office as provided in this section
in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
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If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
Any and all directors may be removed without cause if the removal is
approved by the affirmative vote of a majority of the outstanding shares of the
corporation entitled to vote. Such approval shall include the affirmative vote
of a majority of the outstanding shares of each class and series entitled to
vote as a class or series on the subject matter being voted upon and shall also
include the affirmative vote of such greater proportion (including all) of the
outstanding shares of any class or series if such greater proportion is required
by the corporation's certificate of incorporation or by applicable laws.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and
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place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board may be called by the president on three (3)
days' notice to each director, either personally or by mail, telegram, telex, or
telephone; special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of two (2) directors
unless the board consists of only one (1) director, in which case special
meetings shall be called by the president or secretary in like manner and on
like notice on the written request of the sole director.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
-------------------------
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
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3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corpo ration. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except
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that a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation), (ii) adopt an agreement of merger or consolidation
under Sections 251 or 252 of the General Corporation Law of Delaware, (iii)
recommend to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a
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chairman of the board, one or more assistant vice presidents, assistant
secretaries, assistant treasurers, and any such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
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5.7 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS
--------------------------------------------
No officer shall take any action, enter into any agreement, make any
representation or, by purposeful inaction, effect any of the actions or
decisions which the Board of Directors is prohibited or restricted from enacting
pursuant to these Bylaws or the certificate of incorporation and their further
amendments.
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint
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venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of the General Corporation Law of Delaware.
6.4 NON-EXCLUSIVITY OF RIGHTS
-------------------------
The rights conferred on any person by this Article 6 shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the certificate of incorporation, these by-laws,
agreement, vote of stockholders or disinterested directors or otherwise.
6.5 OTHER INDEMNIFICATION
---------------------
The corporation's obligation, if any, to indemnify any person who was or is
serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or non-profit entity
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, enterprise or non-
profit enterprise.
6.6 AMENDMENT OR REPEAL
-------------------
Any repeal or modification of the foregoing provisions of this Article 6
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
shareholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or
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other agent is the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing that
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the corporation at its registered
office in Delaware or at its principal place of business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
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ARTICLE VII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend
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on fully paid shares, the corporation shall declare a dividend upon partly paid
shares of the same class, but only upon the basis of the percentage of the
consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal represen tative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
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<PAGE>
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may have a corporate seal, which shall be adopted and which
may be altered by the Board of Directors, and may use the same by causing it or
a facsimile thereof, to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
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<PAGE>
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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<PAGE>
CERTIFICATE OF ADOPTION OF
AMENDED AND RESTATED BYLAWS
OF
COVAD COMMUNICATIONS GROUP, INC.
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Covad Communications Group, Inc. and that the foregoing
Amended and Restated Bylaws, comprising twenty (20) pages, were adopted as the
Amended and Restated Bylaws of the corporation on September __, 1998, by the
Board of Directors of the corporation to be effective upon the closing of the
corporation's initial public offering.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ___th day of September 1998.
----------------------------------------
Dhruv Khanna, Secretary
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EXHIBIT 4.1
________________________________________________
COVAD COMMUNICATIONS GROUP, INC.
$260,000,000 AGGREGATE PRINCIPAL AMOUNT
AT MATURITY OF
SERIES A AND SERIES B
13 1/2% SENIOR DISCOUNT NOTES DUE 2008
INDENTURE
________________________________________________
Dated as of March 11, 1998
________________________
The Bank of New York
Trustee
______________
________________________________________________________________________________
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
<S> <C>
310(a)(1)................................................... 7.10
(a)(2)...................................................... 7.10
(a)(3)...................................................... N.A.
(a)(4)...................................................... N.A.
(a)(5)...................................................... 7.10
()(b)....................................................... 7.10
()(c)....................................................... N.A.
311(a)...................................................... 7.11
(b)......................................................... 7.11
((c)........................................................ N.A.
312(a)...................................................... 2.05
(b)......................................................... 11.03
()(c)....................................................... 11.03
313(a)...................................................... 7.06
(b)(1)...................................................... 10.03
(b)(2)...................................................... 7.07
()(c)....................................................... 7.06; 11.02
()(d)....................................................... 7.06
314(a)...................................................... 4.03; 11.02
(c)(1)...................................................... 11.04
(c)(2)...................................................... 11.04
(c)(3)...................................................... N.A.
()(e)....................................................... 11.05
(f)......................................................... N.A.
315(a)...................................................... 7.01
(b)......................................................... 7.05; 11.02
()(c)....................................................... 7.01
(d)......................................................... 7.01
(e)......................................................... 6.11
316(a)(last sentence)....................................... 2.09
(a)(1)(A)................................................... 6.05
(a)(1)(B)................................................... 6.04
(a)(2)...................................................... N.A.
(b)......................................................... 6.07
()(c)....................................................... 2.12
317(a)(1)................................................... 6.08
(a)(2)...................................................... 6.09
(b)......................................................... 2.04
318(a)...................................................... 11.01
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(b)............................................................. N.A.
(c)............................................................. 11.01
</TABLE>
*This Cross-Reference Table is not part of the Indenture.
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE..................... 6
Section 1.01 Definitions........................................... 6
Section 1.02 Other Definitions..................................... 25
Section 1.03......................................................... 25
Section 1.04 Rules of Construction................................. 26
ARTICLE 2. THE NOTES...................................................... 26
Section 2.01 Form and Dating....................................... 26
Section 2.02 Execution and Authentication.......................... 27
Section 2.03 Registrar and Paying Agent............................ 28
Section 2.04 Paying Agent to Hold Money in Trust................... 28
Section 2.05 Holder Lists.......................................... 29
Section 2.06 Transfer and Exchange................................. 29
Section 2.07 Replacement Notes..................................... 43
Section 2.08 Outstanding Notes..................................... 43
Section 2.09 Treasury Notes........................................ 43
Section 2.10 Temporary Notes....................................... 44
Section 2.11 Cancellation.......................................... 44
Section 2.12 Defaulted Interest.................................... 44
Section 2.13 CUSIP Numbers......................................... 44
ARTICLE 3. REDEMPTION AND PREPAYMENT...................................... 45
Section 3.01 Notices to Trustee.................................... 45
Section 3.02 Selection of Notes to Be Redeemed..................... 45
Section 3.03 Notice of Redemption.................................. 45
Section 3.04 Effect of Notice of Redemption........................ 46
Section 3.05 Deposit of Redemption Price........................... 46
Section 3.06 Notes Redeemed in Part................................ 47
Section 3.07 Optional Redemption................................... 47
Section 3.08 Mandatory Redemption.................................. 48
Section 3.09 Offer to Purchase by Application of Excess Proceeds... 48
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
ARTICLE 4. COVENANTS................................................................ 50
Section 4.01 Payment of Notes................................................ 50
Section 4.02 Maintenance of Office or Agency................................. 50
Section 4.03 Reports......................................................... 51
Section 4.04 Compliance Certificate.......................................... 51
Section 4.05 Taxes........................................................... 52
Section 4.06 Stay, Extension and Usury Laws.................................. 52
Section 4.07 Restricted Payments............................................. 53
Section 4.08 Dividend and Other Payment Restrictions Affecting Subsidiaries.. 55
Section 4.09 Incurrence of debt and Issuance of disqualified Stock........... 56
Section 4.10 Asset Sales..................................................... 58
Section 4.11 Transactions with Affiliates.................................... 59
Section 4.12 Limitation on Liens............................................. 60
Section 4.13 Business Activities............................................. 60
Section 4.14 Corporate Existence............................................. 60
Section 4.15 Offer to Repurchase Upon Change of Control...................... 60
Section 4.16 Limitation on Sale and Leaseback Transactions................... 62
Section 4.17 Limitation on Issuances and Sales of equity
interests in Wholly Owned restricted Subsidiaries............... 62
Section 4.18 Limitation on Issuances of Guarantees of debt................... 62
Section 4.19 Payments for Consent............................................ 63
Section 4.20 equity commitment............................................... 63
ARTICLE 5. SUCCESSORS............................................................... 63
Section 5.01 Merger, Consolidation, or Sale of Assets........................ 63
Section 5.02 Successor Corporation Substituted............................... 64
ARTICLE 6. DEFAULTS AND REMEDIES.................................................... 64
Section 6.01 Events of Default............................................... 64
Section 6.02 Acceleration.................................................... 66
Section 6.03 Other Remedies.................................................. 67
Section 6.04 Waiver of Defaults.............................................. 67
Section 6.05 Control by Majority............................................. 67
Section 6.06 Limitation on Suits............................................. 67
Section 6.07 Rights of Holders of Notes to Receive Payment................... 68
Section 6.08 Collection Suit by Trustee...................................... 68
Section 6.09 Trustee May File Proofs of Claim................................ 68
Section 6.10 Priorities...................................................... 69
Section 6.11 Undertaking for Costs........................................... 69
</TABLE>
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<TABLE>
<S> <C>
ARTICLE 7. TRUSTEE.................................................................. 70
Section 7.01 Duties of Trustee............................................... 70
Section 7.02 Rights of Trustee............................................... 71
Section 7.03 Individual Rights of Trustee.................................... 71
Section 7.04 Trustee's Disclaimer............................................ 71
Section 7.05 Notice of Defaults.............................................. 72
Section 7.06 Reports by Trustee to Holders of the Notes...................... 72
Section 7.07 Compensation and Indemnity...................................... 72
Section 7.08 Replacement of Trustee.......................................... 73
Section 7.09 Successor Trustee by Merger, etc................................ 74
Section 7.10 Eligibility; Disqualification................................... 74
Section 7.11 Preferential Collection of Claims Against Company............... 75
ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE................................. 75
Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance........ 75
Section 8.02 Legal Defeasance and Discharge.................................. 75
Section 8.03 Covenant Defeasance............................................. 75
Section 8.04 Conditions to Legal or Covenant Defeasance...................... 76
Section 8.05 Deposited Money and Government Securities to be Held
in Trust; Other Miscellaneous Provisions........................ 77
Section 8.06 Repayment to Company............................................ 78
Section 8.07 Reinstatement................................................... 78
Section 8.08 Survival........................................................ 79
ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER......................................... 79
Section 9.01 Without Consent of Holders of Notes............................. 79
Section 9.02 With Consent of Holders of Notes................................ 79
Section 9.03 Compliance with Trust Indenture Act............................. 81
Section 9.04 Revocation and Effect of Consents............................... 81
Section 9.05 Notation on or Exchange of Notes................................ 81
Section 9.06 Trustee to Sign Amendments, etc................................. 81
ARTICLE 10. MISCELLANEOUS........................................................... 82
Section 10.01 Trust Indenture Act Controls.................................... 82
Section 10.02 Notices......................................................... 82
Section 10.03 Communication by Holders of Notes with Other Holders of Notes... 83
Section 10.04 Certificate and Opinion as to Conditions Precedent.............. 83
Section 10.05 Statements Required in Certificate or Opinion................... 83
Section 10.06 Rules by Trustee and Agents..................................... 84
</TABLE>
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<TABLE>
<S> <C>
Section 10.07 No Personal Liability of Directors, Officers,
Employees and Stockholders...................................... 84
Section 10.08 Governing Law................................................... 84
Section 10.09 No Adverse Interpretation of Other Agreements................... 84
Section 10.10 Successors...................................................... 85
Section 10.11 Severability.................................................... 85
Section 10.12 Counterpart Originals........................................... 85
Section 10.13 Table of Contents, Headings, etc................................ 85
</TABLE>
EXHIBIT
EXHIBIT A-1 (Face of Note)
EXHIBIT A-2 (Face of Regulation S Temporary Global Note)
EXHIBIT B FORM OF CERTIFICATE OF TRANSFER
EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE
EXHIBIT D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED
INVESTOR
EXHIBIT E FORM OF NOTATION OF GUARANTEE
EXHIBIT F CONFORMED COPY OF EQUITY COMMITMENT
-5-
<PAGE>
INDENTURE dated as of March 11, 1998 between Covad Communications
Group, Inc., a Delaware corporation (the "Company"), and The Bank of New York,
as trustee (the "Trustee").
The Company and the Trustee agree as follows for the benefit of each
other and for the equal and ratable benefit of the Holders of the 13 1/2% Series
A Senior Discount Notes due 2008 (the "Series A Notes") and the 13 1/2% Series B
Senior Discount Notes due 2008 (the "Series B Notes" and, together with the
Series A Notes, the "Notes"):
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.0 Definitions.
"144A Global Note" means a global note in the form of Exhibit A-1
hereto bearing the Global Note Legend and the Private Placement Legend and
deposited with or on behalf of, and registered in the name of, the Depositary or
its nominee that will be issued in a denomination equal to the outstanding
principal amount at maturity of the Notes sold in reliance on Rule 144A.
"Accreted Value" means, as of 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 ................................ 1000.00
- ---------------------------------------------------------
</TABLE>
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<PAGE>
(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 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 assets acquired by such
specified Person.
"Additional Interest" means, on any date of determination, all additional
interest then owing pursuant to the Registration Rights Agreement, if any. All
references in this Indenture to interest which is or may become payable on the
Notes shall be deemed to include Additional Interest, if applicable.
"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. The Initial Purchasers shall not be deemed Affiliates of
the Company solely by reason of their purchase of the Warrants.
"Agent" means any Registrar, Paying Agent or co-registrar.
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<PAGE>
"all or substantially all" has the meaning given such phrase in the Revised
Model Business Corporation Act.
"Applicable Procedures" means, with respect to any transfer or exchange of
or for beneficial interests in any Global Note, the rules and procedures of the
Depositary, Euroclear and Cedel that apply to such transfer or exchange.
"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 Section 4.15 hereof and
not by the provisions of Section 4.10 hereof, 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 Restricted Subsidiary
or by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary; (ii) an issuance of Equity Interests by a Restricted Subsidiary to
the Company or to another Restricted Subsidiary; (iii) a Restricted Payment that
is permitted by the covenant described under Section 4.07 hereof; (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.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state
law providing for the relief of debtors, as from time to time amended and
applicable to the relevant case.
"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
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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.
"Board of Directors" means the Board of Directors of the Company, or any
authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"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 (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 exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
combined 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.
"Cedel" means Cedel Bank, S.A.
"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
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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.
"Company" means Covad Communications Group, Inc., and any and all
successors thereto.
"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 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
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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
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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 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 this Indenture 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.
"Corporate Trust Office of the Trustee" shall be at the address of the
Trustee specified in Section 10.02 hereof or such other address as to which the
Trustee may give written notice to the Company.
"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.
"Custodian" means the Trustee, as custodian with respect to the Notes in
global form, or any successor entity thereto.
"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)
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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.
"Definitive Note" means a certificated Note registered in the name of the
Holder thereof and issued in accordance with Section 2.06 hereof, in the form of
Exhibit A-1 hereto except that such Note shall not bear the Global Note Legend
and shall not have the "Schedule of Exchanges of Interests in the Global Note"
attached thereto.
"Depositary" means, with respect to the Notes issuable or issued in whole
or in part in global form, the Person specified in Section 2.03 hereof as the
Depositary with respect to the Notes, and any and all successors thereto
appointed as depositary hereunder and having become such pursuant to the
applicable provision of this Indenture.
"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 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
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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 under Section 4.07
hereof.
"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 agreement relating to 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, together with the supplemental letter from Warburg, Pincus Ventures,
L.P. and Crosspoint Venture Partners 1996 dated February 21, 1998 relating
thereto. A conformed copy of the Equity Commitment is attached hereto as
Exhibit F.
"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).
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor act), and the rules and regulations thereunder.
"Exchange Notes" means the Notes issued in the Exchange Offer pursuant to
Section 2.06(f) hereof.
"Exchange Offer" has the meaning set forth in the Registration Rights
Agreement.
"Exchange Offer Registration Statement" has the meaning set forth in the
Registration Rights Agreement.
"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.
"Full Accretion Date" means March 15, 2003.
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"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 date of this Indenture.
"Global Notes" means, individually and collectively, each of the Restricted
Global Notes and the Unrestricted Global Notes, in the form of Exhibit A hereto
issued in accordance with Section 2.01, 2.06(b)(iv), 2.06(d)(ii) or 2.06(f)
hereof.
"Global Note Legend" means the legend set forth in Section 2.06(g)(ii),
which is required to be placed on all Global Notes issued under this Indenture.
"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 covenant described under Section 4.18
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.
"Holder" means a Person in whose name a Note is registered.
"IAI Global Note" means the global Note in the form of Exhibit A-1 hereto
bearing the Global Note Legend and the Private Placement Legend and deposited
with or on behalf of and registered in the name of the Depositary or its nominee
that will be issued in a denomination equal to the outstanding principal amount
at maturity of the Notes sold to Institutional Accredited Investors.
"Indenture" means this Indenture, as amended or supplemented from time to
time.
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"Indirect Participant" means a Person who holds a beneficial interest in a
Global Note through a Participant.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, which is not also a QIB.
"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 Section 4.07.
"Investor" means any Warburg Entity, Intel Corporation or Crosspoint
Venture Partners 1996.
"Issue Date" means March 11, 1998.
"Initial Purchasers" means Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated, as initial purchasers in the Offering.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue on
such payment for the intervening period.
"Letter of Transmittal" means the letter of transmittal to be prepared by
the Company and sent to all Holders of the Notes for use by such Holders in
connection with the Exchange Offer.
"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).
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"Measurement Period" has 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 Subsidiaries or
the extinguishment of any Indebtedness of such Person or any of its
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.
"Non-U.S. Person" means a Person who is not a U.S. Person within the
meaning of Regulation S.
"Notes" has the meaning assigned to it in the preamble to this Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Offering" means the offering of the Notes by the Company.
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"Officer" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary or any Vice- President of such Person.
"Officers" Certificate" means a certificate signed on behalf of the Company
by two Officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company, that meets the requirements of Section 10.05
hereof.
"Opinion of Counsel" means an opinion from legal counsel that meets the
requirements of Section 10.05 hereof. The counsel may be an employee of or
counsel to the Company, any Subsidiary of the Company or the Trustee.
"Pari Passu Debt" means (i) any Debt of the Company that is pari passu in
right of payment to the Notes and (ii) with respect to any guarantee, Debt which
ranks pari passu in right of payment to such guarantee.
"Participant" means, with respect to the Depositary, Euroclear or Cedel, a
Person who has an account with the Depositary, Euroclear or Cedel, respectively
(and, with respect to the Depository, shall include Euroclear and Cedel).
"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 under Section 4.10 hereof; (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
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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
Section 7.07 hereof, 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 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
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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.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof (including any
subdivision or ongoing business of any such entity or substantially all of the
assets of any such entity, subdivision or business).
"Private Placement Legend" means the legend set forth in Section 2.06(g)(i)
to be placed on all Notes issued under this Indenture except where otherwise
permitted by the provisions of this Indenture.
"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.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of March 11, 1998, by and among the Company and the other parties named
on the signature pages thereof, as such agreement may be amended, modified or
supplemented from time to time.
"Regulation S" means Regulation S promulgated under the Securities Act.
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"Regulation S Global Note" means a Regulation S Temporary Global Note or
Regulation S Permanent Global Note, as appropriate.
"Regulation S Permanent Global Note" means a permanent global Note in the
form of Exhibit A-1 hereto bearing the Global Note Legend and the Private
Placement Legend and deposited with or on behalf of and registered in the name
of the Depositary or its nominee, issued in a denomination equal to the
outstanding principal amount at maturity of the Regulation S Temporary Global
Note upon expiration of the Restricted Period.
"Regulation S Temporary Global Note" means a temporary global Note in the
form of Exhibit A-2 hereto bearing the Global Note Legend and the Private
Placement Legend and deposited with or on behalf of and registered in the name
of the Depositary or its nominee, issued in a denomination equal to the
outstanding principal amount at maturity of the Notes initially sold in reliance
on Rule 903 of Regulation S.
"Responsible Officer" when used with respect to the Trustee, means any
officer within the Corporate Trust Administration of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Definitive Note" means a Definitive Note bearing the Private
Placement Legend.
"Restricted Global Note" means a Global Note bearing the Private Placement
Legend.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Period" means the 40-day restricted period as defined in
Regulation S, or, if longer, the period from the Issue Date through the
Separation Date.
"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.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Rule 903" means Rule 903 promulgated under the Securities Act.
"Rule 904" means Rule 904 promulgated the Securities Act.
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"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.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Separation Date" means the earliest of (i) the date that is 90 days from
the Issue Date, (ii) such date as the Initial Purchasers may, in their
discretion, deem appropriate, (iii) in the event of a Change of Control, the
date the Company mails notice thereof to holders of Notes, (iv) the date on
which the Exchange Offer is consummated and (v) the date on which the Shelf
Registration Statement is declared effective. On the Separation Date, the Notes
and Warrants will be automatically separated.
"Shelf Registration Statement" means the Shelf Registration Statement as
defined in the Registration Rights Agreement.
"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 Securities Act, as such Regulation is in effect on
the date of this Indenture.
"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.
"Strategic Equity Investor" means any Investor or any other Person which is
(or a controlled Affiliate of any Person which is or a controlled Affiliate of
which is engaged in the Telecommunications Business and which 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 the Guarantor, as the use
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,
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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.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb)
as in effect on the date on which this Indenture is qualified under the TIA.
"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.
"Trustee" means the party named as such above until a successor replaces it
in accordance with the applicable provisions of this Indenture and thereafter
means the successor serving hereunder.
"Unrestricted Global Note" means a permanent global Note in the form of
Exhibit A-1 attached hereto that bears the Global Note Legend and that has the
"Schedule of Exchanges of Interests in the Global Note" attached thereto, and
that is deposited with or on behalf of and registered in the name of the
Depositary, representing a series of Notes that do not bear the Private
Placement Legend.
"Unrestricted Definitive Note" means a Definitive Note that does not bear
and is not required to bear the Private Placement Legend.
"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
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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.
"U.S. Person" means a U.S. person as defined in Rule 902(o) under the
Securities Act.
"Vendor Debt" means any Debt of the Company or any Restricted Subsidiary
incurred in connection with the acquisition or construction of
Telecommunications Related Assets.
"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.
"Warrant Agreement" means the Warrant Agreement dated as of March 11, 1998,
by and among the Company and The Bank of New York, as Warrant Agent.
"Warrants" means the Warrants to purchase Common Stock issued pursuant to
the Warrant Agreement.
"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
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Owned Restricted Subsidiaries of such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
Section 1.02 Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Affiliate Transaction"............................... 4.11
"Asset Sale Offer".................................... 3.09
"Authentication Order"................................ 2.02
"Change of Control Offer"............................. 4.15
"Change of Control Payment"........................... 4.15
"Change of Control Payment Date"...................... 4.15
"Covenant Defeasance"................................. 8.03
"DTC"................................................. 2.03
"Event of Default".................................... 6.01
"Excess Proceeds"..................................... 4.10
"incur"............................................... 4.09
"Legal Defeasance".................................... 8.02
"Offer Amount"........................................ 3.09
"Offer Period"........................................ 3.09
"Paying Agent"........................................ 2.03
"Permitted Debt"...................................... 4.09
"Purchase Date"....................................... 3.09
"Registrar"........................................... 2.03
"Restricted Payments"................................. 4.07
</TABLE>
Section 1.03
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes;
"indenture security Holder" means a Holder of a Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the Notes means the Company and any successor obligor upon the
Notes.
All other terms used in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule under the TIA have
the meanings so assigned to them.
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Section 1.04 Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural
include the singular;
(5) provisions apply to successive events and transactions; and
(6) references to sections of or rules under the Securities Act
shall be deemed to include substitute, replacement of successor sections or
rules adopted by the SEC from time to time.
ARTICLE 2.
THE NOTES
Section 2.01 Form and Dating.
(a) General. The Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto. The Notes may have
notations, legends or endorsements required by law, stock exchange rule or
usage. Each Note shall be dated the date of its authentication. The Notes
shall be in denominations of $1,000 and integral multiples thereof.
The terms and provisions contained in the Notes shall constitute, and
are hereby expressly made, a part of this Indenture and the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby. However, to the extent any
provision of any Note conflicts with the express provisions of this Indenture,
the provisions of this Indenture shall govern and be controlling.
(b) Global Notes. Notes issued in global form shall be substantially in
the form of Exhibits A-1 or A-2 attached hereto (including the Global Note
Legend thereon and the "Schedule of Exchanges of Interests in the Global Note"
attached thereto). Notes issued in definitive form shall be substantially in
the form of Exhibit A-1 attached hereto (but without the Global Note Legend
thereon and without the "Schedule of Exchanges of Interests in the Global Note"
attached thereto). Each Global Note shall represent such of the outstanding
Notes as shall be specified therein and each shall provide that it shall
represent the aggregate principal amount at maturity of outstanding Notes from
time to time endorsed thereon and that the aggregate principal amount at
maturity of
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outstanding Notes represented thereby may from time to time be reduced or
increased, as appropriate, to reflect exchanges and redemptions. Any endorsement
of a Global Note to reflect the amount of any increase or decrease in the
aggregate principal amount at maturity of outstanding Notes represented thereby
shall be made by the Trustee or the Note Custodian, at the direction of the
Trustee, in accordance with instructions given by the Holder thereof as required
by Section 2.06 hereof.
(c) Temporary Global Notes. Notes offered and sold in reliance on
Regulation S shall be issued initially in the form of the Regulation S Temporary
Global Note, which shall be deposited on behalf of the purchasers of the Notes
represented thereby with the Trustee, at its New York office, as custodian for
the Depositary, and registered in the name of the Depositary or the nominee of
the Depositary for the accounts of designated agents holding on behalf of
Euroclear or Cedel Bank, duly executed by the Company and authenticated by the
Trustee as hereinafter provided. The Restricted Period shall be terminated upon
the receipt by the Trustee of (i) a written certificate from the Depositary,
together with copies of certificates from Euroclear and Cedel Bank certifying
that they have received certification of non-United States beneficial ownership
of 100% of the aggregate principal amount at maturity of the Regulation S
Temporary Global Notes (except to the extent of any beneficial owners thereof
who acquired an interest therein during the Restricted Period pursuant to
another exemption from registration under the Securities Act and who will take
delivery of a beneficial ownership interest in a 144A Global Note or an IAI
Global Note bearing a Private Placement Legend, all as contemplated by Section
2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the Company.
Following the termination of the Restricted Period, beneficial interests in the
Regulation S Temporary Global Notes shall be exchanged for beneficial interests
in Regulation S Permanent Global Notes pursuant to the Applicable Procedures.
Simultaneously with the authentication of Regulation S Permanent Global Notes,
the Trustee shall cancel the Regulation S Temporary Global Note. The aggregate
principal amount at maturity of the Regulation S Temporary Global Notes and the
Regulation S Permanent Global Notes may from time to time be increased or
decreased by adjustments made on the records of the Trustee and the Depositary
or its nominee, as the case may be, in connection with transfers of interest as
hereinafter provided.
(d) Euroclear and Cedel Procedures Applicable. The provisions of the
"Operating Procedures of the Euroclear System" and "Terms and Conditions
Governing Use of Euroclear" and the "General Terms and Conditions of Cedel Bank"
and "Customer Handbook" of Cedel Bank shall be applicable to transfers of
beneficial interests in the Regulation S Temporary Global Notes and the
Regulation S Permanent Global Notes that are held by Participants through
Euroclear or Cedel Bank.
Section 2.02 Execution and Authentication.
Two Officers shall sign the Notes for the Company by manual or facsimile
signature.
If an Officer whose signature is on a Note no longer holds that office at
the time a Note is authenticated, the Note shall nevertheless be valid.
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A Note shall not be valid until authenticated by the manual signature of
the Trustee. The signature shall be conclusive evidence that the Note has been
authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed by two
Officers (an "Authentication Order"), authenticate Notes for original issue up
to $260,000,000 aggregate principal amount at maturity on the Issue Date. The
aggregate principal amount at maturity of Notes outstanding at any time may not
exceed such amount except as provided in the following paragraph or in Section
2.07 hereof.
The Trustee shall, upon execution and delivery of a corporate
Authentication Order, authenticate up to approximately $ 49.9 million Accreted
Value of additional Notes ("Additional Notes") for issuance under this
Indenture, subject to the covenant described under Section 4.09 hereof. The
Company agrees to comply with all applicable SEC rules and regulations that
relate to the issuance and sale of any such Additional Notes.
The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate Notes. An authenticating agent may authenticate Notes whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such agent. An authenticating agent has
the same rights as an Agent to deal with Holders or an Affiliate of the Company.
Section 2.03 Registrar and Paying Agent.
The Company shall maintain an office or agency where Notes may be presented
for registration of transfer or for exchange ("Registrar") and an office or
agency where Notes may be presented for payment ("Paying Agent"). The Registrar
shall keep a register of the Notes and of their transfer and exchange. The
Company may appoint one or more co-registrars and one or more additional paying
agents. The term "Registrar" includes any co-registrar and the term "Paying
Agent" includes any additional paying agent. The Company may change any Paying
Agent or Registrar without notice to any Holder. The Company shall notify the
Trustee in writing of the name and address of any Agent not a party to this
Indenture. If the Company fails to appoint or maintain another entity as
Registrar or Paying Agent, the Trustee shall act as such. The Company or any of
its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company ("DTC") to act
as Depositary with respect to the Global Notes.
The Company initially appoints the Trustee to act as the Registrar and
Paying Agent and to act as Note Custodian with respect to the Global Notes.
Section 2.04 Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent other than the Trustee to agree
in writing that the Paying Agent will hold in trust for the benefit of Holders
or the Trustee all money held by the
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Paying Agent for the payment of principal, premium, if any, or interest on the
Notes, and will notify the Trustee of any default by the Company in making any
such payment. While any such default continues, the Trustee may require a Paying
Agent to pay all money held by it to the Trustee. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee. Upon payment
over to the Trustee, the Paying Agent (if other than the Company or a
Subsidiary) shall have no further liability for the money. If the Company or a
Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust
fund for the benefit of the Holders all money held by it as Paying Agent. Upon
any bankruptcy or reorganization proceedings relating to the Company, the
Trustee shall serve as Paying Agent for the Notes.
Section 2.05 Holder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is
not the Registrar, the Company shall furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Holders of
Notes and the Company shall otherwise comply with TIA (S) 312(a).
Section 2.06 Transfer and Exchange.
(a) Transfer and Exchange of Global Notes. A Global Note may not be
transferred as a whole except by the Depositary to a nominee of the Depositary,
by a nominee of the Depositary to the Depositary or to another nominee of the
Depositary, the Depositary or any such nominee to a successor Depositary or a
nominee of such successor Depositary. All Global Notes will be exchanged by the
Company for Definitive Notes if (i) the Company delivers to the Trustee notice
from the Depositary that it is unwilling or unable to continue to act as
Depositary or that it is no longer a clearing agency registered under the
Exchange Act and, in either case, a successor Depositary is not appointed by the
Company within 120 days after the date of such notice from the Depositary or
(ii) the Company in its sole discretion determines that the Global Notes (in
whole but not in part) should be exchanged for Definitive Notes and delivers a
written notice to such effect to the Trustee; provided that in no event shall
the Regulation S Temporary Global Notes be exchanged by the Company for
Definitive Notes prior to (x) the expiration of the Restricted Period and (y)
the receipt by the Registrar of any certificates required pursuant to Rule
903(c)(3)(ii)(B) under the Securities Act. Upon the occurrence of either of the
preceding events in (i) or (ii) above, Definitive Notes shall be issued in such
names as the Depositary shall instruct the Trustee. Global Notes also may be
exchanged or replaced, in whole or in part, as provided in Sections 2.07 and
2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu
of, a Global Note or any portion thereof, pursuant to this Section 2.06 or
Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form
of, and shall be, a Global Note. A Global Note may not be exchanged for another
Note other than as provided in this Section 2.06(a), however, beneficial
interests in a Global Note may be transferred and exchanged as provided in
Sections 2.06(b), (c) or (f) hereof.
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(b) Transfer and Exchange of Beneficial Interests in the Global Notes. The
transfer and exchange of beneficial interests in the Global Notes shall be
effected through the Depositary, in accordance with the provisions of this
Indenture and the Applicable Procedures. Beneficial interests in the Restricted
Global Notes shall be subject to restrictions on transfer comparable to those
set forth herein to the extent required by the Securities Act. Transfers of
beneficial interests in the Global Notes also shall require compliance with
either subparagraph (i) or (ii) below, as applicable, as well as one or more of
the other following subparagraphs, as applicable:
(i) Transfer of Beneficial Interests in the Same Global Note.
Beneficial interests in any Restricted Global Note may be transferred to Persons
who take delivery thereof in the form of a beneficial interest in the same
Restricted Global Note in accordance with the transfer restrictions set forth in
the Private Placement Legend; provided, however, that prior to the expiration of
the Restricted Period, transfers of beneficial interests in the Regulation S
Temporary Global Note may not be made to a U.S. Person or for the account or
benefit of a U.S. Person (other than an Initial Purchaser). Beneficial
interests in any Unrestricted Global Note may be transferred to Persons who take
delivery thereof in the form of a beneficial interest in an Unrestricted Global
Note. No written orders or instructions shall be required to be delivered to
the Registrar to effect the transfers described in this Section 2.06(b)(i).
(ii) All Other Transfers and Exchanges of Beneficial Interests in
Global Notes. In connection with all transfers and exchanges of beneficial
interests that are not subject to Section 2.06(b)(i) above, the transferor of
such beneficial interest must deliver to the Registrar either (A) (1) a written
order from a Participant or an Indirect Participant given to the Depositary in
accordance with the Applicable Procedures directing the Depositary to credit or
cause to be credited a beneficial interest in another Global Note in an amount
equal to the beneficial interest to be transferred or exchanged and (2)
instructions given in accordance with the Applicable Procedures containing
information regarding the Participant account to be credited with such increase
or (B) (1) a written order from a Participant or an Indirect Participant given
to the Depositary in accordance with the Applicable Procedures directing the
Depositary to cause to be issued a Definitive Note in an amount equal to the
beneficial interest to be transferred or exchanged and (2) instructions given by
the Depositary to the Registrar containing information regarding the Person in
whose name such Definitive Note shall be registered to effect the transfer or
exchange referred to in (1) above; provided that in no event shall Definitive
Notes be issued upon the transfer or exchange of beneficial interests in the
Regulation S Temporary Global Notes prior to (x) the expiration of the
Restricted Period and (y) the receipt by the Registrar of any certificates
required pursuant to Rule 903 under the Securities Act. Upon consummation of an
Exchange Offer by the Company in accordance with Section 2.06(f) hereof, the
requirements of this Section 2.06(b)(ii) shall be deemed to have been satisfied
upon receipt by the Registrar of the instructions contained in the Letter of
Transmittal delivered by the Holder of such beneficial interests in the
Restricted Global Notes. Upon satisfaction of all of the requirements for
transfer or exchange of beneficial interests in Global Notes contained in this
Indenture and the Notes or otherwise applicable under the Securities Act, the
Trustee shall adjust the principal amount at maturity of the relevant Global
Note(s) pursuant to Section 2.06(h) hereof.
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(iii) Transfer of Beneficial Interests to Another Restricted Global
Note. A beneficial interest in any Restricted Global Note may be transferred to
a Person who takes delivery thereof in the form of a beneficial interest in
another Restricted Global Note if the transfer complies with the requirements of
Section 2.06(b)(ii) above and the Registrar receives the following:
(A) if the transferee will take delivery in the form of a beneficial
interest in the 144A Global Note, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the certifications
in item (1) thereof; and
(B) if the transferee will take delivery in the form of a beneficial
interest in the Regulation S Temporary Global Note or the Regulation S
Permanent Global Note, then the transferor must deliver a certificate in
the form of Exhibit B hereto, including the certifications in item (2)
thereof; and
(C) if the transferee will take delivery in the form of a beneficial
interest in the IAI Global Note, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the certifications
and certificates and Opinion of Counsel required by item (3) thereof, if
applicable.
(iv) Transfer and Exchange of Beneficial Interests in a Restricted
Global Note for Beneficial Interests in the Unrestricted Global Note. A
beneficial interest in any Restricted Global Note may be exchanged by any holder
thereof for a beneficial interest in an Unrestricted Global Note or transferred
to a Person who takes delivery thereof in the form of a beneficial interest in
an Unrestricted Global Note if the exchange or transfer complies with the
requirements of Section 2.06(b)(ii) above and:
(A) such exchange or transfer is effected pursuant to the Exchange
Offer in accordance with the Registration Rights Agreement and the holder of
the beneficial interest to be transferred, in the case of an exchange, or the
transferee, in the case of a transfer, certifies in the applicable Letter of
Transmittal or via the Depository's book-entry system that it is not (1) a
broker-dealer, (2) a Person participating in the distribution of the Exchange
Notes or (3) a Person who is an affiliate (as defined in Rule 144) of the
Company;
(B) such transfer is effected pursuant to the Shelf Registration
Statement in accordance with the Registration Rights Agreement;
(C) such transfer is effected by a Participating Broker-Dealer
pursuant to the Exchange Offer Registration Statement in accordance with
the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest for a
beneficial interest in an Unrestricted Global
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Note, a certificate from such holder in the form of Exhibit C hereto, including
the certifications in item (1)(a) thereof; or
(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial interest to a Person
who shall take delivery thereof in the form of a beneficial interest in an
Unrestricted Global Note, a certificate from such holder in the form of Exhibit
B hereto, including the certifications in item (4) thereof;
and, in each such case set forth in this subparagraph
(D), if the Registrar so requests or if the Applicable Procedures so require, an
Opinion of Counsel in form reasonably acceptable to the Registrar to the effect
that such exchange or transfer is in compliance with the Securities Act and that
the restrictions on transfer contained herein and in the Private Placement
Legend are no longer required in order to maintain compliance with the
Securities Act.
If any such transfer is effected pursuant to subparagraph (B) or (D)
above at a time when an Unrestricted Global Note has not yet been issued, the
Company shall issue and, upon receipt of an Authentication Order in accordance
with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount at maturity equal to
the aggregate principal amount at maturity of beneficial interests transferred
pursuant to subparagraph (B) or (D) above.
Beneficial interests in an Unrestricted Global Note cannot be
exchanged for, or transferred to Persons who take delivery thereof in the form
of, a beneficial interest in a Restricted Global Note.
(c) Transfer or Exchange of Beneficial Interests for Definitive Notes.
(i) Beneficial Interests in Restricted Global Notes to Restricted
Definitive Notes. If any holder of a beneficial interest in a Restricted Global
Note proposes to exchange such beneficial interest for a Restricted Definitive
Note or to transfer such beneficial interest to a Person who takes delivery
thereof in the form of a Restricted Definitive Note, then, upon receipt by the
Registrar of the following documentation:
(A) if the holder of such beneficial interest in a Restricted Global
Note proposes to exchange such beneficial interest for a Restricted
Definitive Note, a certificate from such holder in the form of Exhibit C
hereto, including the certifications in item (2)(a) thereof;
(B) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act, a certificate to the
effect set forth in Exhibit B hereto, including the certifications in item
(1) thereof;
(C) if such beneficial interest is being transferred to a Non-U.S.
Person in an offshore transaction in accordance with Rule 903 or Rule 904
under the Securities Act, a
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certificate to the effect set forth in Exhibit B hereto, including the
certifications in item (2) thereof;
(D) if such beneficial interest is being transferred pursuant to an
exemption from the registration requirements of the Securities Act in
accordance with Rule 144 under the Securities Act, a certificate to the
effect set forth in Exhibit B hereto, including the certifications in item
(3)(a) thereof;
(E) if such beneficial interest is being transferred to an
Institutional Accredited Investor in reliance on an exemption from the
registration requirements of the Securities Act other than those listed in
subparagraphs (B) through (D) above, a certificate to the effect set forth
in Exhibit B hereto, including the certifications, certificates and Opinion
of Counsel required by item (3) thereof, if applicable;
(F) if such beneficial interest is being transferred to the Company
or any of its Subsidiaries, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(b) thereof; or
(G) if such beneficial interest is being transferred pursuant to an
effective registration statement under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications in
item (3)(c) thereof,
the Trustee shall cause the aggregate principal amount at
maturity of the applicable Global Note to be reduced accordingly pursuant to
Section 2.06(h) hereof, and the Company shall execute and the Trustee shall
authenticate and deliver to the Person designated in the instructions a
Definitive Note in the appropriate principal amount at maturity. Any Definitive
Note issued in exchange for a beneficial interest in a Restricted Global Note
pursuant to this Section 2.06(c) shall be registered in such name or names and
in such authorized denomination or denominations as the holder of such
beneficial interest shall instruct the Registrar through instructions from the
Depositary and the Participant or Indirect Participant. The Trustee shall
deliver such Definitive Notes to the Persons in whose names such Notes are so
registered. Any Definitive Note issued in exchange for a beneficial interest in
a Restricted Global Note pursuant to this Section 2.06(c)(i) shall bear the
Private Placement Legend and shall be subject to all restrictions on transfer
contained therein.
(ii) Beneficial Interest in Regulation S Temporary Global Notes to
Definitive Notes. Notwithstanding Sections 2.06(c)(i)(A) and (C) hereof, a
beneficial interest in a Regulation S Temporary Global Note may not be exchanged
for a Definitive Note or transferred to a Person who takes delivery thereof in
the form of a Definitive Note prior to (x) the expiration of the Restricted
Period and (y) the receipt by the Registrar of any certificates required
pursuant to Rule 903(c)(3)(ii)(B) under the Securities Act, except in the case
of a transfer pursuant to an exemption from the registration requirements of the
Securities Act other than Rule 903 or Rule 904.
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(iii) Beneficial Interests in Restricted Global Notes to Unrestricted
Definitive Notes. A holder of a beneficial interest in a Restricted Global Note
may exchange such beneficial interest for an Unrestricted Definitive Note or may
transfer such beneficial interest to a Person who takes delivery thereof in the
form of an Unrestricted Definitive Note only if:
(A) such exchange or transfer is effected pursuant to the Exchange
Offer in accordance with the Registration Rights Agreement and the holder
of such beneficial interest, in the case of an exchange, or the transferee,
in the case of a transfer, certifies in the applicable Letter of
Transmittal that it is not (1) a broker-dealer, (2) a Person participating
in the distribution of the Exchange Notes or (3) a Person who is an
affiliate (as defined in Rule 144) of the Company;
(B) such transfer is effected pursuant to the Shelf Registration
Statement in accordance with the Registration Rights Agreement;
(C) such transfer is effected by a participating broker-dealer
pursuant to the Exchange Offer Registration Statement in accordance with
the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest for a
Definitive Note that does not bear the Private Placement Legend, a certificate
from such holder in the form of Exhibit C hereto, including the certifications
in item (1)(b) thereof; or
(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial interest to a Person
who shall take delivery thereof in the form of a Definitive Note that does not
bear the Private Placement Legend, a certificate from such holder in the form of
Exhibit B hereto, including the certifications in item (4) thereof;
and, in each such case set forth in this subparagraph (D),
if the Company so requests or the Applicable Procedures so require, an Opinion
of Counsel in form reasonably acceptable to the Registrar to the effect that
such exchange or transfer is in compliance with the Securities Act and that the
restrictions on transfer contained herein and in the Private Placement Legend
are no longer required in order to maintain compliance with the Securities Act.
(iv) Beneficial Interests in Unrestricted Global Notes to
Unrestricted Definitive Notes. If any holder of a beneficial interest in an
Unrestricted Global Note proposes to exchange such beneficial interest for an
Unrestricted Definitive Note or to transfer such beneficial interest to a Person
who takes delivery thereof in the form of an Unrestricted Definitive Note, then,
upon satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the
Trustee shall cause the aggregate principal amount at maturity of the applicable
Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and
the Company shall execute and the Trustee shall authenticate
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and deliver to the Person designated in the instructions an Unrestricted
Definitive Note in the appropriate principal amount at maturity. Any
Unrestricted Definitive Note issued in exchange for a beneficial interest
pursuant to this Section 2.06(c)(iii) shall be registered in such name or names
and in such authorized denomination or denominations as the holder of such
beneficial interest shall instruct the Registrar through instructions from the
Depositary and the Participant or Indirect Participant. The Trustee shall
deliver such Unrestricted Definitive Notes to the Persons in whose names such
Notes are so registered. Any Unrestricted Definitive Note issued in exchange for
a beneficial interest pursuant to this Section 2.06(c)(iii) shall not bear the
Private Placement Legend.
(d) Transfer and Exchange of Definitive Notes for Beneficial Interests.
(i) Restricted Definitive Notes to Beneficial Interests in Restricted
Global Notes. If any Holder of a Restricted Definitive Note proposes to exchange
such Note for a beneficial interest in a Restricted Global Note or to transfer
such Restricted Definitive Notes to a Person who takes delivery thereof in the
form of a beneficial interest in a Restricted Global Note, then, upon receipt by
the Registrar of the following documentation:
(A) if the Holder of such Restricted Definitive Note proposes to
exchange such Note for a beneficial interest in a Restricted Global Note, a
certificate from such Holder in the form of Exhibit C hereto, including the
certifications in item (2)(b) thereof;
(B) if such Restricted Definitive Note is being transferred to a QIB
in accordance with Rule 144A under the Securities Act, a certificate to the
effect set forth in Exhibit B hereto, including the certifications in item
(1) thereof;
(C) if such Restricted Definitive Note is being transferred to a Non-
U.S. Person in an offshore transaction in accordance with Rule 903 or Rule
904 under the Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (2) thereof;
(D) if such Restricted Definitive Note is being transferred pursuant
to an exemption from the registration requirements of the Securities Act in
accordance with Rule 144 under the Securities Act, a certificate to the
effect set forth in Exhibit B hereto, including the certifications in item
(3)(a) thereof;
(E) if such Restricted Definitive Note is being transferred to an
Institutional Accredited Investor in reliance on an exemption from the
registration requirements of the Securities Act other than those listed in
subparagraphs (B) through (D) above, a certificate to the effect set forth
in Exhibit B hereto, including the certifications, certificates and Opinion
of Counsel required by item (3) thereof, if applicable;
(F) if such Restricted Definitive Note is being transferred to the
Company or any of its Subsidiaries, a certificate to the effect set forth
in Exhibit B hereto, including the certifications in item (3)(b) thereof;
or
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(G) if such Restricted Definitive Note is being transferred pursuant
to an effective registration statement under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including the
certifications in item (3)(c) thereof,
the Trustee shall cancel the Restricted Definitive Note, increase or
cause to be increased the aggregate principal amount at maturity of, in the case
of clause (A) above, the appropriate Restricted Global Note, in the case of
clause (B) above, the 144A Global Note, in the case of clause (C) above, the
Regulation S Global Note and, in all other cases, the IAI Global Note.
(ii) Restricted Definitive Notes to Beneficial Interests in
Unrestricted Global Notes. A Holder of a Restricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global Note or
transfer such Restricted Definitive Note to a Person who takes delivery thereof
in the form of a beneficial interest in an Unrestricted Global Note only if:
(A) such exchange or transfer is effected pursuant to the Exchange
Offer in accordance with the Registration Rights Agreement and the Holder,
in the case of an exchange, or the transferee, in the case of a transfer,
certifies in the applicable Letter of Transmittal that it is not (1) a
broker-dealer, (2) a Person participating in the distribution of the
Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144)
of the Company;
(B) such transfer is effected pursuant to the Shelf Registration
Statement in accordance with the Registration Rights Agreement;
(C) such transfer is effected by a participating broker-dealer
pursuant to the Exchange Offer Registration Statement in accordance with
the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Definitive Notes proposes to
exchange such Notes for a beneficial interest in an Unrestricted Global Note, a
certificate from such Holder in the form of Exhibit C hereto, including the
certifications in item (1)(c) thereof; or
(2) if the Holder of such Definitive Notes proposes to
transfer such Notes to a Person who shall take delivery thereof in the form of a
beneficial interest in an Unrestricted Global Note, a certificate from such
Holder in the form of Exhibit B hereto, including the certifications in item (4)
thereof;
and, in each such case set forth in this subparagraph (D), if the
Company so requests or the Applicable Procedures so require, an Opinion of
Counsel in form reasonably acceptable to the Registrar to the effect that such
exchange or transfer is in compliance with the Securities Act and that the
restrictions on transfer contained herein and in the Private Placement Legend
are no longer required in order to maintain compliance with the Securities Act.
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Upon satisfaction of the conditions of any of the subparagraphs in
this Section 2.06(d)(ii), the Trustee shall cancel the Definitive Notes and
increase or cause to be increased the aggregate principal amount at maturity of
the Unrestricted Global Note.
(iii) Unrestricted Definitive Notes to Beneficial Interests in
Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global Note or
transfer such Definitive Notes to a Person who takes delivery thereof in the
form of a beneficial interest in an Unrestricted Global Note at any time. Upon
receipt of a request for such an exchange or transfer, the Trustee shall cancel
the applicable Unrestricted Definitive Note and increase or cause to be
increased the aggregate principal amount at maturity of one of the Unrestricted
Global Notes.
If any such exchange or transfer from a Definitive Note to a
beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Note has not yet been issued,
the Company shall issue and, upon receipt of an Authentication Order in
accordance with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
principal amount at maturity of Definitive Notes so transferred.
(e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon
request by a Holder of Definitive Notes and such Holders compliance with the
provisions of this Section 2.06(e), the Registrar shall register the transfer or
exchange of Definitive Notes. Prior to such registration of transfer or
exchange, the requesting Holder shall present or surrender to the Registrar the
Definitive Notes duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Registrar duly executed by such Holder or
by his attorney, duly authorized in writing. In addition, the requesting Holder
shall provide any additional certifications, documents and information, as
applicable, required pursuant to the following provisions of this Section
2.06(e).
(i) Restricted Definitive Notes to Restricted Definitive Notes. Any
Restricted Definitive Note may be transferred to and registered in the name of
Persons who take delivery thereof in the form of a Restricted Definitive Note if
the Registrar receives the following:
(A) if the transfer will be made pursuant to Rule 144A under the
Securities Act, then the transferor must deliver a certificate in the form
of Exhibit B hereto, including the certifications in item (1) thereof;
(B) if the transfer will be made pursuant to Rule 903 or Rule 904,
then the transferor must deliver a certificate in the form of Exhibit B
hereto, including the certifications in item (2) thereof; and
(C) if the transfer will be made pursuant to any other exemption
from the registration requirements of the Securities Act, then the
transferor must deliver a certificate in the form of Exhibit B hereto,
including the certifications, certificates and Opinion of Counsel required
by item (3) thereof, if applicable.
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(ii) Restricted Definitive Notes to Unrestricted Definitive Notes.
Any Restricted Definitive Note may be exchanged by the Holder thereof for an
Unrestricted Definitive Note or transferred to a Person or Persons who take
delivery thereof in the form of an Unrestricted Definitive Note if:
(A) such exchange or transfer is effected pursuant to the Exchange
Offer in accordance with the Registration Rights Agreement and the Holder,
in the case of an exchange, or the transferee, in the case of a transfer,
certifies in the applicable Letter of Transmittal that it is not (1) a
broker-dealer, (2) a Person participating in the distribution of the
Exchange Notes or (3) a Person who is an affiliate (as defined in Rule 144)
of the Company;
(B) any such transfer is effected pursuant to the Shelf Registration
Statement in accordance with the Registration Rights Agreement;
(C) any such transfer is effected by a participating broker-dealer
pursuant to the Exchange Offer Registration Statement in accordance with
the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Restricted Definitive Notes proposes
to exchange such Notes for an Unrestricted Definitive Note, a certificate from
such Holder in the form of Exhibit C hereto, including the certifications in
item (1)(d) thereof; or
(2) if the Holder of such Restricted Definitive Notes proposes
to transfer such Notes to a Person who shall take delivery thereof in the form
of an Unrestricted Definitive Note, a certificate from such Holder in the form
of Exhibit B hereto, including the certifications in item (4) thereof;
and, in each such case set forth in this subparagraph (D), an Opinion
of Counsel in form reasonably acceptable to the Company to the effect that such
exchange or transfer is in compliance with the Securities Act and that the
restrictions on transfer contained herein and in the Private Placement Legend
are no longer required in order to maintain compliance with the Securities Act.
(iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes.
A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person
who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon
receipt of a request to register such a transfer, the Registrar shall register
the Unrestricted Definitive Notes pursuant to the instructions from the Holder
thereof.
(f) Exchange Offer. Upon the occurrence of the Exchange Offer in
accordance with the Registration Rights Agreement, the Company shall issue and,
upon receipt of an Authentication
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Order in accordance with Section 2.02, the Trustee shall authenticate (i) one or
more Unrestricted Global Notes in an aggregate principal amount at maturity
equal to the principal amount at maturity of the beneficial interests in the
Restricted Global Notes tendered for acceptance by Persons that certify in the
applicable Letters of Transmittal that (x) they are not broker-dealers, (y) they
are not participating in a distribution of the Exchange Notes and (z) they are
not affiliates (as defined in Rule 144) of the Company, and accepted for
exchange in the Exchange Offer and (ii) Definitive Notes in an aggregate
principal amount at maturity equal to the principal amount at maturity of the
Restricted Definitive Notes accepted for exchange in the Exchange Offer.
Concurrently with the issuance of such Notes, the Trustee shall cause the
aggregate principal amount at maturity of the applicable Restricted Global Notes
to be reduced accordingly, and the Company shall execute and the Trustee shall
authenticate and deliver to the Persons designated by the Holders of Definitive
Notes so accepted Definitive Notes in the appropriate principal amount at
maturity.
(g) Legends. The following legends shall appear on the face of all Global
Notes and Definitive Notes issued under this Indenture unless specifically
stated otherwise in the applicable provisions of this Indenture.
(i) Private Placement Legend.
(A) Except as permitted by subparagraph (B) below, each Global Note
and each Definitive Note (and all Notes issued in exchange therefor or
substitution thereof) shall bear the legend in substantially the following
form.
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES
(A) TO OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO
THE COMPANY, (2) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (3) TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A, (4)
PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE
UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER
THE SECURITIES ACT, (5) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN
THE MEANING OF SUBPARAGRAPH (A),(1), (2), (3) OR (7) OF RULE 501 UNDER THE
SECURITIES ACT IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER
THE SECURITIES ACT, OR (6) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS UNDER
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THE SECURITIES ACT (AND BASED ON AN OPINION OF COUNSEL IF THE COMPANY SO
REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES TO APPLICABLE
JURISDICTION, AND (B) THAT IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED
TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE
RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
(B) Notwithstanding the foregoing, any Global Note or Definitive
Note issued pursuant to subparagraphs (b)(iv), (c)(ii), (c)(iii), (c)(iv),
(d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.06 (and all
Notes issued in exchange therefor or substitution thereof) shall not bear
the Private Placement Legend.
(ii) Global Note Legend. Each Global Note shall bear a legend in
substantially the following form:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF
THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER
ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS
HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II)
THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO
SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED
TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE
AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH
THE PRIOR WRITTEN CONSENT OF THE COMPANY."
(iii) Regulation S Temporary Global Note Legend. The Regulation S
Temporary Global Note shall bear a legend in substantially the following form:
"THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL
NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR
CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN).
NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY
GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON."
(iv) Unit Legend. Each Note issued prior to the Separation Date shall
bear the following legend (the "Unit Legend") on the face thereof:
THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS
PART OF AN ISSUANCE OF UNITS, EACH OF WHICH CONSIST OF $1,000 PRINCIPAL
AMOUNT AT MATURITY OF THE NOTES AND ONE WARRANT
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(EACH, A "WARRANT") INITIALLY ENTITLING THE HOLDER THEREOF TO PURCHASE
6.4792 SHARES, PAR VALUE $0.001 PER SHARE, OF THE COMPANY. THE NOTES AND
WARRANTS WILL BE AUTOMATICALLY SEPARATED UPON THE EARLIEST TO OCCUR OF (i)
90 DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS THE INITIAL PURCHASERS
MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, (iii) IN THE EVENT OF A CHANGE
OF CONTROL (AS DEFINED IN THE INDENTURE), THE DATE THE COMPANY MAILS NOTICE
THEREOF TO HOLDERS OF NOTES, (iv) THE DATE ON WHICH THE EXCHANGE OFFER (AS
DEFINED IN THE INDENTURE) IS CONSUMMATED AND (v) THE DATE ON WHICH THE
SHELF REGISTRATION STATEMENT (AS DEFINED IN THE INDENTURE) IS DECLARED
EFFECTIVE. THE NOTES EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED
OR SEPARATED FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER, WITH
THE WARRANTS UNTIL THE SEPARATION DATE.
(v) Original Issue Discount Legend. Each Note shall bear a legend in
substantially the following form:
"FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH
ORIGINAL ISSUE DISCOUNT; NOT LATER THAN 10 DAYS AFTER MARCH 11, 1998,
INFORMATION TO INCLUDE THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT,
ISSUE DATE, AND YIELD TO MATURITY OF THE SECURITY WILL BE MADE AVAILABLE TO
HOLDERS UPON REQUEST TO TIMOTHY LAEHY, CHIEF FINANCIAL OFFICER, COVAD
COMMUNICATIONS GROUP, INC., (408) 490-4550."
(h) Cancellation and/or Adjustment of Global Notes. At such time as all
beneficial interests in a particular Global Note have been exchanged for
Definitive Notes or a particular Global Note has been redeemed, repurchased or
cancelled in whole and not in part, each such Global Note shall be returned to
or retained and cancelled by the Trustee in accordance with Section 2.11 hereof.
At any time prior to such cancellation, if any beneficial interest in a Global
Note is exchanged for or transferred to a Person who will take delivery thereof
in the form of a beneficial interest in another Global Note or for Definitive
Notes, the principal amount at maturity of Notes represented by such Global Note
shall be reduced accordingly and an endorsement shall be made on such Global
Note by the Trustee or by the Depositary at the direction of the Trustee to
reflect such reduction; and if the beneficial interest is being exchanged for or
transferred to a Person who will take delivery thereof in the form of a
beneficial interest in another Global Note, such other Global Note shall be
increased accordingly and an endorsement shall be made on such Global Note by
the Trustee or by the Depositary at the direction of the Trustee to reflect such
increase.
(i) General Provisions Relating to Transfers and Exchanges.
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(i) To permit registrations of transfers and exchanges, the Company
shall execute and the Trustee shall authenticate Global Notes and Definitive
Notes upon the Company's order or at the Registrar's request.
(ii) No service charge shall be made to a holder of a beneficial
interest in a Global Note or to a Holder of a Definitive Note for any
registration of transfer or exchange, but the Company may require payment of a
sum sufficient to cover any transfer tax or similar governmental charge payable
in connection therewith (other than any such transfer taxes or similar
governmental charge payable upon exchange or transfer pursuant to Sections 2.10,
3.06, 3.09, 4.10, 4.15 and 9.05 hereof).
(iii) The Registrar shall not be required to register the transfer of
or exchange any Note selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part.
(iv) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive Notes shall
be the valid obligations of the Company, evidencing the same debt, and entitled
to the same benefits under this Indenture, as the Global Notes or Definitive
Notes surrendered upon such registration of transfer or exchange.
(v) The Company shall not be required (A) to issue, to register the
transfer of or to exchange any Notes during a period beginning at the opening of
business 15 days before the day of any selection of Notes for redemption under
Section 3.02 hereof and ending at the close of business on the day of selection,
(B) to register the transfer of or to exchange any Note so selected for
redemption in whole or in part, except the unredeemed portion of any Note being
redeemed in part or (c) to register the transfer of or to exchange a Note
between a record date and the next succeeding Interest Payment Date.
(vi) Prior to due presentment for the registration of a transfer of
any Note, the Trustee, any Agent and the Company may deem and treat the Person
in whose name any Note is registered as the absolute owner of such Note for the
purpose of receiving payment of principal of and interest on such Notes and for
all other purposes, and none of the Trustee, any Agent or the Company shall be
affected by notice to the contrary.
(vii) The Trustee shall authenticate Global Notes and Definitive
Notes in accordance with the provisions of Section 2.02 hereof.
(viii) All certifications, certificates and Opinions of Counsel
required to be submitted to the Registrar pursuant to this Section 2.06 to
effect a registration of transfer or exchange may be submitted by facsimile, to
be followed by originals.
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Section 2.07 Replacement Notes.
If any mutilated Note is surrendered to the Trustee or the Company and the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Note, the Company shall issue and the Trustee, upon receipt of an
Authentication Order, shall authenticate a replacement Note if the Trustee's
requirements are met. If required by the Trustee or the Company, an indemnity
bond must be supplied by the Holder that is sufficient in the judgment of the
Trustee and the Company to protect the Company, the Trustee, any Agent and any
authenticating agent from any loss that any of them may suffer if a Note is
replaced. The Company may charge for its expenses in replacing a Note.
Every replacement Note is an additional obligation of the Company and shall
be entitled to all of the benefits of this Indenture equally and proportionately
with all other Notes duly issued hereunder.
Section 2.08 Outstanding Notes.
The Notes outstanding at any time are all the Notes authenticated by the
Trustee except for those cancelled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note
does not cease to be outstanding because the Company or an Affiliate of the
Company holds the Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
If the principal amount at maturity or Accreted Value, as applicable, of
any Note is considered paid under Section 4.01 hereof, it ceases to be
outstanding and ceases to accrete in value or, if applicable, interest on it
ceases to accrue.
If the Paying Agent (other than the Company, a Subsidiary or an Affiliate
of any thereof) holds, on a redemption date or maturity date, money sufficient
to pay Notes payable on that date, then on and after that date such Notes shall
be deemed to be no longer outstanding and shall cease to accrete in value or
accrue interest.
Section 2.09 Treasury Notes.
In determining whether the Holders of the required principal amount at
maturity of Notes have concurred in any direction, waiver or consent, Notes
owned by the Company, or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company, shall
be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes that a Responsible Officer of the
Trustee knows are so owned shall be so disregarded.
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Section 2.10 Temporary Notes.
Until certificates representing Notes are ready for delivery, the Company
may prepare and the Trustee, upon receipt of an Authentication Order, shall
authenticate temporary Notes. Temporary Notes shall be substantially in the
form of certificated Notes but may have variations that the Company considers
appropriate for temporary Notes and as shall be reasonably acceptable to the
Trustee. Without unreasonable delay, the Company shall prepare and the Trustee
shall authenticate definitive Notes in exchange for temporary Notes.
Holders of temporary Notes shall be entitled to all of the benefits of this
Indenture.
Section 2.11 Cancellation.
The Company at any time may deliver Notes to the Trustee for cancellation.
The Registrar and Paying Agent shall forward to the Trustee any Notes
surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall return such
cancelled Notes to the Company upon written request. Certification of the
destruction of all cancelled Notes shall be delivered to the Company. The
Company may not issue new Notes to replace Notes that it has paid or that have
been delivered to the Trustee for cancellation.
Section 2.12 Defaulted Interest.
If the Company defaults in a payment of interest on the Notes, it shall pay
the defaulted interest in any lawful manner plus, to the extent lawful, interest
payable on the defaulted interest, to the Persons who are Holders on a
subsequent special record date, in each case at the rate provided in the Notes
and in Section 4.01 hereof. The Company shall notify the Trustee in writing of
the amount of defaulted interest proposed to be paid on each Note and the date
of the proposed payment. The Company shall fix or cause to be fixed each such
special record date and payment date, provided that no such special record date
shall be less than 10 days prior to the related payment date for such defaulted
interest. At least 15 days before the special record date, the Company (or, upon
the written request of the Company, the Trustee in the name and at the expense
of the Company) shall mail or cause to be mailed to Holders a notice that states
the special record date, the related payment date and the amount of such
interest to be paid.
Section 2.13 CUSIP Numbers.
The Company in issuing the Notes may use "CUSIP" numbers (if then generally
in use), and, if so, the Trustee shall use CUSIP numbers in notices of
redemption as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness of such numbers either as
printed on the Notes or as contained in any notice of a redemption and that
reliance may be placed only on the other identification numbers printed on the
Notes, and any such redemption shall not be affected by any defect in or the
omission of such numbers. The Company will promptly notify the Trustee of any
change in the CUSIP numbers.
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ARTICLE 3.
REDEMPTION AND PREPAYMENT
Section 3.01 Notices To Trustee.
If the Company elects to redeem Notes pursuant to the optional redemption
provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 30
days but not more than 60 days before a redemption date, an Officers'
Certificate setting forth (i) the clause of this Indenture pursuant to which the
redemption shall occur, (ii) the redemption date, (iii) the Accreted Value of
Notes to be redeemed, (iv) the redemption price and (v) the CUSIP numbers of the
Notes to be redeemed.
Section 3.02 Selection Of Notes To Be Redeemed.
If less than all of the Notes are to be redeemed or purchased in an offer
to purchase at any time, the Trustee shall select the Notes to be redeemed or
purchased among the Holders of the Notes 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 in
accordance with any other method the Trustee considers fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. In the
event of partial redemption by lot, the particular Notes to be redeemed shall be
selected, unless otherwise provided herein, not less than 30 nor more than 60
days prior to the redemption date by the Trustee from the outstanding Notes not
previously called for redemption.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount at maturity thereof to be redeemed. Notes and
portions of Notes selected shall be in denominations of $1,000 or integral
multiples of $1,000 in principal amount at maturity; except that if all of the
Notes of a Holder are to be redeemed, the entire outstanding amount of Notes
held by such Holder, even if not an integral multiple of $1,000, shall be
redeemed. Except as provided in the preceding sentence, provisions of this
Indenture that apply to Notes called for redemption also apply to portions of
Notes called for redemption.
Section 3.03 Notice Of Redemption.
Subject to the provisions of Section 3.09 hereof, at least 30 days but not
more than 60 days before a redemption date, the Company shall mail or cause to
be mailed, by first class mail, a notice of redemption to each Holder whose
Notes are to be redeemed at its registered address.
The notice shall identify the Notes to be redeemed and shall state:
(a) the redemption date;
(b) the redemption price;
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(c) if any Note is being redeemed in part, the portion of the principal
amount at maturity of such Note to be redeemed and that, after the redemption
date upon surrender of such Note, a new Note or Notes in principal amount at
maturity equal to the unredeemed portion shall be issued upon cancellation of
the original Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price;
(f) that, unless the Company defaults in making such redemption payment,
Notes called for redemption will cease to accrete in value or, as applicable,
interest on Notes called for redemption will cease to accrue on and after the
redemption date;
(g) the paragraph of the Notes and/or Section of this Indenture pursuant
to which the Notes called for redemption are being redeemed; and
(h) that no representation is made as to the correctness or accuracy of
the CUSIP number, if any, listed in such notice or printed on the Notes.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at its expense; provided, however, that the Company
shall have delivered to the Trustee, at least 45 days prior to the redemption
date, an Officers' Certificate requesting that the Trustee give such notice and
setting forth the information to be stated in such notice as provided in the
preceding paragraph.
Section 3.04 Effect Of Notice Of Redemption.
Once notice of redemption is mailed in accordance with Section 3.03 hereof,
Notes called for redemption become irrevocably due and payable on the redemption
date at the redemption price. A notice of redemption may not be conditional.
Section 3.05 Deposit Of Redemption Price.
Prior to 10:00 a.m. on the redemption date, the Company shall deposit with
the Trustee or with the Paying Agent money sufficient to pay the redemption
price of and accrued interest on all Notes to be redeemed on that date. The
Trustee or the Paying Agent shall promptly return to the Company any money
deposited with the Trustee or the Paying Agent by the Company in excess of the
amounts necessary to pay the redemption price of, and accrued interest on, all
Notes to be redeemed.
If the Company complies with the provisions of the preceding paragraph, on
and after the redemption date, Notes called for redemption prior to the Full
Accretion Date shall cease to accrete in value and interest shall cease to
accrue on the Notes or the portions of Notes called for redemption
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on or after the Full Accretion Date. If a Note is redeemed on or after an
interest record date but on or prior to the related interest payment date, then
any accrued and unpaid interest shall be paid to the Person in whose name such
Note was registered at the close of business on such record date. If any Note
called for redemption shall not be so paid upon surrender for redemption because
of the failure of the Company to comply with the preceding paragraph, interest
shall be paid on the unpaid principal, from the redemption date until such
principal is paid, and to the extent lawful on any interest not paid on such
unpaid principal, in each case at the rate provided in the Notes and in Section
4.01 hereof.
Section 3.06 Notes Redeemed In Part.
Upon surrender of a Note that is redeemed in part, the Company shall issue
and, upon the Company's written request, the Trustee shall authenticate for the
Holder at the expense of the Company a new Note equal in principal amount at
maturity to the unredeemed portion of the Note surrendered.
Section 3.07 Optional Redemption.
(a) Except as set forth in clause (b) of this Section 3.07, the Company
shall not have the option to redeem the Notes pursuant to this Section 3.07
prior to March 15, 2003. Thereafter, the Company shall have the option to redeem
the Notes, in whole or in part, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon, if any, 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........................................ 106.750%
2004........................................ 104.500%
2005........................................ 102.250%
2006 and thereafter......................... 100.000%
</TABLE>
(b) Notwithstanding the provisions of clause (a) of this Section 3.07, at
any time 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
issued on the Issue Date under the Indenture at a redemption price of 113.5% of
the Accreted Value, plus with 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
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Commitment nor the Stock Purchase (as defined in the Equity Commitment) shall
constitute an investment or any part of any investment by a Strategic Equity
Investor.
(c) Any redemption pursuant to this Section 3.07 shall be made pursuant to
the provisions of Section 3.01 through 3.06 hereof.
Section 3.08 Mandatory Redemption.
The Company shall not be required to make mandatory redemption payments
with respect to the Notes.
Section 3.09 Offer To Purchase By Application Of Excess Proceeds.
In the event that, pursuant to Section 4.10 hereof, the Company shall be
required to commence an offer to all Holders to purchase Notes (an "Asset Sale
Offer"), it shall follow the procedures specified below.
The Asset Sale Offer shall remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Offer Period"). No later than five
Business Days after the termination of the Offer Period (the "Purchase Date"),
the Company shall purchase the principal amount at maturity of Notes required to
be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less
than the Offer Amount has been tendered, all Notes tendered in response to the
Asset Sale Offer. Payment for any Notes so purchased shall be made in the same
manner as interest payments are made.
If the Purchase Date is on or after an interest record date and on or
before the related interest payment date, any accrued and unpaid interest shall
be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest shall be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company shall send, by
first class mail, a notice to the Trustee and each of the Holders. The notice
shall contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Asset Sale Offer. The Asset Sale Offer shall be
made to all Holders. The notice, which shall govern the terms of the Asset Sale
Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section 3.09
and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain
open;
(b) the Offer Amount, the purchase price and the Purchase Date;
(c) that any Note not tendered or accepted for payment shall continue to
accrete or accrue interest;
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(d) that, unless the Company defaults in making such payment, any Note
accepted for payment pursuant to the Asset Sale Offer shall cease to accrete or
accrue interest after the Purchase Date;
(e) that Holders electing to have a Note purchased pursuant to an Asset
Sale Offer may only elect to have all of such Note purchased and may not elect
to have only a portion of such Note purchased;
(f) that Holders electing to have a Note purchased pursuant to any Asset
Sale Offer shall be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, or
transfer by book- entry transfer, to the Company, a depositary, if appointed by
the Company, or a Paying Agent at the address specified in the notice at least
three Business Days before the Purchase Date;
(g) that Holders shall be entitled to withdraw their election if the
Company, the depositary or the Paying Agent, as the case may be, receives, not
later than the expiration of the Offer Period, a facsimile transmission or
letter setting forth the name of the Holder, the certificate number, the
principal amount of the Note the Holder delivered for purchase and a statement
that such Holder is withdrawing his election to have such Note purchased;
(h) that, if the aggregate principal amount at maturity (or Accreted
Value, as applicable) of Notes surrendered by Holders exceeds the Offer Amount,
the Company shall select the Notes to be purchased on a pro rata basis (with
such adjustments as may be deemed appropriate by the Company so that only Notes
in denominations of $1,000, or integral multiples thereof, shall be purchased);
and
(i) that Holders whose Notes were purchased only in part shall be issued
new Notes equal in principal amount at maturity to the unpurchased portion of
the Notes surrendered (or transferred by book-entry transfer).
On or before 10:00 a.m. on the Purchase Date, the Company shall, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Offer Amount of Notes or portions thereof tendered pursuant to the Asset
Sale Offer, or if less than the Offer Amount has been tendered, all Notes
tendered, and shall deliver to the Trustee an Officers' Certificate stating that
such Notes or portions thereof were accepted for payment by the Company in
accordance with the terms of this Section 3.09. The Company, the Depositary or
the Paying Agent, as the case may be, shall promptly (but in any case not later
than five Business Days after the Purchase Date) mail or deliver to each
tendering Holder an amount equal to the purchase price of the Notes tendered by
such Holder and accepted by the Company for purchase, and the Company shall
promptly issue a new Note, and the Trustee, upon written request from the
Company shall authenticate and mail or deliver such new Note to such Holder, in
a principal amount at maturity equal to any unpurchased portion of the Note
surrendered. Any Note not so accepted shall be promptly mailed or delivered or
caused to be delivered by the Company to the Holder thereof. The Company shall
publicly announce the results of the Asset Sale Offer on the Purchase Date.
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Other than as specifically provided in this Section 3.09, any purchase
pursuant to this Section 3.09 shall be made pursuant to the provisions of
Sections 3.01 through 3.06 hereof.
ARTICLE 4.
COVENANTS
Section 4.01 Payment Of Notes.
The Company shall pay or cause to be paid the principal amount or Accreted
Value of, premium, if any, and interest on the Notes on the dates and in the
manner provided in the Notes. Principal amount or Accreted Value, premium, if
any, and interest shall be considered paid on the date due if the Paying Agent,
if other than the Company or a Subsidiary thereof, holds as of 10:00 a.m.
Eastern Time on the due date money deposited by the Company in immediately
available funds and designated for and sufficient to pay all principal amount or
Accreted Value, premium, if any, and interest then due.
The Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the rate equal to
1% per annum in excess of the then applicable interest rate on the Notes to the
extent lawful; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace period) at the same rate to the extent
lawful.
Section 4.02 Maintenance Of Office Or Agency.
The Company shall maintain in the Borough of Manhattan, The City of New
York, an office or agency (which may be an office of the Trustee or an affiliate
of the Trustee, Registrar or co-registrar) where Notes may be surrendered for
registration of transfer or for exchange and where notices and demands to or
upon the Company in respect of the Notes and this Indenture may be served. The
Company shall give prompt written notice to the Trustee of the location, and any
change in the location, of such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee.
The Company may also from time to time designate one or more other offices
or agencies where the Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; provided, however,
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in the Borough of Manhattan,
The City of New York for such purposes. The Company shall give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of the Trustee as
one such office or agency of the Company in accordance with Section 2.03.
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Section 4.03 Reports.
(a) Whether or not required by the rules and regulations of the SEC, so
long as any Notes are outstanding, the Company shall furnish to the Holders of
Notes and file with the SEC (unless the SEC will not accept such a filing) (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 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 SEC on Form 8-K if the Company were required to file such reports, in each
case within the time periods specified in the SEC's rules and regulations. The
Company shall at all times comply with TIA (S) 314(a).
(b) For so long as any Notes remain outstanding, the Company shall furnish
to the Holders, securities analysts, prospective investors and beneficial owners
of the Notes, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
Section 4.04 Compliance Certificate.
(a) The Company shall deliver to the Trustee, within 90 days after the end
of each fiscal year, an Officers' Certificate stating that a review of the
activities of the Company and its Subsidiaries during the preceding fiscal year
has been made under the supervision of the signing Officers with a view to
determining whether the Company has kept, observed, performed and fulfilled its
obligations under this Indenture, and further stating, as to each such Officer
signing such certificate, that to the best of his or her knowledge the Company
has kept, observed, performed and fulfilled each and every covenant contained in
this Indenture and is not in default in the performance or observance of any of
the terms, provisions and conditions of this Indenture (or, if a Default or
Event of Default shall have occurred, describing all such Defaults or Events of
Default of which he or she may have knowledge and what action the Company is
taking or proposes to take with respect thereto) and that to the best of his or
her knowledge no event has occurred and remains in existence by reason of which
payments on account of the principal of or interest, if any, on the Notes is
prohibited or if such event has occurred, a description of the event and what
action the Company is taking or proposes to take with respect thereto. For
purposes of this paragraph, such compliance shall be determined without regard
to any period of grace or requirement of notice provided under the Indenture.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to
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Section 4.03(a) above shall be accompanied by a written statement of the
Company's independent public accountants (who shall be a firm of established
national reputation) that in making the examination necessary for certification
of such financial statements, nothing has come to their attention that would
lead them to believe that the Company has violated any provisions of Article 4
or Article 5 hereof or, if any such violation has occurred, specifying the
nature and period of existence thereof, it being understood that such
accountants shall not be liable directly or indirectly to any Person for any
failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Notes are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of any Default
or Event of Default, an Officers' Certificate specifying such Default or Event
of Default and what action the Company is taking or proposes to take with
respect thereto.
(d) The Company shall deliver to the Trustee, within 15 days after the end
of each fiscal year, an Officers' Certificate stating the amount of original
issue discount (including daily rates and accrual periods) accrued on the Notes
as of the end of such fiscal year and such other information relating to such
original issue discount as may then be relevant under the Internal Revenue Code
of 1986, as amended from time to time. The obligation to deliver such Officer's
Certificate shall cease at March 15, 2003.
Section 4.05 Taxes.
The Company shall pay, and shall cause each of its Subsidiaries to pay,
prior to delinquency, all material taxes, assessments, and governmental levies
except such as are contested in good faith and by appropriate proceedings or
where the failure to effect such payment is not adverse in any material respect
to the Holders of the Notes.
Section 4.06 Stay, Extension And Usury LAws.
The Company covenants (to the extent that it may lawfully do so) that it
shall not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, that may affect the covenants or
the performance of this Indenture; and the Company and each of the Guarantors
(to the extent that it may lawfully do so) hereby expressly waives all benefit
or advantage of any such law, and covenants that it shall not, by resort to any
such law, hinder, delay or impede the execution of any power herein granted to
the Trustee, but shall suffer and permit the execution of every such power as
though no such law has been enacted.
Section 4.07 Restricted Payments.
The Company shall not, and shall 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
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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; (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 Section 4.09
hereof.
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of this Indenture (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 this 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 Issue 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 the Equity Commitment $16.0 million of net
proceeds in cash 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 this 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 shall 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 this
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
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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 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 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 this Section 4.07 were
computed, together with a copy of any fairness opinion or appraisal required by
this 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 this Section 4.07.
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 this 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
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incurred as of such date under the covenant described in Section 4.09, 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 Section 4.09, 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.
Section 4.08 Dividend And Other Payment Restrictions Affecting Subsidiaries.
The Company shall not, and shall 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 (a)(i) 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 date of this Indenture, (b) this
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 this 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 Section 4.12 hereof that limit 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 Company shall
not, and shall not permit any of its Restricted Subsidiaries to, create any
Subsidiary after the Issue Date that is not either an Unrestricted Subsidiary or
a Wholly Owned Restricted Subsidiary.
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Section 4.09 Incurrence Of Debt And Issuance Of Disqualified Stock.
The Company shall not, and shall 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
the Company shall 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.
Notwithstanding the foregoing, the Company may not incur any Debt that is
contractually subordinated in right of payment to any other Debt of the Company
unless such Debt is also contractually subordinated in right of payment to the
Notes on substantially identical terms (except to the extent that any such
subordination terms are inapplicable to the Notes); provided, however, that no
Debt of the Company shall be deemed to be contractually subordinated in right of
payment to any other Debt of the Company solely by virtue of being unsecured.
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 in Section 4.10;
(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 the $16.0 million of net
proceeds received by the Company pursuant to the Equity Capital Investment,
plus the fair
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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 this 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 this 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 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 under Section 4.10 hereof.
For purposes of determining compliance with this Section 4.09, 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 Section 4.09, the Company
shall, in its sole discretion, classify such item of Debt in any manner that
complies with
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this Section 4.09. Accrual of interest and accretion of original issue discount
shall not be deemed to be an incurrence of Debt for purposes of this Section
4.09.
Section 4.10 Asset Sales
The Company shall not, and shall 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; 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 any Asset Sale,
the Company (or such Restricted Subsidiary) may, subject to the provisions of
the covenant described in Section 4.07 hereof, 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
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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 shall 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 this
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 this Indenture by virtue thereof.
Section 4.11 Transactions with Affiliates.
The Company shall not, and shall 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
(a) 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 (b) the Company delivers to the Trustee (a) with respect to
any Affiliate Transaction 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 or series of related
Affiliate Transactional 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 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 of business; (ii)
transactions between or among the Company and/or its Restricted Subsidiaries;
(iii) payment of reasonable
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directors fees to Persons who are not otherwise affiliates of the Company; and
(iv) transactions permitted under Section 4.07 hereof shall not be deemed
Affiliate Transactions.
Section 4.12 Limitation on Liens.
The Company shall not, and shall 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.
Section 4.13 Business Activities.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly engage in any business other than the
Telecommunications Business.
Section 4.14 Corporate Existence.
Subject to Article 5 hereof, the Company shall do or cause to be done all
things necessary to preserve and keep in full force and effect (i) its corporate
existence, and the corporate, partnership or other existence of each of its
Subsidiaries, in accordance with the respective organizational documents (as the
same may be amended from time to time) of the Company or any such Subsidiary and
(ii) the rights (charter and statutory), licenses and franchises of the Company
and its Subsidiaries; provided, however, that the Company shall not be required
to preserve any such right, license or franchise, or the corporate, partnership
or other existence of any of its Subsidiaries, if the Board of Directors shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of the Company and its Subsidiaries, taken as a whole, and that the
loss thereof is not adverse in any material respect to the Holders of the Notes.
Section 4.15 Offer to Repurchase Upon Change of Control.
Upon the occurrence of a Change of Control, the Company shall make an offer
(a "Change of Control Offer") to each Holder to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes 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 10 days
following any Change of Control, the Company shall mail a notice to each Holder
stating: (1) that the Change of Control Offer is being made pursuant to this
Section 4.15 and that all Notes tendered will be accepted for payment; (2) the
purchase price and the purchase date, which shall be no earlier than 30 and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"); (3) that any Note not tendered will continue to accrete or
accrue interest; (4) that, unless the Company defaults in the payment of the
Change of Control Payment, all Notes accepted for payment pursuant to the Change
of Control Offer shall cease to accrete or accrue interest after the Change of
Control Payment Date;
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(5) that Holders electing to have any Notes purchased pursuant to a Change of
Control Offer will be required to surrender the Notes, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Notes completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third Business Day preceding the Change of Control Payment Date;
(6) that Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a facsimile transmission or letter
setting forth the name of the Holder, the principal amount of Notes delivered
for purchase, and a statement that such Holder is withdrawing his election to
have the Notes purchased; and (7) that Holders whose Notes are being purchased
only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple thereof. The Company
shall 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 in connection with the repurchase of Notes in
connection with a Change of Control.
On the Change of Control Payment Date, the Company shall, 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
prior to 10:00 a.m. on the Change of Control Payment Date 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 shall promptly mail to each Holder
of Notes so tendered the Change of Control Payment for such Notes, and the
Trustee shall 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 shall be in a principal amount at maturity of $1,000 or an
integral multiple thereof. The Company shall publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
Notwithstanding anything to the contrary in this Section 4.15, the Company
shall 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 this Section 4.15
and purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Section 4.16 Limitation on Sale and Leaseback Transactions.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, 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 Section 4.09 and Section 4.12 hereof 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
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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 Section 4.10.
Section 4.17 Limitation on Issuances and Sales of equity interests in Wholly
Owned restricted Subsidiaries.
The Company (i) shall not, and shall not permit any of its Wholly Owned
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
the Equity Interests in of such Wholly Owned Restricted Subsidiary and (b) the
Net Proceeds from such transfer, conveyance, sale, lease or other disposition
are applied in accordance with Section 4.10 hereof 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.
Section 4.18 Limitation on Issuances of Guarantees of debt.
The Company shall 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 this 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 Section 4.12 hereof 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 clauses (i), (vi),
(vii), (viii) and (ix) of the second paragraph of Section 4.09 hereof.
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 the assets of, such
Subsidiary, which transaction is in compliance with the applicable provisions of
this Indenture and such Subsidiary is released from its guarantees of other Debt
of the Company or any of its Subsidiaries. The form of such Guarantee is
attached as Exhibit E hereto.
Section 4.19 Payments for Consent.
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
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Indenture or the Notes unless such consideration is offered to be paid or is
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.
Section 4.20 Equity Commitment.
The Company shall consummate the Equity Commitment by March 11, 1999 and
shall obtain such consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits as may be required under state
securities or Blue Sky laws in connection therewith.
ARTICLE 5.
SUCCESSORS
Section 5.01 Merger, Consolidation, or Sale of Assets.
The Company shall not and shall not permit any of its Restricted
Subsidiaries to consolidate or merge with or into (whether or not the Company or
such Restricted Subsidiary is the surviving corporation), or 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 this 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) shall 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) shall, 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 Section 4.09
hereof 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.
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Section 5.02 Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the assets of the
Company in accordance with Section 5.01 hereof, the successor corporation formed
by such consolidation or into or with which the Company is merged or to which
such sale, assignment, transfer, lease, conveyance or other disposition is made
shall succeed to, and be substituted for (so that from and after the date of
such consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of this Indenture referring to the "Company" shall refer instead to
the successor corporation and not to the Company), and may exercise every right
and power of the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein; provided, however, that
the predecessor Company shall not be relieved from the obligation to pay the
principal of and interest on the Notes except in the case of a sale of all of
the Company's assets that meets the requirements of Section 5.01 hereof.
ARTICLE 6.
DEFAULTS AND REMEDIES
Section 6.01 Events of Default.
An "Event of Default" occurs if:
(a) the Company defaults in the payment when due of interest on the Notes
(including any Additional Interest) and such default continues for a period of
30 days;
(b) the Company defaults in the payment when due of the principal of or
premium, if any, on the Notes when the same becomes due and payable at maturity,
upon redemption (including in connection with an offer to purchase) or
otherwise;
(c) the Company or any of its Restricted Subsidiaries fail to comply with
any of the provisions of Section 4.07, 4.09, 4.10, 4.15, or 5.01 hereof;
(d) the Company or any of its Restricted Subsidiaries fails to observe or
perform any other covenant, representation, warranty or other agreement in this
Indenture or the Notes for 30 days after notice to the Company by the Trustee or
the Holders of at least 25% in aggregate principal amount at maturity of the
Notes then outstanding voting as a single class;
(e) a default occurs 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
date of this Indenture, 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
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prior to its express maturity and, in each case, the principal amount of 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;
(f) a final judgment or final judgments for the payment of money are
entered by a court or courts of competent jurisdiction against the Company or
any of its Restricted Subsidiaries and such judgment or judgments remain
undischarged and are not stayed for a period (during which execution shall not
be effectively stayed) of 60 days, provided that the aggregate of all such
undischarged judgments exceeds $5 million;
(g) the Company fails for any reason to consummate by March 11, 1999 the
Equity Capital Investment or to obtain such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits as may be
required under state securities or Blue Sky laws in connection therewith;
(h) any of the Investors repudiate their respective obligations under the
Equity Commitment;
(i) the Company or any of its Restricted Subsidiaries pursuant to or
within the meaning of Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it in an
involuntary case,
(iii) consents to the appointment of a custodian of it or for all or
substantially all of its property,
(iv) makes a general assignment for the benefit of its creditors, or
(v) generally is not paying its debts as they become due; or
(j) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(i) is for relief against the Company or any of its Significant
Subsidiaries or any group of Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary in an involuntary case;
(ii) appoints a custodian of the Company or any of its Significant
Subsidiaries or any group of Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary or for all or substantially all of the
property of the Company or any of its Significant Subsidiaries or any group of
Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary;
or
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(iii) orders the liquidation of the Company or any of its Significant
Subsidiaries or any group of Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60
consecutive days.
Section 6.02 Acceleration.
If any Event of Default (other than an Event of Default specified in clause
(i) or (j) of Section 6.01 hereof with respect to the Company, any Significant
Subsidiary or any group of Restricted Subsidiaries that, taken as a whole, would
constitute a Significant Subsidiary) 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. Upon any such declaration, all principal of and accrued interest,
if any, on (if on or after the Full Accretion Date) or Accreted Value of (if
prior to the Full Accretion date) the Notes shall be due and payable
immediately. Notwithstanding the foregoing, if an Event of Default specified in
clause (i) or (j) of Section 6.01 hereof occurs with respect to the Company, any
of its Significant Subsidiaries or any group of Restricted Subsidiaries that,
taken as a whole, would constitute a Significant Subsidiary, all outstanding
Notes shall be due and payable immediately without further action or notice.
If an Event of Default occurs 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 Section 3.07 hereof,
then, upon acceleration of the Notes, an equivalent premium shall also become
and be immediately due and payable, to the extent permitted by law, anything in
this Indenture or in the Notes to the contrary notwithstanding. 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,
upon acceleration of the Notes, an additional premium shall also become and be
immediately due and payable in an amount, for each of the years beginning on
March 15 of the years set forth below, as set forth below (expressed as a
percentage of the Accreted Value to the date of payment that would otherwise be
due but for the provisions of this sentence):
YEAR PERCENTAGE
---- ----------
1998............................................ 118.00%
1999............................................ 115.75%
2000............................................ 113.50%
2001............................................ 111.25%
2002............................................ 109.00%
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Section 6.03 Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy to collect the payment of principal, premium, if any, and
interest on the Notes or to enforce the performance of any provision of the
Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
Section 6.04 Waiver of Defaults.
Holders of not less than a majority in aggregate principal amount at
maturity of the then outstanding Notes by notice to the Trustee may on behalf of
the Holders of all of the Notes waive an existing Default or Event of Default
and its consequences hereunder, except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Notes (including in
connection with an offer to purchase) (provided, however, that the Holders of a
majority in aggregate principal amount at maturity of the then outstanding Notes
may rescind an acceleration and its consequences, including any related payment
default that resulted from such acceleration). Upon any such waiver, such
Default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been cured for every purpose of this Indenture; but no such
waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
Section 6.05 Control by Majority.
Holders of a majority in principal amount at maturity of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of other Holders of Notes or that may
involve the Trustee in personal liability.
Section 6.06 Limitation on Suits.
A Holder of a Note may pursue a remedy with respect to this Indenture or
the Notes only if:
(a) the Holder of a Note gives to a Responsible Officer of the Trustee
written notice of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount at maturity of the
then outstanding Notes make a written request to the Trustee to pursue the
remedy;
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(c) such Holder of a Note or Holders of Notes offer and provide to the
Trustee indemnity satisfactory to the Trustee against any loss, liability or
expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and the provision of indemnity; and
(e) during such 60-day period the Holders of a majority in principal
amount at maturity of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the rights of
another Holder of a Note or to obtain a preference or priority over another
Holder of a Note.
Section 6.07 Rights of Holders of Notes to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Note to receive payment of principal, premium, if any, and interest
on the Note, on or after the respective due dates expressed in the Note
(including in connection with an offer to purchase), or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
Section 6.08 Collection Suit by Trustee.
If an Event of Default specified in Section 6.01(a) or (b) occurs and is
continuing, the Trustee is authorized to recover judgment in its own name and as
trustee of an express trust on behalf of the Holders against the Company for the
whole amount of principal amount or Accreted Value, as applicable, of, premium,
if any, and interest remaining unpaid on the Notes and interest on overdue
principal and, to the extent lawful, interest and such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
Section 6.09 Trustee May File Proofs of Claim.
The Trustee is authorized to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Notes allowed in any judicial proceedings relative to the Company
(or any other obligor upon the Notes), its creditors or its property and shall
be entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents
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and counsel, and any other amounts due the Trustee under Section 7.07 hereof out
of the estate in any such proceeding, shall be denied for any reason, payment of
the same shall be secured by a Lien on, and shall be paid out of, any and all
distributions, dividends, money, securities and other properties that the
Holders may be entitled to receive in such proceeding whether in liquidation or
under any plan of reorganization or arrangement or otherwise. Nothing herein
contained shall be deemed to authorize the Trustee to authorize or consent to or
accept or adopt on behalf of any Holder any plan of reorganization, arrangement,
adjustment or composition affecting the Notes or the rights of any Holder, or to
authorize the Trustee to vote in respect of the claim of any Holder in any such
proceeding.
Section 6.10 Priorities.
If the Trustee collects any money pursuant to this Article, it shall pay
out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.07 hereof, including payment of all reasonable compensation, expense
and liabilities incurred, and all advances made, by the Trustee and the
reasonable costs and expenses of collection;
Second: to Holders of Notes for amounts due and unpaid on the Notes for
principal amount or Accreted Value, as applicable, premium, if any, and
interest, ratably, without preference or priority of any kind, according to the
amounts due and payable on the Notes for principal, premium, if any and
interest, respectively; and
Third: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders of Notes pursuant to this Section 6.10.
Section 6.11 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as a
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section does
not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to
Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount
at maturity of the then outstanding Notes.
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ARTICLE 7.
TRUSTEE
Section 7.01 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in its exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by the
express provisions of this Indenture and the Trustee need perform only those
duties that are specifically set forth in this Indenture and no others, and no
implied covenants or obligations shall be read into this Indenture against the
Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture. However, the
Trustee shall examine the certificates and opinions to determine whether or not
they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liabilities for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section;
(ii) the Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction received by
it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of this
Indenture that in any way relates to the Trustee is subject to paragraphs (a),
(b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or incur any liability. The Trustee shall be under no
obligation to exercise any of its rights and powers under this Indenture at the
request of any Holders, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
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(f) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
Section 7.02 Rights of Trustee.
(a) The Trustee may conclusively rely upon any document believed by it to
be genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel of its selection and the advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any demand,
request, direction or notice from the Company shall be sufficient if signed by
an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders unless such Holders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities that might be
incurred by it in compliance with such request or direction.
Section 7.03 Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the owner or
pledgee of Notes and may otherwise deal with the Company or any Affiliate of the
Company with the same rights it would have if it were not Trustee. However, in
the event that the Trustee acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the SEC for permission to continue as
trustee or resign. Any Agent may do the same with like rights and duties. The
Trustee is also subject to Sections 7.10 and 7.11 hereof.
Section 7.04 Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no representation as to
the validity or adequacy of this Indenture or the Notes; it shall not be
accountable for the Company's use of the
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proceeds from the Notes or any money paid to the Company or upon the Company's
direction under any provision of this Indenture; it shall not be responsible for
the use or application of any money received by any Paying Agent other than the
Trustee; and it shall not be responsible for any statement or recital herein or
any statement in the Notes or any other document in connection with the sale of
the Notes or pursuant to this Indenture other than its certificate of
authentication.
Section 7.05 Notice of Defaults.
(a) The Trustee shall not be deemed to have notice of any Default or Event
of Default unless a Responsible Officer of the Trustee has actual knowledge
thereof or unless written notice of any event which is in fact such a default is
received by a Responsible Officer of the Trustee at the Corporate Trust Office
of the Trustee, and such notice references the Notes and this Indenture.
(b) If a Default or Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to Holders of Notes a notice of the
Default or Event of Default within 90 days after it occurs. Except in the case
of a Default or Event of Default in payment of principal of, premium, if any, or
interest on any Note, the Trustee may withhold the notice if and so long as a
committee of its Responsible Officers in good faith determines that withholding
the notice is in the interests of the Holders of the Notes.
Section 7.06 Reports by Trustee to Holders of the Notes.
Within 60 days after each May 15 beginning with the May 15 following the
date of this Indenture, and for so long as Notes remain outstanding, the Trustee
shall mail to the Holders of the Notes a brief report dated as of such reporting
date that complies with TIA (S) 313(a) (but if no event described in TIA (S)
313(a) has occurred within the twelve months preceding the reporting date, no
report need be transmitted). The Trustee also shall comply with TIA (S)
313(b)(2). The Trustee shall also transmit by mail all reports as required by
TIA (S) 313(c).
A copy of each report at the time of its mailing to the Holders of Notes
shall be mailed to the Company and filed with the SEC and each stock exchange on
which the Notes are listed in accordance with TIA (S) 313(d). The Company shall
promptly notify the Trustee when the Notes are listed on any stock exchange.
Section 7.07 Compensation and Indemnity.
The Company shall pay to the Trustee from time to time such compensation
for its acceptance of this Indenture and services hereunder as the parties shall
agree in writing from time to time. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
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The Company shall indemnify the Trustee against any and all losses,
liabilities or expenses incurred by it arising out of or in connection with the
acceptance or administration of its duties under this Indenture, including the
costs and expenses of enforcing this Indenture against the Company (including
this Section 7.07) and defending itself against any claim (whether asserted by
the Company or any Holder or any other person) or liability in connection with
the exercise or performance of any of its powers or duties hereunder, except to
the extent any such loss, liability or expense may be attributable to its
negligence or bad faith. The Trustee shall notify the Company promptly of any
claim for which it may seek indemnity. Failure by the Trustee to so notify the
Company shall not relieve the Company of its obligations hereunder. The Company
shall defend the claim and the Trustee shall cooperate in the defense. The
Trustee may have separate counsel and the Company shall pay the reasonable fees
and expenses of such counsel. The Company need not pay for any settlement made
without its consent, which consent shall not be unreasonably withheld.
The obligations of the Company under this Section 7.07 shall survive the
satisfaction and discharge of this Indenture.
To secure the Company's payment obligations in this Section, the Trustee
shall have a Lien prior to the Notes on all money or property held or collected
by the Trustee, except that held in trust to pay principal and interest on
particular Notes. Such Lien shall survive the satisfaction and discharge of this
Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(i) or (j) hereof occurs, the expenses and the
compensation for the services (including the reasonable fees and expenses of its
agents and counsel) are intended to constitute expenses of administration under
any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA (S) 313(b)(2) to the
extent applicable.
Section 7.08 Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section.
The Trustee may resign in writing at any time and be discharged from the
trust hereby created by so notifying the Company. The Holders of Notes of a
majority in principal amount of the then outstanding Notes may remove the
Trustee by so notifying the Trustee and the Company in writing. The Company may
remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order for
relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a custodian or public officer takes charge of the Trustee or its
property; or
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(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount at maturity of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company, or
the Holders of Notes of at least 10% in principal amount at maturity of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note who has been
a Holder of a Note for at least six months, fails to comply with Section 7.10,
such Holder of a Note may petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon, the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to
Holders of the Notes and the Company. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee, provided
all sums owing to the Trustee hereunder have been paid and subject to the Lien
provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee
pursuant to this Section 7.08, the Company's obligations under Section 7.07
hereof shall continue for the benefit of the retiring Trustee.
Section 7.09 Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all or
substantially all of its corporate trust business to, another corporation, the
successor corporation without any further act shall be the successor Trustee.
Section 7.10 Eligibility; Disqualification.
There shall at all times be a Trustee hereunder that is a corporation
organized and doing business under the laws of the United States of America or
of any state thereof that is authorized under such laws to exercise corporate
trustee power, that is subject to supervision or examination by federal or state
authorities and that has a combined capital and surplus of at least $100 million
as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the requirements
of TIA (S) 310(a)(1), (2) and (5). The Trustee is subject to TIA (S) 310(b).
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Section 7.11 Preferential Collection of Claims Against Company.
The Trustee is subject to TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated therein.
ARTICLE 8.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance.
The Company may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate, at any time, elect to have
either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon
compliance with the conditions set forth below in this Article Eight.
Section 8.02 Legal Defeasance and Discharge.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.02, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.04 hereof, be deemed to have been
discharged from its obligations with respect to all outstanding Notes on the
date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall
be deemed to have paid and discharged the entire Debt represented by the
outstanding Notes, which shall thereafter be deemed to be "outstanding" only for
the purposes of Section 8.05 hereof and the other Sections of this Indenture
referred to in (a) and (b) below, and to have satisfied all its other
obligations under such Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following provisions which shall survive
until otherwise terminated or discharged hereunder: (a) the rights of Holders
of outstanding Notes to receive solely from the trust fund described in Section
8.04 hereof, and as more fully set forth in such Section, payments in respect of
the principal of, premium, if any, and interest on such Notes when such payments
are due, (b) the Company's obligations with respect to such Notes under Article
2 and Section 4.02 hereof, (c) the rights, powers, trusts, duties and immunities
of the Trustee hereunder and the Company's obligations in connection therewith
and (d) this Article Eight. Subject to compliance with this Article Eight, the
Company may exercise its option under this Section 8.02 notwithstanding the
prior exercise of its option under Section 8.03 hereof.
Section 8.03 Covenant Defeasance.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.04 hereof, be released from its
obligations under the covenants contained in Sections 4.07, 4.08, 4.09, 4.10,
4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18 and 4.19 hereof with respect to the
outstanding Notes on and after the date the conditions set forth in Section 8.04
are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall
thereafter be deemed not "outstanding" for the purposes of any
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direction, waiver, consent or declaration or act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "outstanding" for all other purposes hereunder (it being
understood that such Notes shall not be deemed outstanding for accounting
purposes). For this purpose, Covenant Defeasance means that, with respect to the
outstanding Notes, the Company may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere
herein to any such covenant or by reason of any reference in any such covenant
to any other provision herein or in any other document and such omission to
comply shall not constitute a Default or an Event of Default under Section 6.01
hereof, but, except as specified above, the remainder of this Indenture and such
Notes shall be unaffected thereby. In addition, upon the Company's exercise
under Section 8.01 hereof of the option applicable to this Section 8.03 hereof,
subject to the satisfaction of the conditions set forth in Section 8.04 hereof,
Sections 6.01(c) through 6.01(f) hereof shall not constitute Events of Default.
Section 8.04 Conditions to Legal or Covenant Defeasance.
The following shall be the conditions to the application of either Section
8.02 or 8.03 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders, cash in United States 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 date for payment thereof or on the applicable
redemption date, as the case may be;
(b) in the case of an election under Section 8.02 hereof, the Company
shall have delivered to the Trustee an Opinion of Counsel in the United States
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 this
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;
(c) in the case of an election under Section 8.03 hereof, the Company
shall have delivered to the Trustee an Opinion of Counsel in the United States
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;
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(d) 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 incurrence of Debt all or a portion of the proceeds of which will be
used to defease the Notes pursuant to this Article Eight concurrently with such
incurrence) or insofar as Sections 6.01(i) or 6.01(j) hereof is concerned, at
any time in the period ending on the 91st day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material agreement or
instrument (other than this 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;
(f) the Company shall have delivered to the Trustee an Opinion of Counsel
(which may be subject to customary exceptions) 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;
(g) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; and
(h) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
Section 8.05 Deposited Money and Government Securities to be Held in Trust;
Other Miscellaneous Provisions.
Subject to Section 8.06 hereof, all money and non-callable Government
Securities (including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.05, the
"Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Notes
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (including the Company acting as Paying Agent) as the
Trustee may determine, to the Holders of such Notes of all sums due and to
become due thereon in respect of principal amount or Accreted Value, as
applicable, premium, if any, and interest, but such money need not be segregated
from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the cash or non-callable Government
Securities deposited pursuant to Section 8.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.
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Anything in this Article Eight to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon the request of the
Company any money or non-callable Government Securities held by it as provided
in Section 8.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
8.04(a) hereof), are in excess of the amount thereof that would then be required
to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.
Section 8.06 Repayment to Company.
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal amount or Accreted Value,
as applicable, of, premium, if any, or interest on any Note and remaining
unclaimed for two years after such principal amount or Accreted Value, as
applicable, and premium, if any, or interest has become due and payable shall be
paid to the Company on its request or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Note shall thereafter, as a
secured creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Company cause to be
published once, in the New York Times and The Wall Street Journal (national
edition), notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such
notification or publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
Section 8.07 Reinstatement.
If the Trustee or Paying Agent is unable to apply any United States dollars
or non-callable Government Securities in accordance with Section 8.02 or 8.03
hereof, as the case may be, by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is
permitted to apply all such money in accordance with Section 8.02 or 8.03
hereof, as the case may be; provided, however, that, if the Company makes any
payment of principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.
Section 8.08 Survival.
The Trustee's rights under this Article 8 shall survive termination of this
Indenture.
ARTICLE 9.
AMENDMENT, SUPPLEMENT AND WAIVER
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Section 9.01 Without Consent of Holders of Notes.
Notwithstanding Section 9.02 of this Indenture, the Company and the Trustee
may amend or supplement this Indenture or the Notes without the consent of any
Holder of a Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes or to alter the provisions of Article 2 hereof (including the
related definitions) in a manner that does not materially adversely affect any
Holder;
(c) to provide for the assumption of the Company's obligations to the
Holders of the Notes by a successor to the Company pursuant to Article 5 hereof;
(d) to make any change that would provide any additional rights or
benefits to the Holders of the Notes or that does not adversely affect the legal
rights hereunder of any such Holder;
(e) to comply with requirements of the SEC in order to effect or maintain
the qualification of this Indenture under the TIA;
Upon the request of the Company accompanied by a resolution of its Board of
Directors authorizing the execution of any such amended or supplemental
Indenture, and upon receipt by the Trustee of the documents described in Section
7.02 hereof, the Trustee shall join with the Company in the execution of any
amended or supplemental Indenture authorized or permitted by the terms of this
Indenture and to make any further appropriate agreements and stipulations that
may be therein contained, but the Trustee shall not be obligated to enter into
such amended or supplemental Indenture that affects its own rights, duties or
immunities under this Indenture or otherwise.
Section 9.02 With Consent of Holders of Notes.
Except as provided below in this Section 9.02, the Company and the Trustee
may amend or supplement this Indenture (including Sections 3.09, 4.10 and 4.15
hereof) and 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
voting as a single class (including, without limitation, consents obtained in
connection with a purchase of, or a tender offer or exchange offer for, Notes),
and, subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of
Default (other than a Default or Event of Default in the payment of the
principal of, premium, if any, or interest on the Notes, except a payment
default resulting from an acceleration that has been rescinded) or compliance
with any provision of this 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 voting as a single class (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, the Notes).
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Upon the request of the Company accompanied by a resolution of its Board of
Directors authorizing the execution of any such amended or supplemental
Indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by
the Trustee of the documents described in Section 7.02 hereof, the Trustee shall
join with the Company in the execution of such amended or supplemental Indenture
unless such amended or supplemental Indenture directly affects the Trustee's own
rights, duties or immunities under this Indenture or otherwise, in which case
the Trustee may in its discretion, but shall not be obligated to, enter into
such amended or supplemental Indenture.
It shall not be necessary for the consent of the Holders of Notes under
this Section 9.02 to approve the particular form of any proposed amendment or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders of Notes affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such amended or supplemental
Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a
majority in aggregate principal amount at maturity of the Notes then outstanding
voting as a single class may waive compliance in a particular instance by the
Company with any provision of this Indenture or the Notes. However, without the
consent of each Holder affected, an amendment or waiver under this Section 9.02
may not (with respect to any Notes held by a non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Note or
alter or waive any of the provisions with respect to the redemption of the Notes
except as provided above with respect to Sections 3.09, 4.10 and 4.15 hereof;
(c) reduce the rate of or change the time for payment of interest on any
Note;
(d) 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 then outstanding Notes and a waiver of the payment default
that resulted from such acceleration);
(e) make any Note payable in money other than that stated in the Notes;
(f) make any change in the provisions of this Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or interest on the Notes;
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(g) waive a redemption payment with respect to any Note (other than a
payment required by any of the covenants described under Sections 3.09, 4.10 or
4.15); or
(h) make any change in Section 6.04 or 6.07 hereof or in the foregoing
amendment and waiver provisions.
Section 9.03 Compliance with Trust Indenture Act.
Every amendment or supplement to this Indenture or the Notes shall be set
forth in a amended or supplemental Indenture that complies with the TIA as then
in effect.
Section 9.04 Revocation and Effect of Consents.
Until an amendment, supplement or waiver becomes effective, a consent to it
by a Holder of a Note is a continuing consent by the Holder of a Note and every
subsequent Holder of a Note or portion of a Note that evidences the same debt as
the consenting Holder's Note, even if notation of the consent is not made on any
Note. However, any such Holder of a Note or subsequent Holder of a Note may
revoke the consent as to its Note if the Trustee receives written notice of
revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.
Section 9.05 Notation on or Exchange of Notes.
The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Note thereafter authenticated. The Company in
exchange for all Notes may issue and the Trustee shall, upon receipt of an
Authentication Order, authenticate new Notes that reflect the amendment,
supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such amendment, supplement or waiver.
Section 9.06 Trustee to Sign Amendments, etc.
The Trustee shall sign any amended or supplemental Indenture authorized
pursuant to this Article Nine if the amendment or supplement does not adversely
affect the rights, duties, liabilities or immunities of the Trustee. The Company
may not sign an amendment or supplemental Indenture until the Board of Directors
approves it. In executing any amended or supplemental Indenture, the Trustee
shall be entitled to receive and (subject to Section 7.01 hereof) shall be fully
protected in relying upon an Officer's Certificate and an Opinion of Counsel
stating that the execution of such amended or supplemental Indenture is
authorized or permitted by this Indenture.
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ARTICLE 10.
MISCELLANEOUS
Section 10.01 Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by TIA (S) 318(c), the imposed duties shall control.
Section 10.02 Notices.
Any notice or communication by the Company or the Trustee to the others is
duly given if in writing and delivered in Person or mailed by first class mail
(registered or certified, return receipt requested), telecopier or overnight air
courier guaranteeing next day delivery, to the others' address
If to the Company:
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
Telecopier No.: 408/490-4500
Attention: Chief Executive Officer
With a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Telecopier No. 650/493-6811
Attention: Meredith Jackson
If to the Trustee:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, NY 10286
Telecopier No.: 212/815-5915
Attention: Corporate Trust Administration
The Company or the Trustee, by notice to the others may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders) shall be
deemed to have been duly given: at the time delivered by hand, if personally
delivered; five Business Days after
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being deposited in the mail, postage prepaid, if mailed; when answered back, if
telecopied; and the next Business Day after timely delivery to the courier, if
sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first class
mail, certified or registered, return receipt requested, or by overnight air
courier guaranteeing next day delivery to its address shown on the register kept
by the Registrar. Any notice or communication shall also be so mailed to any
Person described in TIA (S) 313(c), to the extent required by the TIA. Failure
to mail a notice or communication to a Holder or any defect in it shall not
affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above within
the time prescribed, it is duly given, whether or not the addressee receives it.
If the Company mails a notice or communication to Holders, it shall mail a
copy to the Trustee and each Agent at the same time.
Section 10.03 Communication by Holders of Notes with Other Holders of Notes.
Holders may communicate pursuant to TIA (S) 312(b) with other Holders with
respect to their rights under this Indenture or the Notes. The Company, the
Trustee, the Registrar and anyone else shall have the protection of TIA (S)
312(c).
Section 10.04 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any
action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance reasonably satisfactory
to the Trustee (which shall include the statements set forth in Section 10.05
hereof) stating that, in the opinion of the signers, all conditions precedent
and covenants, if any, provided for in this Indenture relating to the proposed
action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably satisfactory to
the Trustee (which shall include the statements set forth in Section 10.05
hereof) stating that, in the opinion of such counsel, all such conditions
precedent and covenants have been satisfied.
Section 10.05 Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA (S) 314(a)(4)) shall comply with the provisions of TIA (S)
314(e) and shall include:
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(a) a statement that the Person making such certificate or opinion has read
such covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she has made
such examination or investigation as is necessary to enable him or her to
express an informed opinion as to whether or not such covenant or condition has
been satisfied; and
(d) a statement as to whether or not, in the opinion of such Person, such
condition or covenant has been satisfied.
Section 10.06 Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
Section 10.07 No Personal Liability of Directors, Officers, Employees and
Stockholders.
No past, present or future director, officer, employee, incorporator or
stockholder of the Company, as such, shall have any liability for any
obligations of the Company under the Notes, this Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes.
Section 10.08 Governing Law.
THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO
CONSTRUE THIS INDENTURE AND THE NOTES WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
Section 10.09 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret any other indenture, loan or
debt agreement of the Company or its Subsidiaries or of any other Person. Any
such indenture, loan or debt agreement may not be used to interpret this
Indenture.
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Section 10.10 Successors.
All agreements of the Company in this Indenture and the Notes shall bind
its successors. All agreements of the Trustee in this Indenture shall bind its
successors.
Section 10.11 Severability.
In case any provision in this Indenture or in the Notes shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
Section 10.12 Counterpart Originals.
The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement.
Section 10.13 Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and Headings of the Articles
and Sections of this Indenture have been inserted for convenience of reference
only, are not to be considered a part of this Indenture and shall in no way
modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
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SIGNATURES
Dated as of March 11, 1998
covad communications company
By:/s/ Dhruv Khanna
----------------------
Name: Dhruv Khanna
Title: V.P., General Counsel
Attest:
/s/ Timothy P. Laehy
- ------------------------
Name: Timothy P. Laehy
Title: Chief Financial Offier, Treasurer
and Vice President, Finance
THE BANK OF NEW YORK
By: /s/ Mary Beth Lewicki
---------------------------
Name: Mary Beth Lewicki
Title: Assistant Vice President
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EXHIBIT A-1
(Face of Note)
================================================================================
"FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT;
NOT LATER THAN 10 DAYS AFTER MARCH 11, 1998, INFORMATION TO INCLUDE THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, AND YIELD TO MATURITY OF
THE SECURITY WILL BE MADE AVAILABLE TO HOLDERS UPON REQUEST TO TIMOTHY LAEHY,
CHIEF FINANCIAL OFFICER, COVAD COMMUNICATIONS GROUP, INC., (408) 490-4550.
(i) CUSIP/CINS _________________________________
13 1/2 % [Series A] [Series B] Senior Discount Notes due 2008
No. _______ $_________________/1/
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to_______________________________________________
or registered assigns,
the principal sum of_____________________________________________
Dollars on March 15, 2008.
Interest Payment Dates: March 15 and September 15
Record Dates: March 1 and September 1
_____________________
/1/ To be initially $______ aggregate principal amount at maturity, subject to
increase and decrease in accordance with the Schedule of Exchanges of Interest
in the Global Note attached hereto and, in combination with Global Note
number[s] _______ [and _______] identified by CUSIP No. ____, and Regulations S
Temporary Global Note number ________ identified by CUSIP No. _____, to equal
$_____ in aggregate principal amount at maturity.
A1-1
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed manually
or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
By:____________________________
Name:
Title:
By:____________________________
Name:
Title:
Dated: March __, 1998
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
The Bank of New York,
as Trustee
By:____________________________
Authorized Signatory
================================================================================
A1-2
<PAGE>
(Back of Note)
13 1/2 % [Series A] [Series B] Senior Discount Notes due 2008
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER, SELL,
PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY, (2) PURSUANT
TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN
A1-3
<PAGE>
RULE 144A, (4) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904
UNDER THE SECURITIES ACT, (5) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN
THE MEANING OF SUBPARAGRAPH (A),(1), (2), (3) OR (7) OF RULE 501 UNDER THE
SECURITIES ACT IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, OR (6) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (AND BASED ON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES TO
APPLICABLE JURISDICTION, AND (B) THAT IT WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSIST OF $1,000 PRINCIPAL AMOUNT AT MATURITY
OF THE NOTES AND ONE WARRANT (EACH, A "WARRANT") INITIALLY ENTITLING THE HOLDER
THEREOF TO PURCHASE 6.4792 SHARES, PAR VALUE $0.001 PER SHARE, OF THE COMPANY.
THE NOTES AND WARRANTS WILL BE AUTOMATICALLY SEPARATED UPON THE EARLIEST TO
OCCUR OF (i) 90 DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS THE INITIAL
PURCHASERS MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, (iii) IN THE EVENT OF A
CHANGE OF CONTROL (AS DEFINED IN THE INDENTURE), THE DATE THE COMPANY MAILS
NOTICE THEREOF TO HOLDERS OF NOTES, (iv) THE DATE ON WHICH THE EXCHANGE OFFER
(AS DEFINED IN THE INDENTURE) IS CONSUMMATED AND (v) THE DATE ON WHICH THE SHELF
REGISTRATION STATEMENT (AS DEFINED IN THE INDENTURE) IS DECLARED EFFECTIVE. THE
NOTES EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR SEPARATED FROM,
BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER, WITH THE WARRANTS UNTIL THE
SEPARATION DATE.
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. Interest. Covad Communications Group, Inc., a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at 13 1/2% per annum. Interest will not accrue until March 15, 2003. Thereafter,
the Company shall pay interest and additional Interest, if any, semi-annually on
March 15 and September 15, commencing on September 15, 2003, or if any such day
is not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). 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; provided that if there is no existing Default in the payment of
interest, and if this Note is authenticated between a record date referred to on
the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such next succeeding Interest Payment Date; provided, further, that
the first Interest Payment Date shall be September 15, 2003. The Company shall
pay interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue principal and
A1-4
<PAGE>
premium, if any, from time to time on demand at a rate that is 1% per annum in
excess of the rate then in effect; it shall pay interest (including post-
petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. The Accreted
Value will accrete between the date hereof and March 15, 2003, on a semi-annual
bond equivalent basis using a 360-day year comprised of twelve 30-day months.
All references in this Note and in the Indenture to "interest" shall be deemed
to include any Additional Interest that may become payable thereon according to
the provisions of the Indenture.
2. Method of Payment. The Company will pay interest on the Notes (except
defaulted interest) to the Persons who are registered Holders of Notes at the
close of business on March 1 or September 1 preceding the Interest Payment Date,
even if such Notes are cancelled after such record date and on or before such
Interest Payment Date, except as provided in Section 2.12 of the Indenture with
respect to defaulted interest. The Notes will be payable as to principal,
premium and interest at the office or agency of the Company maintained for such
purpose within or without 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 at
their addresses set forth in the register of Holders, and provided that payment
by wire transfer of immediately available funds will be required with respect to
principal of and interest, premium on, all Global Notes and all other Notes the
Holders of which shall have provided wire transfer instructions to the Company
or the Paying Agent. Such payment shall be in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.
3. Paying Agent and Registrar. Initially, The Bank of New York, the
Trustee under the Indenture, will act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any Holder.
The Company or any of its Subsidiaries may act in any such capacity.
4. Indenture. The Company issued the Notes under an Indenture dated as
of March 15, 1998 ("Indenture") between the Company and the Trustee. The terms
of the 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 (15 U.S.
Code (S)(S) 77aaa-77bbbb). The Notes are subject to all such terms, and Holders
are referred to the Indenture and such Act for a statement of such terms. To
the extent any provision of this Note conflicts with the express provisions of
the Indenture, the provisions of the Indenture shall govern and be controlling.
The Notes are obligations of the Company limited to $185,000,000 in aggregate
initial Accreted Value.
5. Optional Redemption.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to March 15, 2003.
Thereafter, the Company shall have the option to redeem the Notes, in whole or
in part, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon, if any,
A1-5
<PAGE>
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...................................... 106.750%
2004...................................... 104.500%
2005...................................... 102.250%
2006 and thereafter....................... 100.000%
</TABLE>
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time 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 issued on the Issue Date under the Indenture at a redemption price of
113.5 % of the Accreted Value, plus with accrued and unpaid interest, if any, to
the date of redemption; provided that at least $87.8 million of Accreted Value
of 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 (as
defined in the Equity Commitment) shall constitute an investment or any part of
any investment by a Strategic Equity Investor.
6. Mandatory Redemption.
Except as set forth in paragraph 7 below, the Company shall not be required
to make mandatory redemption payments with respect to the Notes.
7. Repurchase at Option of Holder.
(a) If there is a Change of Control, the Company shall be required to
make an offer (a "Change of Control Offer") to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase
price equal to 101% of the Accreted Value thereof on the date of purchase (if
prior to March 15, 2003) or 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (if on or after March 15,
2003) (in either case, the "Change of Control Payment"). Within 10 days
following any Change of Control, the Company shall mail a notice to each Holder
setting forth the procedures governing the Change of Control Offer as required
by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $5 million, the Company shall commence an offer to all Holders
of Notes (as "Asset Sale Offer") pursuant to Section 3.09 of the Indenture to
purchase the maximum principal amount of Notes that may be
A1-6
<PAGE>
purchased out of the Excess Proceeds at an offer price in cash in an amount
equal to 100% of the Accreted Value thereof on the date fixed for the closing of
such offer (if prior to March 15, 2003) or 100% of the principal amount thereof
plus accrued and unpaid interest and Additional Interest thereon, if any, to the
date fixed for the closing of such offer (if on or after March 15, 2003), in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less
than the Excess Proceeds, the Company (or such Restricted Subsidiary) may use
such deficiency for general corporate purposes. If the aggregate Accreted Value
or principal amount, as the case may be, of Notes surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be
purchased on a pro rata basis. Holders of Notes that are the subject of an offer
to purchase will receive an Asset Sale Offer from the Company prior to any
related purchase date and may elect to have such Notes purchased by completing
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Notes.
8. Notice of Redemption. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each Holder whose
Notes are to be redeemed at its registered address. Notes in denominations
larger than $1,000 may be redeemed in part but only in whole multiples of
$1,000, unless all of the Notes held by a Holder are to be redeemed. On and
after the redemption date interest ceases to accrue on Notes or portions thereof
called for redemption.
9. Denominations, Transfer, Exchange. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000.
The transfer of Notes may be registered and Notes may be exchanged as provided
in 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 need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a period of 15 days
before a selection of Notes to be redeemed or during the period between a record
date and the corresponding Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a Note may be treated
as its owner for all purposes.
11. Amendment, Supplement and Waiver. Subject to certain exceptions, 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 then outstanding Notes
voting as a single class, and any existing 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 principal amount of the then outstanding Notes voting
as a single class. Without the consent of any Holder of a Note, the Indenture or
the Notes may be amended or supplemented 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 the Notes in 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
A1-7
<PAGE>
to the Holders of the Notes or that does not adversely affect the legal rights
under the Indenture of any such Holder, to comply with the requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act, otherwise comply with applicable law.
12. Defaults and Remedies. Events of Default include: (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 principal of or premium, if any,
on the Notes when the same becomes due and payable at maturity, upon redemption
(including in connection with an offer to purchase) or otherwise, (iii) failure
by the Company or any of its Restricted Subsidiaries to comply with Section
4.07, 4.09, 4.10 or 5.01 of the Indenture; (iv) failure by the Company or any of
its Restricted Subsidiaries for 30 days after notice to the Company by the
Trustee or the Holders of at least 25% in principal amount of the Notes then
outstanding voting as a single class to comply with certain other agreements in
the Indenture or the Notes; (v) default under certain other agreements relating
to Debt of the Company which default is caused by a failure to pay principal of
or premium, if any, or interest on such Debt prior to the grace period provided
in such Debt on the date of such default (a "Payment Default") or results in the
acceleration of such Debt prior to its express maturity and, in each case, the
principal amount of any 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) certain final judgments for the payment of money that remain
undischarged 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 Financial Investors of their respective obligations
under the Equity Commitment; (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 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 bankruptcy or
insolvency, all outstanding Notes will become due and payable without further
action or notice. Holders 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. The
Holders of a majority in aggregate principal amount 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.
13. Trustee Dealings with Company. The Trustee, in its individual or any
other capacity, may make loans to, accept deposits from, and perform services
for the Company or its Affiliates, and may otherwise deal with the Company or
its Affiliates, as if it were not the Trustee.
A1-8
<PAGE>
14. No Recourse Against Others. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not 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 by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
15. Authentication. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
16. Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. Additional Rights of Holders of Restricted Global Notes and Restricted
Definitive Notes. In addition to the rights provided to Holders of Notes under
the Indenture, Holders of Restricted Global Notes and Restricted Definitive
Notes shall have all the rights set forth in the Registration Rights Agreement
dated as of March 15, 1998, between the Company and the parties named on the
signature pages thereof (the "Registration Rights Agreement").
18. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
A1-9
<PAGE>
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
Attention: Chief Executive Officer
A1-10
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
________________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint_________________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
________________________________________________________________________________
Date:________________
Your Signature:_____________________________
(Sign exactly as your name appears on the
face of this Note)
SIGNATURE GUARANTEE.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A1-11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.10 or 4.15 of the Indenture, check the box below:
[_] Section 4.10 [_] Section 4.15
If you want to elect to have only part of the Note purchased by the Company
pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you
elect to have purchased: $________
Date:________________ Your Signature:_________________________
(Sign exactly as your
name appears on the Note)
Tax Identification No:__________________
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A1-12
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE
The following exchanges of a part of this Global Note for an interest in
another Global Note or for a Definitive Note, or exchanges of a part of another
Global Note or Definitive Note for an interest in this Global Note, have been
made:
<TABLE>
<CAPTION>
===================================================================================================
PRINCIPAL AMOUNT
AMOUNT OF AMOUNT OF INCREASE AT MATURITY OF
DECREASE IN IN PRINCIPAL THIS GLOBAL NOTE SIGNATURE OF
PRINCIPAL AMOUNT AMOUNT FOLLOWING SUCH AUTHORIZED OFFICER
AT MATURITY OF AT MATURITY OF DECREASE (OR OF TRUSTEE OR NOTE
DATE OF EXCHANGE THIS GLOBAL NOTE THIS GLOBAL NOTE INCREASE) CUSTODIAN
- ---------------- ---------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
A1-13
<PAGE>
EXHIBIT A-2
(Face of Regulation S Temporary Global Note)
================================================================================
"FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT;
NOT LATER THAN 10 DAYS AFTER MARCH 11, 1998, INFORMATION TO INCLUDE THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, AND YIELD TO MATURITY OF
THE SECURITY WILL BE MADE AVAILABLE TO HOLDERS UPON REQUEST TO TIMOTHY LAEHY,
CHIEF FINANCIAL OFFICER, COVAD COMMUNICATIONS GROUP, INC., (408) 490-4550.
(i) CUSIP/CINS _________________________________
13 1/2 % [Series A] [Series B] Senior Discount Notes due 2008
No.________________ $_________________/2/
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to______________________________________________________________
or registered assigns,
the principal sum of_______________________________________________________
Dollars on March 15, 2008.
Interest Payment Dates: March 15 and September 15
Record Dates: March 1 and September 1
______________________
/2/ To be initially $______ aggregate principal amount at maturity, subject to
increase and decrease in accordance with the Schedule of Exchanges of Interest
in the Global Note attached hereto and, in combination with Global Note
number[s] _______ [and _______] identified by CUSIP No. ____, and Regulations S
Temporary Global Note number ________ identified by CUSIP No. _____, to equal
$_____ in aggregate principal amount at maturity.
A2-1
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed manually
or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
By:_____________________________________
Name:
Title:
By:_____________________________________
Name:
Title:
Dated: March __, 1998
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
The Bank of New York,
as Trustee
By:______________________________
Authorized Signatory
================================================================================
A2-2
<PAGE>
(Back of Regulation S Temporary Global Note)
13 1/2 % [Series A] [Series B] Senior Discount Notes due 2008
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE
AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE
BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED
TO RECEIVE PAYMENT OF INTEREST HEREON.
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED
TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
A2-3
<PAGE>
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER, SELL,
PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY, (2) PURSUANT
TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A, (4) PURSUANT TO OFFERS AND SALES
TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (5) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A),(1),
(2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT IN A TRANSACTION MEETING
THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, OR (6) PURSUANT TO ANY
OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT (AND BASED ON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS),
SUBJECT IN EACH OF THE FOREGOING CASES TO APPLICABLE JURISDICTION, AND (B) THAT
IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM
IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A)
ABOVE."
THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSIST OF $1,000 PRINCIPAL AMOUNT AT MATURITY
OF THE NOTES AND ONE WARRANT (EACH, A "WARRANT") INITIALLY ENTITLING THE HOLDER
THEREOF TO PURCHASE 6.4792 SHARES, PAR VALUE $0.001 PER SHARE, OF THE COMPANY.
THE NOTES AND WARRANTS WILL BE AUTO MATICALLY SEPARATED UPON THE EARLIEST TO
OCCUR OF (i) 90 DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS THE INITIAL
PURCHASERS MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, (iii) IN THE EVENT OF A
CHANGE OF CONTROL (AS DEFINED IN THE INDENTURE), THE DATE THE COMPANY MAILS
NOTICE THEREOF TO HOLDERS OF NOTES, (iv) THE DATE ON WHICH THE EXCHANGE OFFER
(AS DEFINED IN THE INDENTURE) IS CONSUMMATED AND (v) THE DATE ON WHICH THE SHELF
REGISTRATION STATEMENT (AS DEFINED IN THE INDENTURE) IS DECLARED EFFECTIVE.
THE NOTES EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR SEPARATED
FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER, WITH THE WARRANTS UNTIL
THE SEPARATION DATE.
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. Interest. Covad Communications Group, Inc., a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at 13 1/2 % per annum. Interest will not accrue until March 15, 2003.
Thereafter, the Company shall pay interest and
A2-4
<PAGE>
additional Interest, if any, semi-annually on March 15 and September 15,
commencing on September 15, 2003, and Additional Interest , or if any such day
is not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). 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; provided that if there is no existing Default in the payment of
interest, and if this Note is authenticated between a record date referred to on
the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such next succeeding Interest Payment Date; provided, further, that
the first Interest Payment Date shall be September 15, 2003. The Company shall
pay interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue principal and premium, if any, from time to time on
demand at a rate that is 1% per annum in excess of the rate then in effect; it
shall pay interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest (without regard to any
applicable grace periods) from time to time on demand at the same rate to the
extent lawful. Interest will be computed on the basis of a 360-day year of
twelve 30-day months. The Accreted Value will accrete between the date hereof
and March 15, 2003, on a semi-annual bond equivalent basis using a 360-day year
comprised of twelve 30-day months. All references in this Note and in the
Indenture to "interest" shall be deemed to include any Additional Interest that
may become payable thereon according to the provisions of the Indenture.
Until this Regulation S Temporary Global Note is exchanged for one or more
Regulation S Permanent Global Notes, the Holder hereof shall not be entitled to
receive payments of interest hereon; until so exchanged in full, this Regulation
S Temporary Global Note shall in all other respects be entitled to the same
benefits as other Senior Subordinated Notes under the Indenture.
2. Method of Payment. The Company will pay interest on the Notes (except
defaulted interest) to the Persons who are registered Holders of Notes at the
close of business on March 1 or September 1 preceding the Interest Payment Date,
even if such Notes are cancelled after such record date and on or before such
Interest Payment Date, except as provided in Section 2.12 of the Indenture with
respect to defaulted interest. The Notes will be payable as to principal,
premium and interest at the office or agency of the Company maintained for such
purpose within or without 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 at
their addresses set forth in the register of Holders, and provided that payment
by wire transfer of immediately available funds will be required with respect to
principal of and interest, premium on, all Global Notes and all other Notes the
Holders of which shall have provided wire transfer instructions to the Company
or the Paying Agent. Such payment shall be in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.
3. Paying Agent and Registrar. Initially, The Bank of New York, the
Trustee under the Indenture, will act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any Holder.
The Company or any of its Subsidiaries may act in any such capacity.
A2-5
<PAGE>
4. Indenture. The Company issued the Notes under an Indenture dated as
of March 15, 1998 ("Indenture") between the Company and the Trustee. The terms
of the 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 (15 U.S.
Code (S)(S) 77aaa-77bbbb). The Notes are subject to all such terms, and Holders
are referred to the Indenture and such Act for a statement of such terms. To
the extent any provision of this Note conflicts with the express provisions of
the Indenture, the provisions of the Indenture shall govern and be controlling.
The Notes are obligations of the Company limited to $185,000,000 in aggregate
initial Accreted Value.
5. Optional Redemption.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to March 15, 2003.
Thereafter, the Company shall have the option to redeem the Notes, in whole or
in part, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon, if any, 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............................... 106.750%
2004............................... 104.500%
2005............................... 102.250%
2006 and thereafter................ 100.000%
</TABLE>
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time 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
a 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 issued on the Issue Date under the Indenture at a redemption price of
113.5% of the Accreted Value, plus with accrued and unpaid interest, if any, to
the date of redemption; provided that at least $ 87.8 million of Accreted Value
of 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 (as
defined in the Equity Commitment) shall constitute an investment or any part of
any investment by a Strategic Equity Investor.
6. Mandatory Redemption.
Except as set forth in paragraph 7 below, the Company shall not be required
to make mandatory redemption payments with respect to the Notes.
A2-6
<PAGE>
7. Repurchase at Option of Holder.
(a) If there is a Change of Control, the Company shall be required to
make an offer (a "Change of Control Offer") to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase
price equal to 101% of the Accreted Value thereof on the date of purchase (if
prior to March 15, 2003) or 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (if on or after March 15,
2003) (in either case, the "Change of Control Payment"). Within 10 days
following any Change of Control, the Company shall mail a notice to each Holder
setting forth the procedures governing the Change of Control Offer as required
by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $5 million, the Company shall commence an offer to all Holders
of Notes (as "Asset Sale Offer") pursuant to Section 3.09 of the Indenture to
purchase 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
Accreted Value thereof on the date fixed for the closing of such offer (if prior
to March 15, 2003) or 100% of the principal amount thereof plus accrued and
unpaid interest and Additional Interest thereon, if any, to the date fixed for
the closing of such offer (if on or after March 15, 2003), in accordance with
the procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company (or such Restricted Subsidiary) may use such deficiency
for general corporate purposes. If the aggregate Accreted Value or principal
amount, as the case may be, of Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on
a pro rata basis. Holders of Notes that are the subject of an offer to purchase
will receive an Asset Sale Offer from the Company prior to any related purchase
date and may elect to have such Notes purchased by completing the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Notes.
8. Notice of Redemption. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each Holder whose
Notes are to be redeemed at its registered address. Notes in denominations
larger than $1,000 may be redeemed in part but only in whole multiples of
$1,000, unless all of the Notes held by a Holder are to be redeemed. On and
after the redemption date interest ceases to accrue on Notes or portions thereof
called for redemption.
9. Denominations, Transfer, Exchange. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000.
The transfer of Notes may be registered and Notes may be exchanged as provided
in 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 need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a
A2-7
<PAGE>
period of 15 days before a selection of Notes to be redeemed or during the
period between a record date and the corresponding Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a Note may be treated
as its owner for all purposes.
11. Amendment, Supplement and Waiver. Subject to certain exceptions, 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 then outstanding Notes
voting as a single class, and any existing 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 principal amount of the then outstanding Notes voting
as a single class. Without the consent of any Holder of a Note, the Indenture or
the Notes may be amended or supplemented 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 the Notes in 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 the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act, otherwise
comply with applicable law.
12. Defaults and Remedies. Events of Default include: (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 principal of or premium, if any,
on the Notes when the same becomes due and payable at maturity, upon redemption
(including in connection with an offer to purchase) or otherwise, (iii) failure
by the Company or any of its Restricted Subsidiaries to comply with Section
4.07, 4.09, 4.10 or 5.01 of the Indenture; (iv) failure by the Company or any of
its Restricted Subsidiaries for 30 days after notice to the Company by the
Trustee or the Holders of at least 25% in principal amount of the Notes then
outstanding voting as a single class to comply with certain other agreements in
the Indenture or the Notes; (v) default under certain other agreements relating
to Debt of the Company which default is caused by a failure to pay principal of
or premium, if any, or interest on such Debt prior to the grace period provided
in such Debt on the date of such default (a "Payment Default") or results in the
acceleration of such Debt prior to its express maturity and, in each case, the
principal amount of any 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) certain final judgments for the payment of money that remain
undischarged 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 Financial Investors of their respective obligations
under the Equity Commitment; (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 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 bankruptcy or
insolvency, all outstanding
A2-8
<PAGE>
Notes will become due and payable without further action or notice. Holders 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. The Holders of a majority in aggregate
principal amount 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.
13. Trustee Dealings with Company. The Trustee, in its individual or any
other capacity, may make loans to, accept deposits from, and perform services
for the Company or its Affiliates, and may otherwise deal with the Company or
its Affiliates, as if it were not the Trustee.
14. No Recourse Against Others. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not 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 by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
15. Authentication. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
16. Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. Additional Rights of Holders of Restricted Global Notes and Restricted
Definitive Notes. In addition to the rights provided to Holders of Notes under
the Indenture, Holders of Restricted Global Notes and Restricted Definitive
Notes shall have all the rights set forth in the Registration Rights Agreement
dated as of March 15, 1998, between the Company and the parties named on the
signature pages thereof (the "Registration Rights Agreement").
18. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
Attention: Chief Executive Officer
A2-9
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
________________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint_________________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
________________________________________________________________________________
Date:__________________
Your Signature:_____________________________
(Sign exactly as your name appears on the face of this Note)
SIGNATURE GUARANTEE.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A2-10
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.10 or 4.15 of the Indenture, check the box below:
[_] Section 4.10 [_] Section 4.15
If you want to elect to have only part of the Note purchased by the Company
pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you
elect to have purchased: $________
Date:________________ Your Signature:_______________
(Sign exactly as your name appears on the Note)
Tax Identification No:.________
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A2-11
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE
The following exchanges of a part of this Global Note for an interest in
another Global Note or for a Definitive Note, or exchanges of a part of another
Global Note or Definitive Note for an interest in this Global Note, have been
made:
<TABLE>
<CAPTION>
=================================================================================================
PRINCIPAL AMOUNT
AMOUNT OF AMOUNT OF INCREASE AT MATURITY OF
DECREASE IN IN PRINCIPAL THIS GLOBAL NOTE SIGNATURE OF
PRINCIPAL AMOUNT AMOUNT FOLLOWING SUCH AUTHORIZED OFFICER
AT MATURITY OF AT MATURITY DECREASE (OR OF TRUSTEE OR NOTE
DATE OF EXCHANGE THIS GLOBAL NOTE THIS GLOBAL NOTE INCREASE) CUSTODIAN
- ---------------- ---------------- ------------------ ---------------- ------------------
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
</TABLE>
A2-12
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: 13 1/2% Senior Discount Notes due 2008 of
Covad Communications Group, Inc.
--------------------------------
Reference is hereby made to the Indenture, dated as of March 15, 1998 (the
"Indenture"), between Covad Communications Group, Inc., as issuer (the
---------
"Company"), and The Bank of New York, as trustee. Capitalized terms used but
-------
not defined herein shall have the meanings given to them in the Indenture.
______________, (the "Transferor") owns and proposes to transfer the
----------
Note[s] or interest in such Note[s] specified in Annex A hereto, in the
principal amount of $___________ in such Note[s] or interests (the "Transfer"),
--------
to __________ (the "Transferee"), as further specified in Annex A hereto. In
----------
connection with the Transfer, the Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. [_] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE
----------------------------------------------------------------------
144A GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO RULE 144A. The Transfer is
- -----------------------------------------------------------
being effected pursuant to and in accordance with Rule 144A under the United
States Securities Act of 1933, as amended (the "Securities Act"), and,
--------------
accordingly, the Transferor hereby further certifies that the beneficial
interest or Definitive Note is being transferred to a Person that the Transferor
reasonably believed and believes is purchasing the beneficial interest or
Definitive Note for its own account, or for one or more accounts with respect to
which such Person exercises sole investment discretion, and such Person and each
such account is a "qualified institutional buyer" within the meaning of Rule
144A in a transaction meeting the requirements of Rule 144A and such Transfer is
in compliance with any applicable blue sky securities laws of any state of the
United States. Upon consummation of the proposed Transfer in accordance with
the terms of the Indenture, the transferred beneficial interest or Definitive
Note will be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the 144A Global Note and/or the Definitive Note and
in the Indenture and the Securities Act.
B-1
<PAGE>
2. [_] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE
----------------------------------------------------------------------
TEMPORARY REGULATION S GLOBAL NOTE, THE REGULATION S GLOBAL NOTE OR A DEFINITIVE
- --------------------------------------------------------------------------------
NOTE PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and
- -----------------------------
in accordance with Rule 903 or Rule 904 under the Securities Act and,
accordingly, the Transferor hereby further certifies that (i) the Transfer is
not being made to a person in the United States and (x) at the time the buy
order was originated, the Transferee was outside the United States or such
Transferor and any Person acting on its behalf reasonably believed and believes
that the Transferee was outside the United States or (y) the transaction was
executed in, on or through the facilities of a designated offshore securities
market and neither such Transferor nor any Person acting on its behalf knows
that the transaction was prearranged with a buyer in the United States, (ii) no
directed selling efforts have been made in contravention of the requirements of
Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the
transaction is not part of a plan or scheme to evade the registration
requirements of the Securities Act and (iv) if the proposed transfer is being
made prior to the expiration of the Restricted Period, the transfer is not being
made to a U.S. Person or for the account or benefit of a U.S. Person (other than
an Initial Purchaser). Upon consummation of the proposed transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Definitive Note will be subject to the restrictions on Transfer enumerated in
the Private Placement Legend printed on the Regulation S Global Note, the
Temporary Regulation S Global Note and/or the Definitive Note and in the
Indenture and the Securities Act.
3. [_] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL
-------------------------------------------------------------------
INTEREST IN THE IAI GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO ANY PROVISION
- ------------------------------------------------------------------------------
OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The Transfer is
- ----------------------------------------------------------
being effected in compliance with the transfer restrictions applicable to
beneficial interests in Restricted Global Notes and Restricted Definitive Notes
and pursuant to and in accordance with the Securities Act and any applicable
blue sky securities laws of any state of the United States, and accordingly the
Transferor hereby further certifies that (check one):
(a) [_] such Transfer is being effected pursuant to and in accordance with
Rule 144 under the Securities Act;
or
(b) [_] such Transfer is being effected to the Company or a subsidiary
thereof;
or
(c) [_] such Transfer is being effected pursuant to an effective
registration statement under the Securities Act and in compliance with the
prospectus delivery requirements of the Securities Act;
or
B-2
<PAGE>
(d) [_] such Transfer is being effected to an Institutional Accredited
Investor and pursuant to an exemption from the registration requirements of the
Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor
hereby further certifies that it has not engaged in any general solicitation
within the meaning of Regulation D under the Securities Act and the Transfer
complies with the transfer restrictions applicable to beneficial interests in a
Restricted Global Note or Restricted Definitive Notes and the requirements of
the exemption claimed, which certification is supported by (1) a certificate
executed by the Transferee in the form of Exhibit D to the Indenture and (2) an
Opinion of Counsel provided by the Transferor or the Transferee (a copy of which
the Transferor has attached to this certification), to the effect that such
Transfer is in compliance with the Securities Act. Upon consummation of the
proposed transfer in accordance with the terms of the Indenture, the transferred
beneficial interest or Definitive Note will be subject to the restrictions on
transfer enumerated in the Private Placement Legend printed on the IAI Global
Note and/or the Definitive Notes and in the Indenture and the Securities Act.
4. [_] Check if Transferee will take delivery of a beneficial interest in an
Unrestricted Global Note or of an Unrestricted Definitive Note.
(a) [_] CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The Transfer is
being effected pursuant to and in accordance with Rule 144 under the Securities
Act and in compliance with the transfer restrictions contained in the Indenture
and any applicable blue sky securities laws of any state of the United States
and (ii) the restrictions on transfer contained in the Indenture and the Private
Placement Legend are not required in order to maintain compliance with the
Securities Act. Upon consummation of the proposed Transfer in accordance with
the terms of the Indenture, the transferred beneficial interest or Definitive
Note will no longer be subject to the restrictions on transfer enumerated in the
Private Placement Legend printed on the Restricted Global Notes, on Restricted
Definitive Notes and in the Indenture.
(b) [_] CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The Transfer is
being effected pursuant to and in accordance with Rule 903 or Rule 904 under the
Securities Act and in compliance with the transfer restrictions contained in the
Indenture and any applicable blue sky securities laws of any state of the United
States and (ii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act. Upon consummation of the proposed Transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Definitive Note will no longer be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes, on Restricted Definitive Notes and in the Indenture.
(c) [_] CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The Transfer
is being effected pursuant to and in compliance with an exemption from the
registration requirements of the Securities Act other than Rule 144, Rule 903 or
Rule 904 and in compliance with the transfer restrictions contained in the
Indenture and any applicable blue sky securities laws of any State of the United
States and (ii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act. Upon
B-3
<PAGE>
consummation of the proposed Transfer in accordance with the terms of the
Indenture, the transferred beneficial interest or Definitive Note will not be
subject to the restrictions on transfer enumerated in the Private Placement
Legend printed on the Restricted Global Notes or Restricted Definitive Notes and
in the Indenture.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company.
__________________________________
[Insert Name of Transferor]
By:________________________________
Name:
Title:
Dated:___________________
B-4
<PAGE>
ANNEX A TO CERTIFICATE OF TRANSFER
1. The Transferor owns and proposes to transfer the following:
CHECK ONE OF (A) OR (B)
(a) [_] a beneficial interest in the:
(i) [_] 144A Global Note (CUSIP _________), or
(ii) [_] Regulation S Global Note (CUSIP _________), or
(iii) [_] IAI Global Note (CUSIP ________); or
(b) [_] a Restricted Definitive Note.
2. After the Transfer the Transferee will hold:
CHECK ONE
(a) [_] a beneficial interest in the:
(i) [_] 144A Global Note (CUSIP ________), or
(ii) [_] Regulation S Global Note (CUSIP ________), or
(iii) [_] IAI Global Note (CUSIP ________); or
(iv) [_] Unrestricted Global Note (CUSIP ________); or
(b) [_] a Restricted Definitive Note; or
(c) [_] an Unrestricted Definitive Note,
in accordance with the terms of the Indenture.
B-5
<PAGE>
EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: 13 1/2 % Senior Discount Notes due 2008 of
Covad Communications Group, Inc.
--------------------------------
(CUSIP______________)
Reference is hereby made to the Indenture, dated as of March 15, 1998 (the
"Indenture"), between Covad Communications Group, Inc., as issuer (the
---------
"Company"), and The Bank of New York, as trustee. Capitalized terms used but
-------
not defined herein shall have the meanings given to them in the Indenture.
____________, (the "Owner") owns and proposes to exchange the Note[s] or
-----
interest in such Note[s] specified herein, in the principal amount of
$____________ in such Note[s] or interests (the "Exchange"). In connection with
--------
the Exchange, the Owner hereby certifies that:
1. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN A
RESTRICTED GLOBAL NOTE FOR UNRESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS
IN AN UNRESTRICTED GLOBAL NOTE
(a) [_]CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
-------------------------------------------------------------
GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In
- -----------------------------------------------------------------
connection with the Exchange of the Owner's beneficial interest in a Restricted
Global Note for a beneficial interest in an Unrestricted Global Note in an equal
principal amount, the Owner hereby certifies (i) the beneficial interest is
being acquired for the Owner's own account without transfer, (ii) such Exchange
has been effected in compliance with the transfer restrictions applicable to the
Global Notes and pursuant to and in accordance with the United States Securities
Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on
--------------
transfer contained in the Indenture and the Private Placement Legend are not
required in order to maintain compliance with the Securities Act and (iv) the
beneficial interest in an Unrestricted Global Note is being acquired in
compliance with any applicable blue sky securities laws of any state of the
United States.
C-1
<PAGE>
(b) [_]CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
-------------------------------------------------------------
GLOBAL NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Exchange of
- -------------------------------------------
the Owner's beneficial interest in a Restricted Global Note for an Unrestricted
Definitive Note, the Owner hereby certifies (i) the Definitive Note is being
acquired for the Owner's own account without transfer, (ii) such Exchange has
been effected in compliance with the transfer restrictions applicable to the
Restricted Global Notes and pursuant to and in accordance with the Securities
Act, (iii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act and (iv) the Definitive Note is being acquired in compliance
with any applicable blue sky securities laws of any state of the United States.
(c) [_]CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
-------------------------------------------------------
BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the
- --------------------------------------------------
Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an
Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest
is being acquired for the Owner's own account without transfer, (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to Restricted Definitive Notes and pursuant to and in accordance with
the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the beneficial interest is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(d) [_]CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
-------------------------------------------------------
UNRESTRICTED DEFINITIVE NOTE. In connection with the Owner's Exchange of a
- ----------------------------
Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby
certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's
own account without transfer, (ii) such Exchange has been effected in compliance
with the transfer restrictions applicable to Restricted Definitive Notes and
pursuant to and in accordance with the Securities Act, (iii) the restrictions on
transfer contained in the Indenture and the Private Placement Legend are not
required in order to maintain compliance with the Securities Act and (iv) the
Unrestricted Definitive Note is being acquired in compliance with any applicable
blue sky securities laws of any state of the United States.
2. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN
RESTRICTED GLOBAL NOTES FOR RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS
IN RESTRICTED GLOBAL NOTES
(a) [_]CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
-------------------------------------------------------------
GLOBAL NOTE TO RESTRICTED DEFINITIVE NOTE. In connection with the Exchange of
- -----------------------------------------
the Owner's beneficial interest in a Restricted Global Note for a Restricted
Definitive Note with an equal principal amount, the Owner hereby certifies that
the Restricted Definitive Note is being acquired for the Owner's own account
without transfer. Upon consummation of the proposed Exchange in accordance with
the terms of the Indenture, the Restricted Definitive Note issued will continue
to be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the Restricted Definitive Note and in the Indenture
and the Securities Act.
C-2
<PAGE>
(b) [_]CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
-------------------------------------------------------
BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE. In connection with the
- -----------------------------------------------
Exchange of the Owner's Restricted Definitive Note for a beneficial interest in
the [CHECK ONE] "144A Global Note, "Regulation S Global Note, "IAI Global
Note with an equal principal amount, the Owner hereby certifies (i) the
beneficial interest is being acquired for the Owner's own account without
transfer and (ii) such Exchange has been effected in compliance with the
transfer restrictions applicable to the Restricted Global Notes and pursuant to
and in accordance with the Securities Act, and in compliance with any applicable
blue sky securities laws of any state of the United States. Upon consummation
of the proposed Exchange in accordance with the terms of the Indenture, the
beneficial interest issued will be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the relevant Restricted
Global Note and in the Indenture and the Securities Act.
C-3
<PAGE>
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company.
________________________________
[Insert Name of Owner]
By:_____________________________
Name:
Title:
Dated:________________________
C-4
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: 13 1/2 % Senior Discount Notes due 2008 of
Covad Communications Group, Inc.
--------------------------------
Reference is hereby made to the Indenture, dated as of March __, 1998 (the
"Indenture"), between Covad Communications Group, Inc., as issuer (the
---------
"Company"), and The Bank of New York, as trustee. Capitalized terms used but
-------
not defined herein shall have the meanings given to them in the Indenture.
In connection with our proposed purchase of $____________ aggregate
principal amount of:
(a) [_] a beneficial interest in a Global Note, or
(b) [_] a Definitive Note,
we confirm that:
1. We understand that any subsequent transfer of the Notes or any
interest therein is subject to certain restrictions and conditions set forth in
the Indenture and the undersigned agrees to be bound by, and not to resell,
pledge or otherwise transfer the Notes or any interest therein except in
compliance with, such restrictions and conditions and the United States
Securities Act of 1933, as amended (the "Securities Act").
--------------
2. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes and any interest therein
may not be offered or sold except as permitted in the following sentence. We
agree, on our own behalf and on behalf of any accounts for which we are acting
as hereinafter stated, that if we should sell the Notes or any interest therein,
we will do so only (A) to the Company or any subsidiary thereof, (B) in
accordance with Rule 144A under the Securities Act to a "qualified institutional
buyer" (as defined therein), (c) to an institutional
D-1
<PAGE>
"accredited investor" (as defined below) that, prior to such transfer, furnishes
(or has furnished on its behalf by a U.S. broker-dealer) to you and to the
Company a signed letter substantially in the form of this letter and an Opinion
of Counsel in form reasonably acceptable to the Company to the effect that such
transfer is in compliance with the Securities Act, (D) outside the United States
in accordance with Rule 904 of Regulation S under the Securities Act, (E)
pursuant to the provisions of Rule 144(k) under the Securities Act or (F)
pursuant to an effective registration statement under the Securities Act, and we
further agree to provide to any person purchasing the Definitive Note or
beneficial interest in a Global Note from us in a transaction meeting the
requirements of clauses (A) through (E) of this paragraph a notice advising such
purchaser that resales thereof are restricted as stated herein.
3. We understand that, on any proposed resale of the Notes or beneficial
interest therein, we will be required to furnish to you and the Company such
certifications, legal opinions and other information as you and the Company may
reasonably require to confirm that the proposed sale complies with the foregoing
restrictions. We further understand that the Notes purchased by us will bear a
legend to the foregoing effect. We further understand that any subsequent
transfer by us of the Notes or beneficial interest therein acquired by us must
be effected through one of the Placement Agents.
4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Notes, and we and
any accounts for which we are acting are each able to bear the economic risk of
our or its investment.
5. We are acquiring the Notes or beneficial interest therein purchased by
us for our own account or for one or more accounts (each of which is an
institutional "accredited investor") as to each of which we exercise sole
investment discretion.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
________________________________________
[Insert Name of Accredited Investor]
By:_____________________________________
Name:
Title:
Dated:__________________________
D-2
<PAGE>
EXHIBIT E
FORM OF NOTATION OF GUARANTEE
For value received, each Guarantor (which term includes any successor
Person under the Indenture) has, jointly and severally, unconditionally
guaranteed, to the extent set forth in the Indenture and subject to the
provisions in the Indenture dated as of March 11, 1998 (the "Indenture") among
Covad Communications Group, Inc., the Guarantors named below and The Bank of New
York, as trustee (the "Trustee"), (a) the due and punctual payment of the
principal of, premium, if any, and interest (including Additional Interest) on
the Notes (as defined in the Indenture), whether at maturity, by acceleration,
redemption or otherwise, the due and punctual payment of interest on overdue
principal and premium, and, to the extent permitted by law, interest, and the
due and punctual performance of all other obligations of the Company to the
Holders or the Trustee all in accordance with the terms of the Indenture and (b)
in case of any extension of time of payment or renewal of any Notes or any of
such other obligations, that the same will be promptly paid in full when due or
performed in accordance with the terms of the extension or renewal, whether at
stated maturity, by acceleration or otherwise. The obligations of the
Guarantors to the Holders of Notes and to the Trustee pursuant to the Note
Guarantee and the Indenture are expressly set forth in Article 10 of the
Indenture and reference is hereby made to the Indenture for the precise terms of
the Note Guarantee. Each Holder of a Note, by accepting the same, (a) agrees to
and shall be bound by such provisions, (b) authorizes and directs the Trustee,
on behalf of such Holder, to take such action as may be necessary or appropriate
to effectuate the subordination as provided in the Indenture and (c) appoints
the Trustee attorney-in-fact of such Holder for such purpose; provided, however,
that the Indebtedness evidenced by this Note Guarantee shall cease to be so
subordinated and subject in right of payment upon any defeasance of this Note in
accordance with the provisions of the Indenture.
Name of Guarantor(s)
By:___________________________________
Name:
Title:
E-1
<PAGE>
EXHIBIT F
CONFORMED COPY OF EQUITY COMMITMENT
See Exhibit 10.5 of the Registration Statement
F-1
<PAGE>
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
BY AND AMONG
COVAD COMMUNICATIONS GROUP, INC.,
as Issuer
and
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED,
as Initial Purchasers
DATED AS OF MARCH 11, 1998
<PAGE>
This Registration Rights Agreement (this "Agreement") is made and
---------
entered into as of March 11, 1998, by and among Covad Communications Group,
Inc., a Delaware corporation (the "Issuer"), on the one hand, and Bear, Stearns
------
& Co. Inc. and BT Alex. Brown Incorporated (each an "Initial Purchaser" and,
-----------------
collectively, the "Initial Purchasers"), on the other hand, each of whom has
------------------
agreed to purchase a specified number of the Issuer's 13 1/2% Senior Discount
Notes due 2008 (the "Initial Notes") pursuant to the Purchase Agreement (as
-------------
defined below).
This Agreement is made pursuant to the Purchase Agreement, dated as of
March 6, 1998 (the "Purchase Agreement"), by and among the Issuer and the
------------------
Initial Purchasers (i) for the benefit of the Issuer and the Initial Purchasers
and (ii) for the benefit of the holders from time to time of the Notes
(including the Initial Purchasers). In order to induce the Initial Purchasers
to purchase the Initial Notes, the Issuer has agreed to provide the registration
rights set forth in this Agreement. The execution and delivery of this
Agreement is a condition to the obligations of the Initial Purchasers set forth
in Section 8 of the Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Additional Interest: As defined in Section 5 hereto.
-------------------
Additional Interest Payment Date: With respect to the Initial Notes,
--------------------------------
March 15 and September 15, while a Registration Default is outstanding.
Broker-Dealer: Any broker or dealer registered under the Exchange
-------------
Act.
Broker-Dealer Transfer Restricted Securities: Exchange Notes that are
--------------------------------------------
acquired by a Broker-Dealer in the Exchange Offer in exchange for Initial Notes
that such Broker-Dealer acquired for its own account as a result of market
making activities or other trading activities (other than Initial Notes acquired
directly from the Company or any of its affiliates).
Closing Date: The date of this Agreement.
------------
Commission: The Securities and Exchange Commission.
----------
Consummate: An Exchange Offer shall be deemed "Consummated" for
----------
purposes of this Agreement upon the occurrence of (i) the filing and
effectiveness under the Securities Act of the Exchange Offer Registration
Statement relating to the Exchange Notes to be issued in the Exchange Offer,
(ii) the maintenance of such Registration Statement continuously effective and
the keeping of the Exchange Offer open for a period not less than the minimum
period required pursuant to Section 3(b)
<PAGE>
hereof, and (iii) the delivery by the Issuer to the Registrar under the
Indenture of Exchange Notes in the same aggregate principal amount at maturity
as the aggregate principal amount at maturity of Initial Notes that were
tendered by Holders thereof pursuant to the Exchange Offer.
Effectiveness Target Date: As defined in Section 5.
-------------------------
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Exchange Notes: The Series B 13 1/2% Senior Discount Notes due 2008,
--------------
of the same class under the Indenture as the Initial Notes, to be issued to
Holders in exchange for Transfer Restricted Securities pursuant to this
Agreement.
Exchange Offer: The registration by the Issuer under the Securities
--------------
Act of the Exchange Notes pursuant to a Registration Statement pursuant to which
the Issuer offers the Holders of all outstanding Transfer Restricted Securities
the opportunity to exchange all such outstanding Transfer Restricted Securities
held by such Holders for Exchange Notes in an aggregate principal amount at
maturity equal to the aggregate principal amount at maturity of the Transfer
Restricted Securities tendered in such exchange offer by such Holders.
Exchange Offer Registration Statement: The Registration Statement
-------------------------------------
relating to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchasers
--------------
propose to sell the Initial Notes to certain "qualified institutional buyers,"
as such term is defined in Rule 144A under the Securities Act, and to certain
non-U.S. persons outside the United States within the meaning of Regulation S
under the Securities Act.
Holders: As defined in Section 2(b) hereof.
-------
Indemnified Holder: As defined in Section 8(a) hereof.
------------------
Indenture: The Indenture, dated as of March 11, 1998, among the
---------
Issuer and The Bank of New York, as trustee (the "Trustee"), pursuant to which
-------
the Notes are to be issued, as such Indenture is amended or supplemented from
time to time in accordance with the terms thereof.
Initial Purchaser: As defined in the preamble hereto.
-----------------
Initial Notes: The Series A 13 1/2% Senior Discount Notes due 2008,
-------------
of the same class under the Indenture as the Exchange Notes, for so long as such
securities constitute Transfer Restricted Securities.
Initial Placement: The issuance and sale by the Issuer of the Initial
-----------------
Notes to the Initial Purchasers pursuant to the Purchase Agreement.
-2-
<PAGE>
Interest Payment Date: As defined in the Notes.
---------------------
NASD: National Association of Securities Dealers, Inc.
----
Notes: The Initial Notes and the Exchange Notes.
-----
Person: An individual, partnership, corporation, trust or
------
unincorporated organization, or a government or agency or political subdivision
thereof.
Prospectus: The prospectus included in a Registration Statement, as
----------
amended or supplemented by any prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material incorporated by
reference into such Prospectus.
Record Date. With respect to the Initial Notes, for the purposes of
-----------
determining the Holders entitled to payments of Additional Interest, each March
1 and September 1.
Record Holder: With respect to any Additional Interest Payment Date
-------------
relating to the Notes, each Person who is a Holder of Notes on the Record Date
with respect to the Additional Interest Payment Date.
Registration Default: As defined in Section 5 hereof.
--------------------
Registration Statement: Any registration statement of the Issuer
----------------------
relating to (a) an offering of Exchange Notes pursuant to the Exchange Offer or
(b) the registration for resale of Transfer Restricted Securities pursuant to
the Shelf Registration Statement, which is filed pursuant to the provisions of
this Agreement, in each case, including the Prospectus included therein, all
amendments and supplements thereto (including post-effective amendments) and all
exhibits and material incorporated by reference therein.
Restricted Broker-Dealer: Any Broker-Dealer which holds Broker-Dealer
------------------------
Transfer Restricted Securities.
Securities Act: The Securities Act of 1933, as amended.
--------------
Shelf Filing Deadline: As defined in Section 4 hereof.
---------------------
Shelf Registration Statement: As defined in Section 4 hereof.
----------------------------
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb)
---
as in effect on the date of the Indenture.
Transfer Restricted Securities: Each Initial Note, until the earliest
------------------------------
to occur of (a) the date on which such Note is exchanged in the Exchange Offer
and entitled to be resold to the public by the
-3-
<PAGE>
Holder thereof without complying with the prospectus delivery requirements of
the Securities Act, (b) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with a Shelf
Registration Statement and (c) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Securities Act or by a Broker-Dealer
pursuant to the "Plan of Distribution" contemplated by the Exchange Offer
Registration Statement (including delivery of the Prospectus contained therein).
Underwritten Registration or Underwritten Offering: A registration in
------------------------- ---------------------
which securities of the Issuer are sold to an underwriter for reoffering to the
public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities entitled to the
------------------------------
benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. On any date of
-----------------------------------------
determination, any Person in whose name Transfer Restricted Securities are
registered in accordance with the Indenture is deemed to be a holder of Transfer
Restricted Securities (each, a "Holder").
------
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permissible under applicable
law or Commission policy (after the procedures set forth in Section 6(a) below
have been complied with), the Issuer shall (i) cause to be filed with the
Commission no later than 45 days after the Closing Date, a Registration
Statement under the Securities Act relating to the Exchange Notes and the
Exchange Offer, (ii) use its best efforts to cause such Registration Statement
to become effective no later than 120 days after the Closing Date, (iii) in
connection with the foregoing, (A) file all pre-effective amendments to such
Registration Statement as may be necessary in order to cause such Registration
Statement to become effective, (B) if applicable, file a post-effective
amendment to such Registration Statement pursuant to Rule 430A under the
Securities Act and (C) cause all necessary filings in connection with the
registration and qualification of the Exchange Notes to be made under the Blue
Sky laws of such jurisdictions as are necessary to permit Consummation of the
Exchange Offer, and (iv) upon the effectiveness of such Registration Statement,
commence the Exchange Offer. The Exchange Offer shall be on the appropriate
form to permit registration of the Exchange Notes to be offered in exchange for
the Transfer Restricted Securities and sales of Broker-Dealer Transfer
Restricted Securities by Restricted Broker-Dealers as contemplated by Section
3(c) below.
(b) The Issuer shall cause the Exchange Offer Registration Statement to be
effective continuously and shall keep the Exchange Offer open for a period of
not less than the minimum period required under applicable federal and state
securities laws to Consummate the Exchange Offer; provided, however, that in no
event shall such period be less than 30 days after the date notice of the
Exchange Offer is mailed to the Holders. The Issuer shall cause the Exchange
Offer to comply with all applicable federal and state securities laws. No
securities other than the Notes shall be included in the Exchange
-4-
<PAGE>
Offer Registration Statement. The Issuer shall use its best efforts to cause the
Exchange Offer to be Consummated no later than 150 days after the Closing Date.
(c) The Issuer shall indicate in a "Plan of Distribution" section
contained in the Prospectus forming a part of the Exchange Offer Registration
Statement that any Restricted Broker-Dealer who holds Initial Notes that are
Transfer Restricted Securities and that were acquired for its own account as a
result of market-making activities or other trading activities (other than
Transfer Restricted Securities acquired directly from the Issuer or one of its
affiliates), may exchange such Initial Notes pursuant to the Exchange Offer;
however, such Broker-Dealer may be deemed to be an "underwriter" within the
meaning of the Securities Act and must, therefore, deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of the
Exchange Notes received by such Broker-Dealer in the Exchange Offer, which
prospectus delivery requirement may be satisfied by the delivery by such Broker-
Dealer of the Prospectus contained in the Exchange Offer Registration Statement.
Such "Plan of Distribution" section shall also contain all other information
with respect to such resales by Restricted Broker-Dealers that the Commission
may require in order to permit such resales pursuant thereto, but such "Plan of
Distribution" shall not name any such Broker-Dealer or disclose the amount of
Notes held by any such Broker-Dealer except to the extent required by the
Commission as a result of a change in policy after the date of this Agreement.
The Issuer shall use its best efforts to keep the Exchange Offer
Registration Statement continuously effective, supplemented and amended as
required by the provisions of Section 6(c) below to the extent necessary to
ensure that it is available for resales of Broker-Dealer Transfer Restricted
Securities acquired by Restricted Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities, and to ensure
that it conforms with the requirements of this Agreement, the Securities Act and
the policies, rules and regulations of the Commission as announced from time to
time, for a period ending on the earlier of (i) 150 days from the date on which
the Exchange Offer Registration Statement is declared effective and (ii) the
date on which a Restricted Broker-Dealer is no longer required to deliver a
prospectus in connection with market-making or other trading activities.
The Issuer shall provide sufficient copies of the latest version of
such Prospectus to Restricted Broker-Dealers promptly upon request at any time
during such 150-day (or shorter as provided in the foregoing sentence) period in
order to facilitate such resales.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Issuer is not required to file an
------------------
Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy (after the procedures set forth in Section 6(a) below have been complied
with), (ii) for any reason the Exchange Offer is not Consummated within 150 days
after the Closing Date, or (iii) with respect to any Holder of Transfer
Restricted Securities (A) such Holder is prohibited by applicable law or
Commission policy from participating in the Exchange Offer, or (B) such Holder
may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public
-5-
<PAGE>
without delivering a prospectus and that the Prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such Holder, or (C) such Holder is a Broker-Dealer and holds Initial
Notes acquired directly from the Issuer or one of its affiliates, then, upon
such Holder's request, the Issuer shall
(x) cause to be filed a shelf registration statement pursuant to
Rule 415 under the Securities Act, which may be an amendment to the
Exchange Offer Registration Statement (in either event, the "Shelf
-----
Registration Statement") as soon as practicable but in any event on or
----------------------
prior to 30 days after the obligation to file the Shelf Registration
Statement arises (such date being the "Shelf Filing Deadline"), which
---------------------
Shelf Registration Statement shall provide for resales of all Transfer
Restricted Securities the Holders of which shall have provided the
information required pursuant to Section 4(b) hereof; and
(y) use its best efforts to cause such Shelf Registration Statement to
be declared effective by the Commission on or before the 120th day after
such obligation arises.
The Issuer shall use its best efforts to keep such Shelf Registration Statement
continuously effective, supplemented and amended as required by the provisions
of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is
available for resales of Notes by the Holders of Transfer Restricted Securities
entitled to the benefit of this Section 4(a), and to ensure that it conforms
with the requirements of this Agreement, the Securities Act and the policies,
rules and regulations of the Commission as announced from time to time, for a
period of at least two years following the effective date of such Shelf
Registration Statement (or shorter period that will terminate when all the Notes
covered by such Shelf Registration Statement have been sold pursuant to such
Shelf Registration Statement).
(b) Provision by Holders of Certain Information in Connection with the
------------------------------------------------------------------
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
- ----------------------------
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Issuer in writing, within 10 business days after receipt of a request
therefor, such information as the Issuer may reasonably request for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein. Each Holder as to which any Shelf Registration
Statement is being effected agrees to furnish promptly to the Issuer all
information required to be disclosed in order to make the information previously
furnished to the Issuer by such Holder not materially misleading.
SECTION 5. ADDITIONAL INTEREST
If (i) any of the Registration Statements required by this Agreement
is not filed with the Commission on or prior to the date specified for such
filing in this Agreement, (ii) any of such Registration Statements has not been
declared effective by the Commission on or prior to the date specified for such
effectiveness in this Agreement (the "Effectiveness Target Date"), regardless of
-------------------------
the reasonableness of any efforts made by or on behalf of the Issuer to cause
such Registration Statement to become effective), (iii) the Company fails to
consummate the Exchange Offer within 30 days of the
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<PAGE>
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (iv) any Registration Statement required by this Agreement is
filed and declared effective but shall thereafter cease to be effective or fail
to be usable for its intended purpose without being succeeded immediately by a
post-effective amendment to such Registration Statement that cures such failure
and that is itself immediately declared effective (each such event referred to
in clauses (i) through (iv), a "Registration Default"), the Issuer hereby agrees
--------------------
that additional interest ("Additional Interest") shall accrue on the Transfer
-------------------
Restricted Securities 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 (as determined under the provisions of the Indenture) 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 2.00% per annum. Following
the cure of all Registration Defaults relating to any particular Transfer
Restricted Securities, the Issuer shall not be obligated to accrue and pay
Additional Interest on the Transfer Restricted Securities; provided, however,
that, if at any time thereafter a different Registration Default occurs,
Additional Interest shall again become payable on the relevant Transfer
Restricted Securities pursuant to the foregoing provisions.
All obligations of the Issuer set forth in the preceding paragraph
that are outstanding with respect to any Transfer Restricted Security at the
time such security ceases to be a Transfer Restricted Security shall survive
until such time as all such obligations with respect to such Note shall have
been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection with the
-------------------------------------
Exchange Offer, the Issuer shall comply with all of the provisions of Section
6(c) below, shall use its best efforts to effect such exchange to permit the
sale of Broker-Dealer Transfer Restricted Securities being sold in accordance
with the intended method or methods of distribution thereof, and shall comply
with all of the following provisions:
(i) If in the reasonable opinion of counsel to the Issuer there is a
question as to whether the Exchange Offer is permitted by applicable law, the
Issuer hereby agrees to seek a no-action letter or other favorable decision from
the Commission allowing the Issuer to Consummate an Exchange Offer for such
Initial Notes. The Issuer hereby agrees to pursue the issuance of such a
decision to the Commission staff level but shall not be required to take
commercially unreasonable action to effect a change of Commission policy. The
Issuer hereby agrees, however, to (A) participate in telephonic conferences with
the Commission, (B) deliver to the Commission staff an analysis prepared by
counsel to the Issuer setting forth the legal bases, if any, upon which such
counsel has concluded that such an Exchange Offer should be permitted and (C)
diligently pursue a favorable resolution by the Commission staff of such
submission.
(ii) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Securities shall furnish, upon the request of the Issuer, prior to the
Consummation thereof, a written representation to the Issuer (which may be
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<PAGE>
contained in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) to the effect that (A) it is not an affiliate of the
Issuer, (B) it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a distribution
of the Exchange Notes to be issued in the Exchange Offer and (C) it is acquiring
the Exchange Notes in its ordinary course of business. In addition, all such
Holders of Transfer Restricted Securities shall otherwise cooperate in the
Issuer's preparations for the Exchange Offer. Each Holder hereby acknowledges
and agrees that any Broker-Dealer and any such Holder using the Exchange Offer
to participate in a distribution of the securities to be acquired in the
Exchange Offer (1) could not under Commission policy as in effect on the date of
this Agreement rely on the position of the Commission enunciated in Morgan
------
Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings
- --------------------- ----------------------
Corporation (available May 13, 1988), as interpreted in the Commission's letter
- -----------
to Shearman & Sterling dated July 2, 1993, and similar no-action letters (which
may include any no-action letter obtained pursuant to clause (i) above), and (2)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction and that such a
secondary resale transaction should be covered by an effective registration
statement containing the selling security holder information required by Item
507 or 508, as applicable, of Regulation S-K if the resales are of Exchange
Notes obtained by such Holder in exchange for Initial Notes acquired by such
Holder directly from the Issuer.
(b) Shelf Registration Statement. In connection with the Shelf
----------------------------
Registration Statement, the Issuer shall comply with all the provisions of
Section 6(c) below and shall use its best efforts to effect such registration to
permit the sale of the Transfer Restricted Securities being sold in accordance
with the intended method or methods of distribution thereof, and pursuant
thereto the Issuer will as expeditiously as possible prepare and file with the
Commission a Registration Statement relating to the registration on any
appropriate form under the Securities Act, which form shall be available for the
sale of the Transfer Restricted Securities in accordance with the intended
method or methods of distribution thereof.
(c) General Provisions. In connection with any Registration Statement and
------------------
any Prospectus required by this Agreement to permit the sale or resale of
Transfer Restricted Securities (including, without limitation, any Registration
Statement and the related Prospectus required to permit resales of Broker-Dealer
Transfer Restricted Securities by Restricted Broker-Dealers), the Issuer shall:
(i) use its best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements for the
period specified in Section 3 or 4 of this Agreement, as applicable; upon the
occurrence of any event that would cause any such Registration Statement or the
Prospectus contained therein (A) to contain a material misstatement or omission
or (B) not to be effective and usable for resale of Transfer Restricted
Securities during the period required by this Agreement, the Issuer shall file
promptly an appropriate amendment to such Registration Statement, in the case of
clause (A), correcting any such misstatement or omission, and, in the case of
either clause (A) or (B), use its best efforts to cause such amendment to be
declared effective and such Registration Statement and the related Prospectus to
become usable for their intended purpose(s) as soon as practicable thereafter;
-8-
<PAGE>
(ii) prepare and file with the Commission such amendments and post-
effective amendments to the Registration Statement as may be necessary to keep
the Registration Statement effective for the applicable period set forth in
Section 3 or 4 hereof, as applicable, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Registration Statement
have been sold; cause the Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act, and to comply fully with the applicable provisions of
Rules 424 and 430A under the Securities Act in a timely manner; and comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable period
in accordance with the intended method or methods of distribution by the sellers
thereof set forth in such Registration Statement or supplement to the
Prospectus;
(iii) advise the underwriter(s), if any, and selling Holders promptly
and, if requested by such Persons, to confirm such advice in writing, (A) when
the Prospectus or any Prospectus supplement or post-effective amendment has been
filed, and, with respect to any Registration Statement or any post-effective
amendment thereto, when the same has become effective, (B) of any request by the
Commission for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information relating thereto,
(C) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement under the Securities Act or of the
suspension by any state securities commission of the qualification of the
Transfer Restricted Securities for offering or sale in any jurisdiction, or the
initiation of any proceeding for any of the preceding purposes, (D) of the
existence of any fact or the happening of any event that makes any statement of
a material fact made in the Registration Statement, the Prospectus, any
amendment or supplement thereto, or any document incorporated by reference
therein untrue in any material respect, or that requires the making of any
additions to or changes in the Registration Statement or the Prospectus in order
to make the statements therein not misleading in any material respect. If at any
time the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption from qualification of the Transfer Restricted Securities under state
securities or Blue Sky laws, the Issuer shall use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time;
(iv) furnish without charge to each of the Initial Purchasers and
each of the underwriter(s), if any, before filing with the Commission, copies of
any Registration Statement or any Prospectus included therein or any amendments
or supplements to any such Registration Statement or Prospectus, which documents
will be subject to the review of Initial Purchasers which are Holders of
Transfer Restricted Securities covered by such Registration Statement and
underwriter(s), if any, for a period of at least five business days, and the
Issuer will not file any such Registration Statement or Prospectus or any
amendment or supplement to any such Registration Statement or Prospectus
(including all such documents incorporated by reference) to which any such
Initial Purchaser or the underwriter(s), if any, shall reasonably object in
writing within five business days after the receipt thereof (such objection to
be deemed timely made upon confirmation of telecopy transmission within such
period). The objection of any such Initial Purchaser or underwriter, if any,
shall be deemed to be
-9-
<PAGE>
reasonable if such Registration Statement, amendment, Prospectus or supplement,
as applicable, as proposed to be filed, contains a material misstatement or
omission;
(v) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus provide
copies of such document to the Initial Purchasers and to the underwriter(s), if
any, make the Issuer's representatives available for discussion of such document
and other customary due diligence matters, and include such information in such
document prior to the filing thereof as the underwriter(s), if any, reasonably
may request;
(vi) make available upon request at reasonable times for inspection
by the Initial Purchasers, any managing underwriter participating in any
disposition pursuant to such Registration Statement, and any attorney or
accountant retained by any of the underwriter(s), all financial and other
records, pertinent corporate documents of the Issuer and cause the Issuer's
officers, directors and employees to supply all information reasonably requested
by any such underwriter, attorney or accountant in connection with such
Registration Statement subsequent to the filing thereof and prior to its
effectiveness;
(vii) if requested the underwriter(s), if any, promptly incorporate
in any Registration Statement or Prospectus, pursuant to a supplement or post-
effective amendment if necessary, such information as such selling Holders and
underwriter(s), if any, may reasonably request to have included therein,
including, without limitation, information relating to the "Plan of
Distribution" of the Transfer Restricted Securities, information with respect to
the principal amount of Transfer Restricted Securities being sold to such
underwriter(s), the purchase price being paid therefor and any other terms of
the offering of the Transfer Restricted Securities to be sold in such offering;
and make all required filings of such Prospectus supplement or post-effective
amendment as soon as practicable after the Issuer is notified of the matters to
be incorporated in such Prospectus supplement or post-effective amendment;
(viii) cause the Transfer Restricted Securities covered by the
Registration Statement to be rated with the appropriate rating agencies, if so
requested by the Holders of a majority in aggregate principal amount of Notes
covered thereby or the underwriter(s), if any;
(ix) furnish to each selling Holder and each of the underwriter(s),
if any, without charge, at least one copy of the Registration Statement, as
first filed with the Commission, and of each amendment thereto, including
financial statements and schedules, all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by reference);
(ix) deliver to each selling Holder and each of the underwriter(s),
if any, without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such Persons
reasonably may request; the Issuer hereby consents to the use of the Prospectus
and any amendment or supplement thereto by each of the selling Holders and each
of the underwriter(s), if any, in connection with the offering and the sale of
the Transfer Restricted Securities covered by the Prospectus or any amendment or
supplement thereto;
-10-
<PAGE>
(xi) enter into such agreements (including an underwriting agreement),
and make such representations and warranties, and take all such other actions in
connection therewith in order to expedite or facilitate the disposition of the
Transfer Restricted Securities pursuant to any Registration Statement
contemplated by this Agreement, all to such extent as may be requested by any
Initial Purchaser or by any underwriter in connection with any sale or resale
pursuant to any Registration Statement contemplated by this Agreement; and
whether or not an underwriting agreement is entered into and whether or not the
registration is an Underwritten Registration, the Issuer shall:
(A) furnish to each underwriter, if any, in such substance and scope
as they may request and as are customarily made by issuers to underwriters
in primary underwritten offerings, upon the date of the Consummation of the
Exchange Offer and, if applicable, the effectiveness of the Shelf
Registration Statement:
(1) a certificate, dated the date of Consummation of the
Exchange Offer or the date of effectiveness of the Shelf Registration
Statement, as the case may be, signed by (y) the President or any Vice
President and (z) a principal financial or accounting officer of the
Issuer confirming, as of the date thereof, the matters set forth in
paragraphs (c) and (d) of Section 8 of the Purchase Agreement but
applying, mutatis mutandis, to the Shelf Registration Statement in
each place where reference is made to the Offering Memorandum in such
Sections 9(c) and (d), and to the filing date of the Shelf
Registration Statement in each place where reference is made to "the
Closing Date" or "the date hereof" in such Sections 9(c) and (d), and
such other matters as such parties may reasonably request;
(2) an opinion, dated the date of Consummation of the Exchange
Offer or the date of effectiveness of the Shelf Registration
Statement, as the case may be, of counsel for the Issuer covering the
matters set forth in paragraphs (e) through (g) of Section 9 of the
Purchase Agreement and such other matter as such parties may
reasonably request, and in any event including a statement to the
effect that such counsel has participated in conferences with officers
and other representatives of the Issuer, representatives of the
independent public accountants for the Issuer, the Initial Purchasers'
representatives and the Initial Purchasers' counsel in connection with
the preparation of such Registration Statement and the related
Prospectus and has considered the matters required to be stated
therein and the statements contained therein, although such counsel
has not independently verified the accuracy, completeness or fairness
of any such statements; and that such counsel advises that, on the
basis of the foregoing (relying as to materiality to a large extent
upon facts provided to such counsel by officers and other
representatives of the Issuer and without independent check or
verification), no facts came to such counsel's attention that caused
such counsel to believe that the applicable Registration Statement, at
the time such Registration Statement or any post-effective amendment
thereto became effective, and, in the case of the Exchange Offer
Registration Statement, as of the date of filing contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein
-11-
<PAGE>
not misleading in any material respect, or that the Prospectus
contained in such Registration Statement as of its date and, in the
case of the opinion dated the date of Consummation of the Exchange
Offer, as of the date of filing, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order
to make the statements therein, in light of the circumstances under
which they were made, not misleading in any material respect. Without
limiting the foregoing, such counsel may state further that such
counsel assumes no responsibility for, and has not independently
verified, the accuracy, completeness or fairness of the financial
statements, notes and schedules and other financial data included in
any Registration Statement contemplated by this Agreement or the
related Prospectus; and
(3) a customary comfort letter, dated as of the date of
Consummation of the Exchange Offer or the date of effectiveness of the
Shelf Registration Statement, as the case may be, from the Issuer's
independent accountants, in the customary form and covering matters of
the type customarily covered in comfort letters by underwriters in
connection with primary underwritten offerings, and affirming the
matters set forth in the comfort letters delivered pursuant to Section
8 of the Purchase Agreement, as they relate to the Shelf Registration
Statement without exception;
(B) set forth in full or incorporate by reference in the underwriting
agreement, if any, the indemnification provisions and procedures of Section
8 hereof with respect to all parties to be indemnified pursuant to said
Section; and
(C) deliver such other documents and certificates as may be
reasonably requested by such parties to evidence compliance with clause (A)
above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Issuer pursuant to this
clause (xi), if any.
If at any time the representations and warranties of the Issuer
contemplated in clause (A)(1) above cease to be true and correct in any material
respect, the Issuer shall so advise the Initial Purchasers and the
underwriter(s), if any, and each selling Holder promptly and, if requested by
such Persons, shall confirm such advice in writing;
(xii) prior to any public offering of Transfer Restricted Securities,
cooperate with the selling Holders, the underwriter(s), if any, and their
respective counsel in connection with the registration and qualification of the
Transfer Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as the selling Holders or underwriter(s) may request and do any
and all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Transfer Restricted Securities covered by the Shelf
Registration Statement; provided, however, that the Issuer shall not be required
to register or qualify as a foreign corporation where it is not then so
qualified or to take any action that would subject it to the service of process
in suits or to taxation, other than as to matters and transactions relating to
the Registration Statement, in any jurisdiction where it is not then so subject;
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<PAGE>
(xiii) shall issue, upon the request of any Holder of Initial Notes
covered by the Shelf Registration Statement, Exchange Notes, having an aggregate
principal amount at maturity equal to the aggregate principal amount at
maturity of Initial Notes surrendered to the Issuer by such Holder in exchange
therefor or being sold by such Holder; such Exchange Notes to be registered in
the name of such Holder or in the name of the purchaser(s) of such Notes, as the
case may be; in return, the Initial Notes held by such Holder shall be
surrendered to the Issuer for cancellation;
(xiv) cooperate with the selling Holders and the underwriter(s), if
any, to facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold and not bearing any
restrictive legends; and enable such Transfer Restricted Securities to be in
such denominations and registered in such names as the Holders or the
underwriter(s), if any, may request at least two business days prior to any sale
of Transfer Restricted Securities made by such underwriter(s);
(xv) use its best efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof or the underwriter(s), if any, to
consummate the disposition of such Transfer Restricted Securities, subject to
the proviso contained in clause (viii) above;
(xiiii) if any fact or event contemplated by clause (c)(iii)(D)
above shall exist or have occurred, prepare a supplement or post-effective
amendment to the Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of Transfer Restricted Securities, the
Prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading;
(xivii) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of the Registration Statement and
provide the Trustee under the Indenture with printed certificates for the
Transfer Restricted Securities which are in a form eligible for deposit with The
Depositary Trust Company;
(xvii) cooperate and assist in any filings required to be made with
the NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is required
to be retained in accordance with the rules and regulations of the NASD, and use
its reasonable best efforts to cause such Registration Statement to become
effective and approved by such governmental agencies or authorities as may be
necessary to enable the Holders selling Transfer Restricted Securities to
consummate the disposition of such Transfer Restricted Securities;
(xvix) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to its
security holders, as soon as practicable, a consolidated earnings statement
meeting the requirements of Rule 158 (which need not be audited) for the twelve-
month period (A) commencing at the end of any fiscal quarter in which Transfer
Restricted
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<PAGE>
Securities are sold to underwriters in a firm or best efforts Underwritten
Offering or (B) if not sold to underwriters in such an offering, beginning with
the first month of the Issuer's first fiscal quarter commencing after the
effective date of the Registration Statement;
(xx) cause the Indenture to be qualified under the TIA not later
than the effective date of the first Registration Statement required by this
Agreement, and, in connection therewith, cooperate with the Trustee and the
Holders of Notes to effect such changes to the Indenture as may be required for
such Indenture to be so qualified in accordance with the terms of the TIA; and
execute and use its best efforts to cause the Trustee to execute, all documents
that may be required to effect such changes and all other forms and documents
required to be filed with the Commission to enable such Indenture to be so
qualified in a timely manner; and
(xviii) provide promptly to each Holder upon request each document
filed with the Commission pursuant to the requirements of Section 13 and Section
15 of the Exchange Act.
Each Holder agrees by acquisition of a Transfer Restricted Security
that, upon receipt of any notice from the Issuer of the existence of any fact of
the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith
discontinue disposition of Transfer Restricted Securities pursuant to the
applicable Registration Statement until such Holder's receipt of the copies of
the supplemented or amended Prospectus contemplated by Section 6(c)(xvi) hereof,
or until it is advised in writing (the "Advice") by the Issuer that the use of
------
the Prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated by reference in the Prospectus. If
so directed by the Issuer, each Holder will deliver to the Issuer (at the
Issuer's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Transfer Restricted
Securities that was current at the time of receipt of such notice. In the event
the Issuer shall give any such notice, the time period regarding the
effectiveness of such Registration Statement set forth in Section 3 or 4 hereof,
as applicable, shall be extended by the number of days during the period from
and including the date of the giving of such notice pursuant to Section
6(c)(iii)(D) hereof to and including the date when each selling Holder covered
by such Registration Statement shall have received the copies of the
supplemented or amended Prospectus contemplated by Section 6(c)(xvi) hereof or
shall have received the Advice; however, no such extension shall be taken into
account in determining whether Additional Interest is due pursuant to Section 5
hereof or the amount of such Additional Interest, it being agreed that the
Issuer's option to suspend use of a Registration Statement pursuant to this
paragraph shall be treated as a Registration Default for purposes of Section 5.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Issuer's performance of or compliance
with this Agreement will be borne by the Issuer regardless of whether a
Registration Statement becomes effective, including without limitation: (i) all
registration and filing fees and expenses (including filings made by any Initial
Purchaser or Holder with the NASD (and, if applicable, the fees and expenses of
any "qualified independent underwriter" and its counsel that may be required by
the rules and regulations of the NASD)); (ii) all fees and expenses of
compliance with federal securities and state Blue Sky or securities
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<PAGE>
laws; (iii) all expenses of printing (including printing certificates for the
Exchange Notes to be issued in the Exchange Offer and printing of Prospectuses),
messenger and delivery services and telephone; (iv) all fees and disbursements
of counsel for the Issuer and, subject to Section 7(b) below, the Holders of
Transfer Restricted Securities; and (v) all fees and disbursements of
independent certified public accountants of the Issuer (including the expenses
of any special audit and comfort letters required by or incident to such
performance).
The Issuer will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Issuer.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Issuer will reimburse the
Initial Purchasers and the Holders of Transfer Restricted Securities being
tendered in the Exchange Offer and/or resold pursuant to the "Plan of
Distribution" contained in the Exchange Offer Registration Statement or
registered pursuant to the Shelf Registration Statement, as applicable, for the
reasonable fees and disbursements of not more than one counsel, who shall be
Latham & Watkins or such other counsel as may be chosen by the Holders of a
majority in principal amount of the Transfer Restricted Securities for whose
benefit such Registration Statement is being prepared.
SECTION 8. INDEMNIFICATION
(a) The Issuer agrees to indemnify and hold harmless (i) each Holder and
(ii) each person, if any, who controls (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) any Holder (any of the persons
referred to in this clause (ii) being hereinafter referred to as a "controlling
person") and (iii) the respective officers, directors, partners, employees,
representatives and agents of any Holder or any controlling person (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an
"Indemnified Holder"), to the fullest extent lawful, from and against any and
- -------------------
all losses, claims, damages, liabilities, judgments, actions and expenses
(including without limitation and as incurred, reimbursement of all reasonable
costs of investigating, preparing, pursuing, settling, compromising, paying or
defending any claim or action, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, including the reasonable
fees and expenses of counsel to any Indemnified Holder), joint or several,
directly or indirectly caused by, related to, based upon, arising out of or in
connection with any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement or Prospectus (or any amendment or
supplement thereto), 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, except insofar as such losses, claims, damages,
liabilities or expenses are caused by an untrue statement or omission or alleged
untrue statement or omission that is made in reliance upon and in conformity
with information relating to any of the Holders furnished in writing to the
Issuer by any of the Holders expressly for use therein. This indemnity agreement
shall be in addition to any liability which the Issuer may otherwise have.
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<PAGE>
In case any action or proceeding (including any governmental or
regulatory investigation or proceeding) shall be brought or asserted against any
of the Indemnified Holders with respect to which indemnity may be sought against
the Issuer, such Indemnified Holder (or the Indemnified Holder controlled by
such controlling person) shall promptly notify the Issuer in writing (provided,
that the failure to give such notice shall not relieve the Issuer of its
obligations pursuant to this Agreement). Such Indemnified Holder shall have the
right to employ its own counsel in any such action and the fees and expenses of
such counsel shall be paid, as incurred, by the Issuer. The Issuer shall not,
in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) at any time for such Indemnified Holders, which
firm shall be designated by the Holders. The Issuer shall be liable for any
settlement of any such action or proceeding effected with the Issuer's prior
written consent, which consent shall not be withheld unreasonably, and the
Issuer agrees to indemnify and hold harmless any Indemnified Holder from and
against any loss, claim, damage, liability or expense by reason of any
settlement of any action effected with the written consent of the Issuer. The
Issuer shall not, without the prior written consent of each Indemnified Holder,
settle or compromise or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, claim, litigation or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not any Indemnified Holder is a party thereto), unless such
settlement, compromise, consent or termination includes an unconditional release
of each Indemnified Holder from all liability arising out of such action, claim,
litigation or proceeding.
(b) Each Holder of Transfer Restricted Securities agrees, severally and
not jointly, to indemnify and hold harmless the Issuer and its directors,
officers of the Company who sign a Registration Statement, and any person
controlling (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) the Issuer and the respective officers, directors,
partners, employees, representatives and agents of each such person, to the same
extent as the foregoing indemnity from the Issuer to each of the Indemnified
Holders, but only with respect to claims and actions based on information
relating to such Holder furnished in writing by such Holder expressly for use in
any Registration Statement. In case any action or proceeding shall be brought
against the Issuer or its directors or officers or any such controlling person
in respect of which indemnity may be sought against a Holder of Transfer
Restricted Securities, such Holder shall have the rights and duties given the
Issuer and the Issuer or its directors or officers or such controlling person
shall have the rights and duties given to each Holder by the preceding
paragraph. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the proceeds received by such Holder
upon the sale of the Registrable Securities giving rise to such indemnification
obligation.
(c) If the indemnification provided for in this Section 8 is unavailable
to an indemnified party under Section 8(a) or Section 8(b) hereof (other than by
reason of exceptions provided in those Sections) in respect of any losses,
claims, damages, liabilities, judgments, actions or expenses referred to
therein, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative benefits
received by the
-16-
<PAGE>
Issuer on the one hand and the Holders on the other hand from the Initial
Placement (which in the case of the Issuer shall be deemed to be equal to the
total gross proceeds from the Initial Placement as set forth on the cover page
of the Offering Memorandum), the amount of Additional Interest which did not
become payable as a result of the filing of the Registration Statement resulting
in such losses, claims, damages, liabilities, judgments actions or expenses, and
such Registration Statement, or if such allocation is not permitted by
applicable law, the relative fault of the Issuer on the one hand and of the
Indemnified Holder on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of the Issuer
on the one hand and of the Indemnified Holder on the other shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Issuer or by the
Indemnified Holder and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in the second paragraph of Section 8(a),
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim.
The Issuer and each Holder of Transfer Restricted Securities agree
that it would not be just and equitable if contribution pursuant to this Section
8(c) were determined by pro rata allocation (even if the Holders were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8, none of the
Holders (and its related Indemnified Holders) shall be required to contribute,
in the aggregate, any amount in excess of the amount by which the total discount
received by such Holder with respect to the Initial Notes exceeds the amount of
any damages which such Holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute pursuant to this Section 8(c) are several in
proportion to the respective principal amount at maturity of Initial Notes held
by each of the Holders hereunder and not joint.
SECTION 9. RULE 144A
The Issuer hereby agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding, to make available to any Holder or
beneficial owner of Transfer Restricted Securities in connection with any sale
thereof and any prospective purchaser of such Transfer Restricted Securities
from such Holder or beneficial owner, the information required by Rule
144A(d)(4)
-17-
<PAGE>
under the Securities Act in order to permit resales of such Transfer Restricted
Securities pursuant to Rule 144A.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration hereunder
unless such Holder (a) agrees to sell such Holder's Transfer Restricted
Securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements and (b) completes
and executes all reasonable questionnaires, powers of attorney, indemnities,
underwriting agreements, lock-up letters and other documents required under the
terms of such underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering. In any such Underwritten Offering, the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Issuer.
SECTION 12. MISCELLANEOUS
(a) Remedies. The Issuer agrees that monetary damages would not be
--------
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agree to waive the defense in any action
for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Issuer will not, on or after the date
--------------------------
of this Agreement enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. The Company has not previously
entered into any agreement granting any registration rights with respect to its
securities to any Person. The rights granted to the Holders hereunder do not in
any way conflict with and are not inconsistent with the rights granted to the
holders of the Issuer's securities under any agreement in effect on the date
hereof.
(c) Adjustments Affecting the Notes. The Issuer will not take any action,
-------------------------------
or permit any change to occur, with respect to the Notes that would materially
and adversely affect the ability of the Holders to Consummate any Exchange
Offer.
(d) Amendments and Waivers. The provisions of this Agreement may not be
----------------------
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless the Issuer has obtained the
written consent of Holders of a majority of the outstanding principal amount at
maturity of Transfer Restricted Securities. Notwithstanding the foregoing, a
waiver or consent to departure from the provisions hereof that relates
exclusively to the rights of Holders whose
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<PAGE>
securities are being tendered pursuant to the Exchange Offer and that does not
affect directly or indirectly the rights of other Holders whose securities are
not being tendered pursuant to such Exchange Offer may be given by the Holders
of a majority of the outstanding principal amount at maturity of Transfer
Restricted Securities being tendered or registered; provided that, with respect
to any matter that directly or indirectly affects the rights of any Initial
Purchaser hereunder, the Issuer shall obtain the written consent of each such
Initial Purchaser with respect to which such amendment, qualification,
supplement, waiver, consent or departure is to be effective.
(e) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Issuer:
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
Telecopier No.: (408) 490-4501
Attention: Chief Executive Officer
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Transfer Restricted Securities; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities from such Holder.
-19-
<PAGE>
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(j) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Entire Agreement. This Agreement together with the other Operative
----------------
Documents (as defined in the Purchase Agreement) is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Issuer with respect to
the Transfer Restricted Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Timothy P. Laehy
----------------------
Name: Timothy P. Leahy
Title: Chief Financial Officer, Treasurer
and Vice President, Finance
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<PAGE>
The foregoing Registration Rights Agreement is hereby
confirmed and accepted as of the date first above written.
BEAR, STEARNS & CO. INC.
By: /s/ James C. Diao
--------------------------
Name:James C. Diao
Title: Senior Managing Direction
Bean, Streaks & Co. Inc.
BT ALEX. BROWN INCORPORATED
By: /s/ Anne Martin
-----------------------
Name: Anne Martin
Title: Principal
-22-
<PAGE>
EXHIBIT 4.3
================================================================================
WARRANT AGREEMENT
Dated March 11, 1998
by and between
COVAD COMMUNICATIONS GROUP, INC.
and
THE BANK OF NEW YORK
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 1. Certain Definitions..................................................... 1
Section 2. Appointment of Warrant Agent............................................ 4
Section 3. Issuance of Warrants.................................................... 4
(a) Warrant Certificates.................................................... 4
(b) Temporary Global Warrants............................................... 4
Section 4. Execution of Warrant Certificates....................................... 4
Section 5. Separation of Warrants.................................................. 5
Section 6. Registration and Countersignature....................................... 5
Section 7. Registration of Transfers and Exchanges................................. 5
(a) Transfer and Exchange of Global Warrants................................ 5
(b) Exchange of a Beneficial Interest in a Global Warrant for a
Definitive Warrant...................................................... 6
(c) Transfer and Exchange of Definitive Warrants............................ 7
(d) Restrictions on Exchange or Transfer of a Definitive Warrant for a
Beneficial Interest in a Global Warrant................................. 8
(e) Restrictions on Transfer and Exchange of Global Warrants................ 9
(f) Countersigning of Definitive Warrants in Absence of Depositary.......... 9
(g) Legends................................................................. 9
(h) Cancellation of Global Warrant.......................................... 10
(i) Obligations with Respect to Transfers and Exchanges of Warrants......... 10
Section 8. Terms of Warrants: Exercise of Warrants................................. 11
Section 9. Payment of Taxes........................................................ 12
Section 10. Mutilated or Missing Warrant Certificates............................... 13
Section 11. Reservation of Warrant Shares........................................... 13
Section 12. Obtaining Stock Exchange Listings....................................... 14
Section 13. Adjustment of Exercise Price and Number of Warrant Shares Issuable...... 14
(a) Stock Splits, Combinations, etc......................................... 14
(b) Reclassification, Combinations, Mergers, etc............................ 14
(c) Issuance of Options or Convertible Securities........................... 15
(d) Dividends and Distributions............................................. 16
(e) Adjustment for Sale of Common Stock Below Current Market Price.......... 16
(f) Current Market Price.................................................... 18
(g) Certain Distributions................................................... 18
(h) Consideration Received.................................................. 18
(i) Deferral of Certain Adjustments......................................... 19
(j) Changes in Options and Convertible Securities........................... 19
(k) Expiration of Options and Convertible Securities........................ 19
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(l) Other Adjustments....................................................... 19
(m) Equity Commitment....................................................... 20
(n) No Adjustment Required.................................................. 20
Section 14. Statement on Warrants................................................... 20
Section 15. Fractional Interest..................................................... 20
Section 16. Notices to Warrant Holders.............................................. 21
Section 17. Merger, Consolidation or Change of Name of Warrant Agent................ 22
Section 18. Warrant Agent........................................................... 23
Section 19. Resignation and Removal of Warrant Agent; Appointment of Successor...... 24
Section 20. Registration............................................................ 25
Section 21. Reports................................................................. 25
Section 22. Rule 144A............................................................... 25
Section 23. Notices to Company and Warrant Agent.................................... 25
Section 24. Supplements and Amendments.............................................. 26
Section 25. Successors.............................................................. 27
Section 26. Termination............................................................. 27
Section 27. Governing Law........................................................... 27
Section 28. Benefits of This Agreement.............................................. 27
Section 29. Counterparts............................................................ 28
</TABLE>
-ii-
<PAGE>
WARRANT AGREEMENT dated March 11, 1998 (this "AGREEMENT") between COVAD
COMMUNICATIONS GROUP INC., a Delaware corporation (the "COMPANY"), and THE BANK
OF NEW YORK, a New York banking corporation, as warrant agent (the "WARRANT
AGENT").
WHEREAS, the Company proposes to issue common stock warrants, as
hereinafter described (the "WARRANTS"), initially exercisable to purchase an
aggregate of 1,684,588 shares of Common Stock (as defined below), in connection
with an offering of units (the "UNITS"), each Unit consisting of $1,000
principal amount at maturity of the Company's 13 1/2 % Senior Discount Notes due
2008 (the "NOTES") and one Warrant, each such Warrant entitling the holder
thereof to purchase initially 6.4792 shares of Common Stock.
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance of Warrant Certificates (as defined below) and other matters as
provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, and for the purpose of defining the respective rights and
obligations of the Company, the Warrant Agent and the Holders (as defined
below), the parties hereto agree as follows:
Section 1. Certain Definitions. As used in this Agreement, the
-------------------
following terms shall have the following respective meanings:
"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, means 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, however,
that beneficial ownership of 10% or more of the Voting Stock (as defined in the
Indenture) of a Person shall be deemed to be control.
"Cedel" means Cedel Bank, societe anonyme.
"Commission" means the Securities and Exchange Commission or any successor.
"Common Stock" means the common stock, par value $.001 per share, of the
Company.
"Company" means Covad Communications Group, Inc., a Delaware corporation,
and its successors and assigns.
"Equity Commitment" means the commitment of certain investors to purchase
shares of Series C Preferred Stock and warrants to purchase shares of Common
Stock pursuant to a Subscription Agreement, dated as of February 20, 1998,
between the Company and such investors for an aggregate purchase price of $16
million, or any other issuance of equity securities within 12
-1-
<PAGE>
months after the original date of issuance of the Warrants, yielding gross
proceeds of at least $16 million.
"Equity Commitment Warrants" means warrants issuable to the investors in
the Equity Commitment upon consummation thereof to purchase Series C Preferred
Stock.
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor act), and the rules and regulations thereunder.
"Excluded Securities" means shares of Common Stock or other securities
convertible or exchangeable into Common Stock issued (i) pursuant to employee
stock ownership plans, (ii) in connection with mergers and acquisitions with
non-affiliated third parties or (iii) as compensation to directors in lieu of
cash.
"Exercisability Date" means any time on or after the earliest to occur of
(i) September 15, 1998, (ii) an initial Public Equity Offering of the Company
and (iii) in the event a Change of Control (as defined in the Indenture) occurs,
the date the Company mails notice thereof to holders of Notes and to the
Holders.
"Exercise Price" means the purchase price per share of Common Stock to be
paid upon the exercise of each Warrant in accordance with the terms hereof,
which price shall initially be $.01 per share, subject to adjustment from time
to time pursuant to Section 13 hereof.
"Expiration Date" means March 15, 2008.
"Holder" means a registered holder of Registrable Securities.
"Indenture" means the indenture, dated as of March 15, 1998, between the
Company and The Bank of New York, as trustee.
"Initial Purchasers" means Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof (including any subdivision
or ongoing business of any such entity or substantially all of the assets of any
such entity, subdivision or business).
"Public Equity Offering" means an underwritten offering of Common Stock
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).
-2-
<PAGE>
"Registrable Securities" means the Warrant Shares and any other securities
issued or issuable with respect to the Warrants or the Warrant Shares by way of
a stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise
until such date as such security (i) is effectively registered under the
Securities Act and disposed of in accordance with a registration statement or
(ii) is distributed to the public pursuant to Rule 144 under the Securities Act.
"Registration Rights Agreement" means the registration rights agreement,
dated March 11, 1998, by and among the Company and the Initial Purchasers, as
such agreement may be amended, modified or supplemented from time to time.
"Regulation S" means Regulation S promulgated under the Securities Act.
"Regulation S Global Warrant" means a Regulation S Temporary Global Warrant
or Regulation S Permanent Global Warrant, as appropriate.
"Regulation S Permanent Global Warrant" means a permanent global Warrant in
the form of Exhibit A hereto, appropriately completed, and deposited with or on
behalf of and registered in the name of the Depositary or its nominee, issued in
replacement for the Regulation S Temporary Global Warrant upon expiration of the
Restricted Period.
"Regulation S Temporary Global Warrant" means a temporary global Warrant in
the form of Exhibit A hereto, appropriately completed, and deposited with or on
behalf of and registered in the name of the Depositary or its nominee,
representing the number of Warrants initially sold in reliance on Rule 903 of
Regulation S.
"Restricted Period" means the one year period after the date of issuance of
the Units.
"Securities Act" means the Securities Act of 1933, as amended.
"Separation Date" means the earlier of (i) 90 days after the issuance of
the Units, (ii) such date as the Initial Purchasers may, in their discretion,
deem appropriate for the Notes and the Warrants that comprise each Unit to be
transferred or exchanged separately, (iii) in the event a Change of Control (as
defined in the Indenture) occurs, the date the Company mails notice thereof to
holders of Notes, (iv) the date on which the Exchange Offer (as defined in the
Registration Rights Agreement) is consummated and (v) the date on which the
Shelf Registration Statement (as defined in the Registration Rights Agreement)
is declared effective. On the Separation Date, the Notes and the Warrants will
be automatically separated.
"Series C Preferred Stock" means shares of Series C Preferred Stock of the
Company.
"Trustee" means the trustee under the Indenture.
"Warrant Agent" means The Bank of New York or the successor or successors
of such Warrant Agent appointed in accordance with the terms hereof.
-3-
<PAGE>
"Warrant Registration Rights Agreement" means the registration rights
agreement, dated March 11, 1998, by and among the Company and the Initial
Purchasers relating to the Warrants and the Warrant Shares.
"Warrant Shares" means the shares of Common Stock issued or issuable upon
the exercise of the Warrants.
Section 2. Appointment of Warrant Agent. The Company hereby appoints
----------------------------
the Warrant Agent to act as agent for the Company in accordance with the
instructions set forth hereinafter in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Section 3. Issuance of Warrants.
--------------------
(a) Warrant Certificates. The Warrants will be issued in the
--------------------
form of one or more global certificates (the "GLOBAL WARRANTS"), substantially
in the form of Exhibit A (including footnotes 1 and 2 thereto). The Global
Warrants shall be deposited on the Issue Date with, or with the Warrant Agent as
custodian for, The Depository Trust Company (the "DEPOSITARY") and registered in
the name of Cede & Co., as the Depositary's nominee. Each Global Warrant shall
represent such of the outstanding Warrants as shall be specified therein and
each shall provide that it shall represent the aggregate amount of outstanding
Warrants from time to time endorsed thereon and that the aggregate amount of
outstanding Warrants represented thereby may from time to time be reduced or
increased, as appropriate. Upon request, except as otherwise provided in Section
7(b)(iii) hereof, a Holder may receive from the Depositary and the Warrant Agent
Warrants in definitive form (the "DEFINITIVE WARRANTS"), substantially in the
form of Exhibit A (not including footnotes 1 and 2 thereto) as set forth in
Section 7 below.
(b) Temporary Global Warrants. Warrants offered and sold in
-------------------------
reliance on Regulation S shall be issued initially in the form of the Regulation
S Temporary Global Warrant, which shall be deposited on behalf of the purchasers
of the Warrants represented thereby with the Warrant Agent, at its New York
office, as custodian for the Depositary, and registered in the name of the
Depositary or the nominee of the Depositary for the accounts of designated
agents holding on behalf of Euroclear or Cedel, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. Following the termination
of the Restricted Period, beneficial interests in the Regulation S Temporary
Global Warrant shall be exchanged for beneficial interests in Regulation S
Permanent Global Warrants. Simultaneously with the authentication of Regulation
S Permanent Global Warrants, the Trustee shall cancel the Regulation S Temporary
Global Warrant. The aggregate number of Warrants evidenced by the Regulation S
Temporary Global Warrant and the Regulation S Permanent Global Warrants may from
time to time be increased or decreased by adjustments made on the records of the
Warrant Agent and the Depositary or its nominee, as the case may be, in
connection with transfers of interest as hereinafter provided.
Section 4. Execution of Warrant Certificates. Certificates (the
---------------------------------
"WARRANT CERTIFICATES") evidencing Global Warrants or Definitive Warrants to be
delivered pursuant hereto shall be signed on behalf of the Company by its
Chairman of the Board or its President or a Vice President and by
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<PAGE>
its Secretary or an Assistant Secretary. Each such signature upon the Warrant
Certificates may be in the form of a facsimile signature of the present or any
future Chairman of the Board, President, Vice President, Secretary or Assistant
Secretary and may be imprinted or otherwise reproduced on the Warrant
Certificates and for that purpose the Company may adopt and use the facsimile
signature of any person who shall have been Chairman of the Board, President,
Vice President, Secretary or Assistant Secretary, notwithstanding the fact that
at the time the Warrant Certificates shall be countersigned and delivered or
disposed of such person shall have ceased to hold such office.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificates so
signed shall have been countersigned by the Warrant Agent, or disposed of by the
Company, such Warrant Certificates nevertheless may be countersigned and
delivered or disposed of as though such person had not ceased to be such officer
of the Company; and any Warrant Certificate may be signed on behalf of the
Company by any person who, at the actual date of the execution of such Warrant
Certificate, shall be a proper officer of the Company to sign such Warrant
Certificate, although at the date of the execution of this Agreement any such
person was not such officer.
Warrant Certificates shall be dated the date of countersignature.
Section 5. Separation of Warrants. The Notes and Warrants shall not be
----------------------
separately transferable prior to the Separation Date and shall be automatically
separated on the Separation Date.
Section 6. Registration and Countersignature. The Warrant Agent, on
---------------------------------
behalf of the Company, shall number and register the Warrant Certificates in a
register as they are issued by the Company.
Warrant Certificates shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so countersigned. The Warrant
Agent shall, upon written instructions of the Chairman of the Board, the
President, a Vice President, the Treasurer or the Controller of the Company,
initially countersign, issue and deliver Warrants entitling the Holders thereof
to purchase not more than the aggregate number of Warrant Shares referred to
above in the first recital hereof and shall countersign and deliver Warrants as
otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the Holder(s) of the
Warrant Certificates as the absolute owner(s) thereof (notwithstanding any
notation of ownership or other writing thereon made by anyone), for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary. Prior to the Separation Date, the registered holder of
a Unit shall be deemed the registered Holder of the related Warrants for all
purposes hereunder.
Section 7. Registration of Transfers and Exchanges.
---------------------------------------
(a) Transfer and Exchange of Global Warrants. The transfer and
----------------------------------------
exchange of Global Warrants or beneficial interests therein shall be effected
through the Depositary, in accordance with this Agreement and the procedures of
the Depositary therefor.
-5-
<PAGE>
(b) Exchange of a Beneficial Interest in a Global Warrant for a
-----------------------------------------------------------
Definitive Warrant.
- ------------------
(i) Any Holder of a beneficial interest in a Global Warrant may
upon request exchange such beneficial interest for a Definitive Warrant. Upon
receipt by the Warrant Agent of written instructions or such other form of
instructions as is customary for the Depositary from the Depositary or its
nominee on behalf of any Person having a beneficial interest in a Global Warrant
and, in the case of a Registrable Security, the following additional information
and documents (all of which may be submitted by facsimile):
(A) if such beneficial interest is being delivered to the
Person designated by the Depositary as being the beneficial owner, a
certification to that effect (in substantially the form of Exhibit B hereto);
(B) if such beneficial interest is being transferred (1) to
a "qualified institutional buyer" (as defined in Rule 144A under the Securities
Act) in accordance with Rule 144A under the Securities Act or (2) pursuant to an
exemption from registration in accordance with Rule 144 under the Securities Act
(based on an opinion of counsel if the Company so requests) or (3) pursuant to
an effective registration statement under the Securities Act, a certification to
that effect (in substantially the form of Exhibit B hereto);
(C) if such beneficial interest is being transferred to any
institutional "accredited investor," within the meaning of Rule 501(a)(1), (2),
(3) or (7) under the Securities Act pursuant to a private placement exemption
from the registration requirements of the Securities Act (based on an opinion of
counsel if the Company so requests), a certification to that effect (in
substantially the form of Exhibit B hereto) and a certification from the
applicable transferee;
(D) if such beneficial interest is being transferred
pursuant to an exemption from registration in accordance with Rule 904 under the
Securities Act (and based on an opinion of counsel if the Company so requests),
a certification to that effect (in substantially the form of Exhibit B);
provided, however, that no such exchange shall be made during the Restricted
Period; or
(E) if such beneficial interest is being transferred in
reliance on another exemption from the registration requirements of the
Securities Act (and based on an opinion of counsel if the Company so requests),
a certification to that effect (in substantially the form of Exhibit B hereto);
then the Warrant Agent shall cause, in accordance with the standing
instructions and procedures existing between the Depositary and Warrant Agent,
the number of Warrants and Warrant Shares represented by the Global Warrant to
be reduced by the number of Warrants and Warrant Shares to be represented by the
Definitive Warrants to be issued in exchange for the interest of such Person in
the Global Warrant and, following such reduction, the Company shall execute and
-6-
<PAGE>
the Warrant Agent shall countersign and deliver to the transferee, as the case
may be, a Definitive Warrant.
(ii) Definitive Warrants issued in exchange for a beneficial
interest in a Global Warrant pursuant to this Section 7(b) shall be registered
in such names as the Depositary, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Warrant Agent. The
Warrant Agent shall deliver such Definitive Warrants to the Persons in whose
names such Warrants are so registered.
(iii) Notwithstanding the foregoing, a beneficial interest in
the Regulation S Temporary Global Warrant may not be exchanged for a Definitive
Warrant or transferred to a Person who takes delivery thereof in the form of a
Definitive Warrant prior to (x) the expiration of the Restricted Period and (y)
the receipt by the Warrant Agent of any certificates required pursuant to Rule
903(c)(3)(ii)(B) under the Securities Act, except in the case of a transfer
pursuant to an exemption from the registration requirements of the Securities
Act other than Rule 903 or Rule 904.
(c) Transfer and Exchange of Definitive Warrants.
--------------------------------------------
When Definitive Warrants are presented to the Warrant Agent with
a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of
Definitive Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if its requirements for such transactions are met; provided, however, that the
Definitive Warrants presented or surrendered for registration of transfer or
exchange:
(x) shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Warrant Agent, duly executed by the Holder
thereof or by his attorney, duly authorized in writing; and
(y) in the case of Registrable Securities, such request shall be
accompanied by the following additional information and documents, as
applicable:
(i) if such Registrable Security is being delivered to the
Warrant Agent by a Holder for registration in the name of such Holder, without
transfer, a certification from such Holder to that effect (in substantially the
form of Exhibit B hereto);
(ii) if such Registrable Security is being transferred (1) to a
"qualified institutional buyer" (as defined in Rule 144A under the Securities
Act) in accordance with Rule 144A under the Securities Act or (2) pursuant to an
exemption from registration in accordance with Rule 144 under the Securities Act
(and based on an opinion of counsel if the Company so requests)
-7-
<PAGE>
or (3) pursuant to an effective registration statement under the Securities Act,
a certification to that effect (in substantially the form of Exhibit B hereto);
(iii) if such Registrable Security is being transferred to an
institutional "accredited investor," within the meaning of Rule 501(a)(1), (2),
(3) or (7) under the Securities Act pursuant to a private placement exemption
from the registration requirements of the Securities Act (and based on an
opinion of counsel if the Company so requests), a certification to that effect
(in substantially the form of Exhibit B hereto) and a certification from the
applicable transferee;
(iv) if such Registrable Security is being transferred pursuant
to an exemption from registration in accordance with Rule 904 under the
Securities Act (and based on an opinion of counsel if the Company so requests),
a certification to that effect (in substantially the form of Exhibit B hereto);
or
(v) if such Registrable Security is being transferred in
reliance on another exemption from the registration requirements of the
Securities Act (and based on an opinion of counsel if the Company so requests),
a certification to that effect (in substantially the form of Exhibit B hereto).
(d) Restrictions on Exchange or Transfer of a Definitive Warrant for
----------------------------------------------------------------
a Beneficial Interest in a Global Warrant. A Definitive Warrant may not be
- -----------------------------------------
exchanged for a beneficial interest in a Global Warrant except upon satisfaction
of the requirements set forth below. Upon receipt by the Warrant Agent of a
Definitive Warrant, duly endorsed or accompanied by appropriate instruments of
transfer, in form satisfactory to the Warrant Agent, together with:
(i) if such Definitive Warrant is a Registrable Security,
certification from the Holder thereof (in substantially the form of Exhibit B
hereto) to the effect that such Definitive Warrant is being transferred by such
Holder either (A) to a "qualified institutional buyer" (as defined in Rule 144A
under the Securities Act) in accordance with Rule 144A under the Securities Act,
(B) outside the United States to a foreign Person in a transaction meeting the
requirements of Rule 904 under the Securities Act (and based on an opinion of
counsel if the Company so requests) or (C) to an institutional "accredited
investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, pursuant to a private placement exemption from the registration
requirements of the Securities Act, who has provided a certification to that
effect (and based on an opinion of counsel if the Company so requests) and who
wishes to take delivery thereof in the form of a beneficial interest in a Global
Warrant; and
(ii) whether or not such Definitive Warrant is a Registrable
Security, written instructions directing the Warrant Agent to make, or to direct
the Depositary to make, an endorsement on the Global Warrant to reflect an
increase in the number of Warrants and Warrant Shares represented by the Global
Warrant equal to the number of Warrants and Warrant Shares represented by such
Definitive Warrant,
then the Warrant Agent shall cancel such Definitive Warrant and cause, or direct
the Depositary to cause, in accordance with the standing instructions and
procedures existing between the Depositary
-8-
<PAGE>
and the Warrant Agent, the number of Warrants and Warrant Shares represented by
the Global Warrant to be increased accordingly. If no Global Warrants are then
outstanding, the Company shall issue and the Warrant Agent shall countersign a
new Global Warrant representing the appropriate number of Warrants and Warrant
Shares.
(e) Restrictions on Transfer and Exchange of Global Warrants.
--------------------------------------------------------
Notwithstanding any other provisions of this Agreement (other than the
provisions set forth in subsection (f) of this Section 7), a Global Warrant may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) Countersigning of Definitive Warrants in Absence of Depositary.
--------------------------------------------------------------
If at any time:
(i) the Depositary for the Global Warrants notifies the Company
that the Depositary is unwilling or unable to continue as Depositary for the
Global Warrants and a successor Depositary for the Global Warrants is not
appointed by the Company within 90 days after delivery of such notice; or
(ii) the Company, in its sole discretion, notifies the Warrant
Agent in writing that it elects to cause the issuance of Definitive Warrants
under this Agreement,
then the Company shall execute, and the Warrant Agent, upon written instructions
signed by an officer of the Company, shall countersign and deliver Definitive
Warrants, in an aggregate number equal to the number of Warrants represented by
the Global Warrants, in exchange for such Global Warrants.
(g) Legends.
-------
(i) Except for any Registrable Security sold or transferred
(including any Registrable Security represented by a Global Warrant) as
discussed in clause (ii) below, each Warrant Certificate evidencing the Global
Warrants and the Definitive Warrants (and all Warrants issued in exchange
therefor or substitution thereof) and each certificate representing the Warrant
Shares shall be substantially in the form of Exhibit A hereto and shall bear a
legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
-9-
<PAGE>
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER,
SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY, (2)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (4) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS
THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS
OF RULE 904 UNDER THE SECURITIES ACT, (5) TO AN INSTITUTIONAL "ACCREDITED
INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1),(2),(3) OR (7) OF RULE 501
UNDER THE SECURITIES ACT IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144
UNDER THE SECURITIES ACT, OR (6) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (AND BASED ON AN OPINION
OF COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES
TO APPLICABLE JURISDICTION, AND (B) THAT IT WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
(ii) Upon any sale or transfer of a Registrable Security
(including any Registrable Security represented by a Global Warrant) pursuant to
an effective registration statement under the Securities Act, pursuant to Rule
144 under the Securities Act or pursuant to an opinion of counsel reasonably
satisfactory to the Company that no legend is required:
(A) in the case of any Registrable Security that is a
Definitive Warrant, the Warrant Agent shall permit the Holder thereof to
exchange such Registrable Security for a Definitive Warrant that does not bear
the legend set forth in clause (i) above and rescind any restriction on the
transfer of such Registrable Security; and
(B) in the case of any Registrable Security represented by
a Global Warrant, such Registrable Security shall not be required to bear the
legend set forth in clause (i) above but shall continue to be subject to the
provisions of Section 7(e) hereof; provided, however, that with respect to any
request for an exchange of a Registrable Security that is represented by a
Global Warrant for a Definitive Warrant that does not bear the legend set forth
in clause (i) above, which request is made in reliance upon Rule 144 (and based
upon an opinion of counsel if the Company so requests), the Holder thereof shall
certify in writing to the Warrant Agent that such request is being made pursuant
to Rule 144 (such certification to be substantially in the form of Exhibit B
hereto).
(h) Cancellation of Global Warrant. At such time as all beneficial
------------------------------
interests in Global Warrants have either been exchanged for Definitive Warrants,
redeemed, repurchased or cancelled, all Global Warrants shall be returned to or
retained and cancelled by the Warrant Agent.
(i) Obligations with Respect to Transfers and Exchanges of Warrants.
---------------------------------------------------------------
-10-
<PAGE>
(i) To permit registrations of transfers and exchanges,
the Company shall execute and the Warrant Agent is hereby authorized to
countersign, in accordance with the provisions of Section 6 and this Section 7,
Definitive Warrants and Global Warrants as required pursuant to the provisions
of this Section 7.
(ii) All Definitive Warrants and Global Warrants issued
upon any registration of transfer or exchange of Definitive Warrants or Global
Warrants shall be the valid obligations of the Company, entitled to the same
benefits under this Agreement as the Definitive Warrants or Global Warrants
surrendered upon such registration of transfer or exchange.
(iii) Prior to due presentment for registration of transfer
or exchange of any Warrant, the Warrant Agent and the Company may deem and treat
the Person in whose name any Warrant is registered (the "Holder" of such
Warrant) as the absolute owner of such Warrant and neither the Warrant Agent,
nor the Company shall be affected by notice to the contrary.
(iv) No service charge shall be made to a Holder for any
registration, transfer or exchange.
Section 8. Terms of Warrants: Exercise of Warrants. Subject to the
---------------------------------------
terms of this Agreement, each Warrant Holder shall have the right, which may be
exercised commencing at the opening of business on the Exercisability Date and
until 5:00 p.m., New York City time, on the Expiration Date to receive from the
Company the number of fully paid and nonassessable Warrant Shares which the
Holder may at the time be entitled to receive on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares; provided,
however, that no Holder shall be entitled to exercise such Holder's Warrants at
any time, unless, at the time of exercise, (i) a registration statement under
the Securities Act relating to the Warrant Shares has been filed with, and
declared effective by, the Commission, and no stop order suspending the
effectiveness of such registration statement has been issued by the Commission
or (ii) the issuance of the Warrant Shares is permitted pursuant to an exemption
from the registration requirements of the Securities Act. Subject to the
provisions of the following paragraph of this Section 8, each Warrant not
exercised prior to 5:00 p.m., New York City time, on the Expiration Date shall
become void and all rights thereunder and all rights in respect thereof under
this Agreement shall cease as of such time. No adjustments as to dividends will
be made upon exercise of the Warrants.
The Company shall give notice not less than 90, and not more than 120, days
prior to the Expiration Date to the Holders of all then outstanding Warrants to
the effect that the Warrants will terminate and become void as of 5:00 p.m., New
York City time, on the Expiration Date. If the Company fails to give such
notice, the Warrants will not expire until 90 days after the Company gives such
notice; provided, however, in no event will Holders be entitled to any damages
or other remedy for the Company's failure to give such notice other than any
such extension.
A Warrant may be exercised upon surrender to the Company at the principal
office of the Warrant Agent of the certificate or certificates evidencing the
Warrant to be exercised with the form of election to purchase on the reverse
thereof duly completed and signed, which signature shall be guaranteed by a bank
or trust company having an office or correspondent in the United States or a
-11-
<PAGE>
broker or dealer which is a member of a registered securities exchange or the
National Association of Securities Dealers, Inc., and upon payment to the
Warrant Agent for the account of the Company of the Exercise Price as adjusted
as herein provided for each of the Warrant Shares in respect of which such
Warrant is then exercised. Payment of the aggregate Exercise Price shall be made
by Federal wire transfer to the account designated by the Company or by
certified or official bank check, payable to the order of the Company. In the
alternative, each Holder may exercise its right to receive Warrant Shares on a
net basis, such that without the exchange of any funds, the Holder receives that
number of Warrant Shares otherwise issuable upon exercise of its Warrants less
that number of Warrant Shares having a fair market value equal to the aggregate
Exercise Price that would otherwise have been paid by the Holder for the Warrant
Shares being issued. For purposes of the foregoing sentence, "fair market value"
of the Warrant Shares shall be the current market price of the Warrant Shares on
the date immediately preceding the date of payment of the Exercise Price as
determined by the procedures set forth in Section 13(f). The exercise of
Warrants by Holders of beneficial interests in Global Warrants shall be effected
in accordance with this Agreement and the procedures of the Depositary therefor.
Subject to the provisions of Section 9 hereof, upon surrender of Warrants
and payment of the Exercise Price as provided above by any Holder, the Warrant
Agent shall promptly notify the Company, and the Company shall promptly transfer
to such Holder a certificate or certificates for the appropriate number of
Warrant Shares or other securities or property (including any money) to which
such Holder is entitled, registered or otherwise placed in, or payable to the
order of, such name or names as may be directed in writing by such Holder, and
shall deliver such certificate or certificates representing the Warrant Shares
and any other securities or property (including any money) to such Holder or any
other Person or Persons entitled to receive the same, together with an amount in
cash in lieu of any fraction of a share as provided in Section 15. Any such
certificate or certificates representing the Warrant Shares shall be deemed to
have been issued and any Person so designated to be named therein shall be
deemed to have become a Holder of record of such Warrant Shares as of the date
of the surrender of such Warrants and payment of the Exercise Price.
The Warrants shall be exercisable commencing on the Exercisability Date, at
the election of the Holders thereof, either in full or from time to time in
part, and, in the event that a certificate evidencing Warrants is exercised in
respect of fewer than all of the Warrant Shares issuable on such exercise at any
time prior to the Expiration Date, a new certificate evidencing the remaining
Warrant or Warrants will be issued, and the Warrant Agent is hereby irrevocably
authorized to countersign and to deliver the required new Warrant Certificate or
Certificates pursuant to the provisions of this Section 8 and of Section 4
hereof, and the Company, whenever required by the Warrant Agent, will supply the
Warrant Agent with Warrant Certificates duly executed on behalf of the Company
for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall be
cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall, upon
the Company's written request, then be returned by the Warrant Agent to the
Company. The Warrant Agent shall account promptly to the Company with respect
to Warrants exercised and concurrently pay to the Company all monies received by
the Warrant Agent for the purchase of the Warrant Shares through the exercise of
such Warrants.
-12-
<PAGE>
The Warrant Agent shall keep copies of this Agreement and any notices given
or received hereunder by or from the Company available for inspection by the
Holders during normal business hours at its office. The Company shall supply
the Warrant Agent from time to time with such numbers of copies of this
Agreement as the Warrant Agent may request.
Section 9. Payment of Taxes. The Company will pay all documentary
----------------
stamp taxes attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants or to any separation of the Warrants from the Notes;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue of
any Warrant Certificates or any certificates for Warrant Shares in a name other
than that of the Holder of a Warrant Certificate surrendered upon the exercise
of a Warrant, and the Company shall not be required to issue or deliver such
Warrant Certificates unless or until the Person or Persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
Section 10. Mutilated or Missing Warrant Certificates. In case any of
-----------------------------------------
the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue and the Warrant Agent may countersign, in
exchange and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence reasonably
satisfactory to the Company and the Warrant Agent of such loss, theft or
destruction of such Warrant Certificate and indemnity, if requested, also
reasonably satisfactory to them. Applicants for such substitute Warrant
Certificates shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Company or the Warrant Agent may prescribe.
Section 11. Reservation of Warrant Shares. The Company will at all
-----------------------------
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
The transfer agent for the Common Stock (the "TRANSFER AGENT") and every
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of any of the rights of purchase aforesaid will be irrevocably
authorized and directed at all times to reserve such number of authorized shares
as shall be required for such purpose. The Company will keep a copy of this
Agreement on file with the Transfer Agent and with every subsequent transfer
agent for any shares of the Company's capital stock issuable upon the exercise
of the rights of purchase represented by the Warrants. The Warrant Agent is
hereby irrevocably authorized to requisition from time to time from such
Transfer Agent the stock certificates required to honor outstanding Warrants
upon exercise thereof in accordance with the terms of this Agreement. The
Company will supply such Transfer Agent with duly executed certificates for such
purposes and will provide or otherwise make available any cash which may be
payable as provided in Section 15. The Company
-13-
<PAGE>
will furnish such Transfer Agent a copy of all notices of adjustments and
certificates related thereto, transmitted to each Holder of the Warrants
pursuant to Section 16 hereof. Prior to the initial Public Equity Offering of
the Company, the Company may act as Transfer Agent for the Common Stock. The
Warrant Agent hereby agrees that it will not issue any stock certificates
delivered hereunder other than upon the exercise of Warrants in accordance with
the terms of this Agreement and, promptly after the issuance of any such stock
certificates, to notify the Transfer Agent of such issuance.
Before taking any action which would cause an adjustment pursuant to
Section 13 hereof that would reduce the Exercise Price below the then par value
(if any) of the Warrant Shares, the Company will take any corporate action which
may, in the opinion of its counsel (which may be counsel employed by the
Company), be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Shares at the Exercise Price as so
adjusted.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants in accordance with the terms of this Agreement (including
the payment of the Exercise Price) will, upon issue, be duly and validly issued,
fully paid, nonassessable, free of preemptive rights and free from all taxes,
liens, charges and security interests with respect to the issue thereof.
Section 12. Obtaining Stock Exchange Listings. The Company will from
---------------------------------
time to time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed on
the principal securities exchanges and markets (including, without limitation,
the Nasdaq National Market) within the United States of America, if any, on
which other shares of Common Stock are then listed. Upon the listing of such
Warrant Shares, the Company shall notify the Warrant Agent in writing. The
Company will obtain and keep all required permits and records in connection with
such listing.
Section 13. Adjustment of Exercise Price and Number of Warrant Shares
---------------------------------------------------------
Issuable. The number and kind of shares purchasable upon the exercise of
- --------
Warrants and the Exercise Price shall be subject to adjustment from time to time
as follows:
(a) Stock Splits, Combinations, etc. In case the Company shall
-------------------------------
hereafter (A) pay a dividend or make a distribution on its Common Stock in
shares of its capital stock (whether shares of Common Stock or of capital stock
of any other class), (B) subdivide its outstanding shares of Common Stock, (C)
combine its outstanding shares of Common Stock into a smaller number of shares,
or (D) issue by reclassification of its shares of Common Stock any shares of
capital stock of the Company, the Exercise Price in effect and the number of
Warrant Shares issuable upon exercise of each Warrant immediately prior to such
action shall be adjusted so that the Holder of any Warrant thereafter exercised
shall be entitled to receive the number of shares of capital stock of the
Company which such Holder would have owned immediately following such action had
such Warrant been exercised immediately prior thereto. An adjustment made
pursuant to this paragraph shall become effective immediately after the record
date in the case of a dividend and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this paragraph, the Holder of
any Warrant thereafter exercised shall become entitled to receive shares of two
or more classes of capital stock of the
-14-
<PAGE>
Company, the Board of Directors of the Company (whose determination shall be
conclusive) shall determine the allocation of the adjusted Exercise Price
between or among shares of such classes of capital stock.
(b) Reclassification, Combinations, Mergers, etc. In case of any
--------------------------------------------
reclassification or change of outstanding shares of Common Stock issuable upon
exercise of the Warrants (other than as set forth in paragraph (a) above and
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 consolidation or merger of the Company with or into another
corporation (other than a merger or acquisition in which the Company is the
continuing corporation and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants) or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company or such a
successor or purchasing corporation, as the case may be, shall forthwith make
lawful and adequate provision whereby the Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance equivalent in value to the number of shares of Common Stock issuable
upon exercise of such Warrant immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance and enter into a supplemental
warrant agreement so providing. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 13. If the issuer of securities
deliverable upon exercise of Warrants under the supplemental warrant agreement
is an affiliate of the formed, surviving or transferee corporation, that issuer
shall join in the supplemental warrant agreement. The above provisions of this
paragraph (b) shall similarly apply to successive reclassifications and changes
of shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(c) Issuance of Options or Convertible Securities. In the event the
---------------------------------------------
Company shall, at any time or from time to time after the date hereof, issue,
sell, distribute or otherwise grant in any manner (including by assumption) to
all holders of the Common Stock any rights to subscribe for or to purchase, or
any warrants or options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (any such rights,
warrants or options being herein called "OPTIONS" and any such convertible or
exchangeable stock or securities being herein called "CONVERTIBLE SECURITIES")
or any Convertible Securities (other than upon exercise of any Option), whether
or not such Options or the rights to convert or exchange such Convertible
Securities are immediately exercisable, and the price per share at which Common
Stock is issuable upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities (determined by dividing (i) the
aggregate amount, if any, received or receivable by the Company as consideration
for the issuance, sale, distribution or granting of such Options or any such
Convertible Security, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of all such
Options or upon conversion or exchange of all such Convertible Securities, plus,
in the case of Options to acquire Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the conversion or
exchange of all such Convertible Securities, by (ii) the total maximum number of
shares of Common Stock
-15-
<PAGE>
issuable upon the exercise of all such Options or upon the conversion or
exchange of all such Convertible Securities or upon the conversion or exchange
of all Convertible Securities issuable upon the exercise of all such Options)
shall be less than the current market price per share of Common Stock on the
record date for the issuance, sale, distribution or granting of such Options or
Convertible Securities (any such event being herein called a "DISTRIBUTION"),
then, effective upon such Distribution, (I) the Exercise Price shall be reduced
to the price (calculated to the nearest 1/1,000 of one cent) determined by
multiplying the Exercise Price in effect immediately prior to such Distribution
by a fraction, the numerator of which shall be the sum of (i) the number of
shares of Common Stock outstanding (exclusive of any treasury shares)
immediately prior to such Distribution multiplied by the current market price
per share of Common Stock on the date of such Distribution plus (ii) the
consideration, if any, received by the Company upon such Distribution, and the
denominator of which shall be the product of (A) the total number of shares of
Common Stock outstanding (exclusive of any treasury shares) immediately after
such Distribution multiplied by (B) the current market price per share of Common
Stock on the record date for such Distribution and (II) the number of shares of
Common Stock purchasable upon the exercise of each Warrant shall be increased to
a number determined by multiplying the number of shares of Common Stock so
purchasable immediately prior to the record date for such Distribution by a
fraction, the numerator of which shall be the Exercise Price in effect
immediately prior to the adjustment required by clause (I) of this sentence and
the denominator of which shall be the Exercise Price in effect immediately after
such adjustment. For purposes of the foregoing, the total maximum number of
shares of Common Stock issuable upon exercise of all such Options or upon
conversion or exchange of all such Convertible Securities or upon the conversion
or exchange of the total maximum amount of the Convertible Securities issuable
upon the exercise of all such Options shall be deemed to have been issued as of
the date of such Distribution and thereafter shall be deemed to be outstanding
and the Company shall be deemed to have received as consideration therefor such
price per share, determined as provided above. Except as provided in paragraphs
(j) and (k) below, no additional adjustment of the Exercise Price shall be made
upon the actual exercise of such Options or upon conversion or exchange of the
Convertible Securities or upon the conversion or exchange of the Convertible
Securities issuable upon the exercise of such Options.
(d) Dividends and Distributions. In the event the Company shall, at
---------------------------
any time or from time to time after the date hereof, distribute to all the
holders of Common Stock any dividend or other distribution of cash, evidences of
its indebtedness, other securities or other properties or assets (in each case
other than (i) dividends payable in Common Stock, Options or Convertible
Securities and (ii) any cash dividend or other cash distributions from current
or retained earnings), or any options, warrants or other rights to subscribe for
or purchase any of the foregoing, then (A) the Exercise Price shall be decreased
to a price determined by multiplying the Exercise Price then in effect by a
fraction, the numerator of which shall be the current market price per share of
Common Stock on the record date for such distribution less the sum of (X) the
cash portion, if any, of such distribution per share of Common Stock outstanding
(exclusive of any treasury shares) on the record date for such distribution plus
(Y) the then fair market value (as determined in good faith by the Board of
Directors of the Company) per share of Common Stock outstanding (exclusive of
any treasury shares) on the record date for such distribution of that portion,
if any, of such distribution consisting of evidences of indebtedness, other
securities, properties, assets, options, warrants or subscription or purchase
rights, and the denominator of which shall be such current market price per
-16-
<PAGE>
share of Common Stock and (B) the number of shares of Common Stock purchasable
upon the exercise of each Warrant shall be increased to a number determined by
multiplying the number of shares of Common Stock so purchasable immediately
prior to the record date for such distribution by a fraction, the numerator of
which shall be the Exercise Price in effect immediately prior to the adjustment
required by clause (A) of this sentence and the denominator of which shall be
the Exercise Price in effect immediately after such adjustment. The adjustments
required by this paragraph (d) shall be made whenever any such distribution
occurs retroactive to the record date for the determination of stockholders
entitled to receive such distribution.
(e) Adjustment for Sale of Common Stock Below Current Market Price.
--------------------------------------------------------------
If, after the date hereof, the Company sells any Common Stock or any securities
convertible into or exchangeable or exercisable for the Common Stock (other than
(i) pursuant to the exercise of the Warrants, (ii) any security convertible
into, or exchangeable or exercisable for, the Common Stock as to which the
issuance thereof has previously been the subject of any required adjustment
pursuant to this Section 13, (iii) the issuance of Common Stock upon the
conversion, exchange or exercise of convertible, exchangeable or exercisable
securities of the Company outstanding on the date of this Agreement (to the
extent in accordance with the terms of such securities as in effect on the date
of this Agreement) or (iv) Excluded Securities) at a price per share less than
the current market price, the Exercise Price shall be adjusted in accordance
with the formula:
E' = E x (O + N)
------------
(O + (N x P/M))
where:
E' = the adjusted Exercise Price;
E = the current Exercise Price;
O = the number of shares of Common Stock outstanding on the date of sale
of Common Stock at a price per share less than the current market
price to which this paragraph (e) applies;
N = the number of shares of Common Stock so sold or the maximum stated
number of shares of Common Stock issuable upon the conversion,
exchange, or exercise of any such convertible, exchangeable or
exercisable securities, as the case may be;
P = the offering price per share pursuant to any such convertible,
exchangeable or exercisable securities so sold or the sale price of
the shares so sold, as the case may be; and
M = the current market price as of the Time of Determination or at the
time of sale, as the case may be.
-17-
<PAGE>
The adjustment shall become effective immediately after the record
date for the determination of stockholders entitled to receive the rights,
warrants or options to which this paragraph (e) applies or upon consummation of
the sale of Common Stock, as the case may be. To the extent that shares of
Common Stock are not delivered after the expiration of such rights or warrants,
the Exercise Price shall be readjusted to the Exercise Price which would
otherwise be in effect had the adjustment made upon the issuance of such rights
or warrants been made on the basis of delivery of only the number of shares of
Common Stock actually delivered. In the event that such rights or warrants are
not so issued, the Exercise Price shall again be adjusted to be the Exercise
Price which would then be in effect if such date fixed for determination of
stockholders entitled to receive such rights or warrants had not been so fixed.
No adjustment shall be made under this paragraph (e) if (I) the
application of the formula stated above in this paragraph (e) would result in a
value of E' that is lower than the value of E or (II) such adjustment would
require an increase or decrease of less than 1% to the Exercise Price; provided,
that any adjustment not made as a result of this clause (e)(II) shall be carried
forward and included in the next adjustment required to be made hereunder.
Except as provided in paragraphs (j) and (k) below, no adjustment of the
Exercise Price shall be made upon the actual conversion or exchange of the
Convertible Securities.
(f) Current Market Price. For the purpose of any computation of
--------------------
current market price under this Section 13 and Section 15, the current market
price per share of Common Stock at any date shall be (x) for purposes of Section
15, the closing price on the business day immediately prior to the exercise of
the applicable Warrant pursuant to Section 8 and (y) in all other cases, the
average of the daily closing prices for the shorter of (i) the 20 consecutive
trading days ending on the last full trading day on the exchange or market
specified in the second succeeding sentence prior to the Time of Determination
(as defined below) and (ii) the period commencing on the date next succeeding
the first public announcement of the issuance, sale, distribution or granting in
question through such last full trading day prior to the Time of Determination.
The term "TIME OF DETERMINATION" as used herein shall be the time and date of
the earlier to occur of (A) the date as of which the current market price is to
be computed and (B) the last full trading day on such exchange or market before
the commencement of "ex-dividend" trading in the Common Stock relating to the
event giving rise to the adjustment required by paragraph (a), (b), (c) or (d).
The closing price for any day shall be the last reported sale price regular way
or, in case no such reported sale takes place on such day, the average of the
closing bid and asked prices regular way for such day, in each case (1) on the
principal national securities exchange on which the shares of Common Stock are
listed or to which such shares are admitted to trading or (2) if the Common
Stock is not listed or admitted to trading on a national securities exchange, in
the over-the-counter market as reported by Nasdaq National Market or any
comparable system or (3) if the Common Stock is not listed on Nasdaq National
Market or a comparable system, as furnished by two members of the NASD selected
from time to time in good faith by the Board of Directors of the Company for
that purpose. In the absence of all of the foregoing, or if for any other
reason the current market price per share cannot be determined pursuant to the
foregoing provisions of this paragraph (f), the current market price per share
shall be the fair market value thereof as determined in good faith by the Board
of Directors of the Company.
-18-
<PAGE>
(g) Certain Distributions. If the Company shall pay a dividend or
---------------------
make any other distribution payable in Options or Convertible Securities, then,
for purposes of paragraph (d) above, such Options or Convertible Securities
shall be deemed to have been issued or sold without consideration.
(h) Consideration Received. If any shares of Common Stock, Options
----------------------
or Convertible Securities shall be issued, sold or distributed for a
consideration other than cash, the amount of the consideration other than cash
received by the Company in respect thereof shall be deemed to be the then fair
market value of such consideration (as determined in good faith by the Board of
Directors of the Company). If any Options shall be issued in connection with the
issuance and sale of other securities of the Company, together comprising one
integral transaction in which no specific consideration is allocated to such
Options by the parties thereto, such Options shall be deemed to have been issued
without consideration; provided, however, that if such Options have an exercise
price equal to or greater than the current market price of the Common Stock on
the date of issuance of such Options, then such Options shall be deemed to have
been issued for consideration equal to such exercise price.
(i) Deferral of Certain Adjustments. No adjustment to the Exercise
-------------------------------
Price (including the related adjustment to the number of shares of Common Stock
purchasable upon the exercise of each Warrant) shall be required hereunder
unless such adjustment, together with other adjustments carried forward as
provided below, would result in an increase or decrease of at least one percent
of the Exercise Price; provided that any adjustments which by reason of this
paragraph (i) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. No adjustment need be made for a
change in the par value of the Common Stock. All calculations under this
Section 13 shall be made to the nearest 1/1,000 of one cent or to the nearest
1/1000 of a share, as the case may be.
(j) Changes in Options and Convertible Securities. If the exercise
---------------------------------------------
price provided for in any Options referred to in paragraph (c) above, the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in paragraph (c) or (e) above, or the rate at
which any Convertible Securities referred to in paragraph (c) or (e) above are
convertible into or exchangeable for Common Stock shall change at any time
(other than under or by reason of provisions designed to protect against
dilution upon an event which results in a related adjustment pursuant to this
Section 13), the Exercise Price then in effect and the number of shares of
Common Stock purchasable upon the exercise of each Warrant shall forthwith be
readjusted (effective only with respect to any exercise of any Warrant after
such readjustment) to the Exercise Price and number of shares of Common Stock so
purchasable that would then be in effect had the adjustment made upon the
issuance, sale, distribution or granting of such Options or Convertible
Securities been made based upon such changed purchase price, additional
consideration or conversion rate, as the case may be, but only with respect to
such Options and Convertible Securities as then remain outstanding.
(k) Expiration of Options and Convertible Securities. If, at any
------------------------------------------------
time after any adjustment to the number of shares of Common Stock purchasable
upon the exercise of each Warrant shall have been made pursuant to paragraph
(c), (e) or (j) above or this paragraph (k), any Options
-19-
<PAGE>
or Convertible Securities shall have expired unexercised, the number of such
shares so purchasable shall, upon such expiration, be readjusted and shall
thereafter be such as they would have been had they been originally adjusted (or
had the original adjustment not been required, as the case may be) as if (i) the
only shares of Common Stock deemed to have been issued in connection with such
Options or Convertible Securities were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such Options or Convertible
Securities and (ii) such shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Company upon such exercise plus the
aggregate consideration, if any, actually received by the Company for the
issuance, sale, distribution or granting of all such Options or Convertible
Securities, whether or not exercised; provided that no such readjustment shall
have the effect of decreasing the number of such shares so purchasable by an
amount (calculated by adjusting such decrease to account for all other
adjustments made pursuant to this Section 13 following the date of the original
adjustment referred to above) in excess of the amount of the adjustment
initially made in respect of the issuance, sale, distribution or granting of
such Options or Convertible Securities.
(l) Other Adjustments. In the event that at any time, as a result of
-----------------
an adjustment made pursuant to this Section 13, the Holders shall become
entitled to receive any securities of the Company other than shares of Common
Stock, thereafter the number of such other securities so receivable upon
exercise of the Warrants and the Exercise Price applicable to such exercise
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the shares of
Common Stock contained in this Section 13.
(m) Equity Commitment. In the event that the Equity Commitment
-----------------
Warrants are issued, the number of shares of Common Stock issuable upon exercise
of the Warrants shall be increased for any unexercised Warrants as of the date
of issuance of such Equity Commitment Warrants.
(n) No Adjustment Required. Without limiting any other exception
----------------------
contained in this Section 13, and in addition thereto, no adjustment will be
made for:
(i) exercises or conversions of any Options or Convertible
Securities outstanding on the date hereof;
(ii) issuances of Options, Convertible Securities or Common
Stock to employees, directors or consultants of the Company or any of its
subsidiaries pursuant to a plan approved by the Board of Directors of the
Company;
(iii) rights to purchase Common Stock pursuant to a Company plan
for reinvestment of dividends or interest;
(iv) issuances of Options, Convertible Securities or Common
Stock in bona fide public offerings or private placements pursuant to Section
4(2) of the Securities Act, Regulation D thereunder or Regulation S, involving
at least one investment bank of national reputation;
-20-
<PAGE>
(v) issuances of Options, Convertible Securities or Common Stock
in connection with the establishment of commercial bank facilities, capital
lease obligations or other issuances of primarily debt obligations or
securities; or
(vi) issuances of Excluded Securities.
Section 14. Statement on Warrants. Irrespective of any adjustment in the
---------------------
number or kind of shares issuable upon the exercise of the Warrants or the
Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.
Section 15. Fractional Interest. The Company shall not be required to
-------------------
issue fractional shares of Common Stock on the exercise of Warrants. If more
than one Warrant shall be presented for exercise in full at the same time by the
same Holder, the number of full shares of Common Stock which shall be issuable
upon such exercise shall be computed on the basis of the aggregate number of
shares of Common Stock acquirable on exercise of the Warrants so presented. If
any fraction of a share of Common Stock would, except for the provisions of this
Section 15, be issuable on the exercise of any Warrant (or specified portion
thereof), the Company shall direct the Transfer Agent to pay an amount in cash
calculated by it to equal the then current market price per share multiplied by
such fraction computed to the nearest whole cent. The Holders, by their
acceptance of the Warrant Certificates, expressly waive any and all rights to
receive any fraction of a share of Common Stock or a stock certificate
representing a fraction of a share of Common Stock.
Section 16. Notices to Warrant Holders. Upon any adjustment of the
--------------------------
Exercise Price pursuant to Section 13, the Company shall promptly thereafter (i)
cause to be filed with the Warrant Agent a certificate of a firm of independent
public accountants of recognized standing selected by the Board of Directors of
the Company (who may be the regular auditors of the Company) setting forth the
Exercise Price after such adjustment and setting forth in reasonable detail the
method of calculation and the facts upon which such calculations are based and
setting forth the number of Warrant Shares (or portion thereof) issuable after
such adjustment in the Exercise Price, upon exercise of a Warrant and payment of
the adjusted Exercise Price, which certificate shall be conclusive evidence of
the correctness of the matters set forth therein, and (ii) cause to be given to
each of the registered Holders of the Warrant Certificates at his address
appearing on the Warrant register written notice of such adjustments by first-
class mail, postage prepaid. The Warrant Agent shall be entitled to rely on the
above-referenced accountant's certificate and shall be under no duty or
responsibility with respect to any such certificate, except to exhibit the same
from time to time to any Holder desiring an inspection thereof during reasonable
business hours. The Warrant Agent shall not at any time be under any duty or
responsibility to any Holder to determine whether any facts exist that may
require any adjustment of the number of shares of Common Stock or other stock or
property issuable on exercise of the Warrants or the Exercise Price, or with
respect to the nature or extent of any such adjustment when made, or with
respect to the method employed in making such adjustment or the validity or
value (or the kind or amount) of any shares of Common Stock or other stock or
property which may be issuable on exercise of the Warrants. The Warrant Agent
shall not be responsible for any failure of the Company to make any cash payment
or to issue, transfer or
-21-
<PAGE>
deliver any shares of Common Stock or stock certificates or other common stock
or property upon the exercise of any Warrant.
In case:
(a) the Company shall authorize the issuance to all holders of shares
of Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets (other than
cash dividends or cash distributions payable out of consolidated earnings or
earned surplus or dividends payable in shares of Common Stock or distributions
referred to in Section 13 hereof); or
(c) of any consolidation or merger to which the Company is a party
and for which approval of any shareholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock issuable
upon exercise of the Warrants (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 a tender offer or exchange offer for shares of
Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) a Change of Control (as defined in the Indenture) occurs;
then the Company shall cause to be filed with the Warrant Agent and shall cause
to be given to each of the registered Holders of the Warrant Certificates at
such Holder's address appearing on the Warrant register, at least 20 days (or 10
days in any case specified in clauses (a) or (b) above) prior to the applicable
record date hereinafter specified, or promptly in the case of events for which
there is no record date, by first class mail, postage prepaid, a written notice
stating (i) the date as of which the holders of record of shares of Common Stock
to be entitled to receive any such rights, options, warrants or distribution are
to be determined, or (ii) the initial expiration date set forth in any tender
offer or exchange offer for shares of Common Stock, or (iii) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding up or Change of Control is expected to become effective or
consummated, and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange such shares for securities
or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up or Change of Control. The failure to give the notice required by this
Section 16 or any defect therein shall not affect the legality or validity of
any distribution, right, option, warrant, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up, or Change of Control or the
vote upon any action. Nothing contained in this Agreement or in any of the
Warrant Certificates shall be construed as conferring upon the Holders thereof
the right to vote or to consent or to receive notice as shareholders in respect
of the
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<PAGE>
meetings of shareholders or the election of Directors of the Company or any
other matter, or any rights whatsoever as shareholders of the Company.
Section 17. Merger, Consolidation or Change of Name of Warrant Agent.
--------------------------------------------------------
Any corporation into which the Warrant Agent may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Warrant Agent shall be a party, or any corporation succeeding to
the business of the Warrant Agent, shall be the successor to the Warrant Agent
hereunder without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided that such corporation would be
eligible for appointment as a successor warrant agent under the provisions of
Section 19. Any such successor Warrant Agent shall promptly cause notice of its
succession as Warrant Agent to be mailed (by first class mail, postage prepaid)
to each Holder at such Holder's last address as shown on the register maintained
by the Warrant Agent pursuant to this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement, and in case at that time any of the Warrant Certificates shall have
been countersigned but not delivered, any such successor to the Warrant Agent
may adopt the countersignature of the original Warrant Agent; and in case at
that time any of the Warrant Certificates shall not have been countersigned, any
successor to the Warrant Agent may countersign such Warrant Certificates either
in the name of the predecessor Warrant Agent or in the name of the successor to
the Warrant Agent; and in all such cases such Warrant Certificates shall have
the full force and effect provided in the Warrant Certificates and in this
Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent whose name has been changed may adopt the
countersignature under its prior name, and in case at that time any of the
Warrant Certificates shall not have been countersigned, the Warrant Agent may
countersign such Warrant Certificates either in its prior name or in its changed
name, and in all such cases such Warrant Certificates shall have the full force
and effect provided in the Warrant Certificates and in this Agreement.
Section 18. Warrant Agent. The Warrant Agent undertakes the duties and
-------------
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the Holders of Warrants, by their acceptance
thereof, shall be bound:
(a) The statements contained herein and in the Warrant Certificates
shall be taken as statements of the Company and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as describe
the Warrant Agent or action taken or to be taken by it. The Warrant Agent
assumes no responsibility with respect to the distribution of the Warrant
Certificates except as herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.
-23-
<PAGE>
The Warrant Agent may consult at any time with counsel satisfactory to it
(who may be counsel for the Company) and the Warrant Agent shall incur no
liability or responsibility to the Company or to any Holder of any Warrant
Certificate in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
The Warrant Agent shall incur no liability or responsibility to the Company
or to any Holder of any Warrant Certificate for any action taken in reliance on
any Warrant Certificate, certificate of shares, notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument believed by
it to be genuine and to have been signed, sent or presented by the proper party
or parties.
The Company agrees to pay to the Warrant Agent such compensation for all
services rendered by the Warrant Agent in the execution of this Agreement as the
parties shall agree from time to time, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature reasonably incurred by the Warrant Agent in the execution of this
Agreement and to indemnify the Warrant Agent and save it harmless against any
and all liabilities, including judgments, costs and counsel fees, for anything
done or omitted by the Warrant Agent in the execution of this Agreement except
as a result of its negligence or willful misconduct.
The Warrant Agent shall be under no obligation to institute any action,
suit or legal proceeding or to take any other action likely to involve expense
unless the Company or one or more Holders of Warrant Certificates shall furnish
the Warrant Agent with security and indemnity satisfactory to the Warrant Agent
for any costs and expenses which may be incurred, but this provision shall not
affect the power of the Warrant Agent to take such action as it may consider
proper, whether with or without any such security or indemnity. All rights of
action under this Agreement or under any of the Warrants may be enforced by the
Warrant Agent without the possession of any of the Warrant Certificates or the
production thereof at any trial or other proceeding relative thereto, and any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent and any recovery of judgment shall be for the
ratable benefit of the Holders of the Warrants, as their respective rights or
interests may appear. No provision of this Agreement shall require the Warrant
Agent to expend or risk its own funds.
The Warrant Agent, and any stockholder, director, officer or employee of
it, may buy, sell or deal in any of the Warrants or other securities of the
Company or become pecuniarily interested in any transaction in which the Company
may be interested, or contract with or lend money to the Company or otherwise
act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
The Warrant Agent shall act hereunder solely as agent for the Company, and
its duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not be liable for anything which it may do or refrain from doing in
connection with this Agreement except for its own negligence or willful
misconduct.
-24-
<PAGE>
The Warrant Agent shall not at any time be under any duty or responsibility
to any Holder of any Warrant Certificate to make or cause to be made any
adjustment of the Exercise Price or number of the Warrant Shares or other
securities or property deliverable as provided in this Agreement, or to
determine whether any facts exist which may require any of such adjustments, or
with respect to the nature or extent of any such adjustments, when made, or with
respect to the method employed in making the same. The Warrant Agent shall not
be accountable with respect to the validity or value or the kind or amount of
any Warrant Shares or of any securities or property which may at any time be
issued or delivered upon the exercise of any Warrant or with respect to whether
any such Warrant Shares or other securities will when issued be validly issued
and fully paid and nonassessable, and makes no representation with respect
thereto.
Section 19. Resignation and Removal of Warrant Agent; Appointment of
--------------------------------------------------------
Successor. No resignation or removal of the Warrant Agent and no appointment of
- ---------
a successor warrant agent shall become effective until the acceptance of
appointment by the successor warrant agent as provided herein. The Warrant
Agent may resign its duties and be discharged from all further duties and
liability hereunder (except liability arising as a result of the Warrant Agent's
own negligence or willful misconduct) after giving written notice to the
Company. The Company may remove the Warrant Agent upon written notice, and the
Warrant Agent shall thereupon in like manner be discharged from all further
duties and liabilities hereunder, except as aforesaid. The Warrant Agent shall,
at the Company's expense, cause to be mailed (by first class mail, postage
prepaid) to each Holder of a Warrant at such Holder's last address as shown on
the register of the Company maintained by the Warrant Agent a copy of said
notice of resignation or notice of removal, as the case may be. Upon such
resignation or removal, the Company shall appoint in writing a new warrant
agent. If the Company shall fail to make such appointment within a period of 30
days after it has been notified in writing of such resignation by the resigning
Warrant Agent or after such removal, then the resigning Warrant Agent or the
Holder of any Warrant may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a corporation doing business under the
laws of the United States or any state thereof, in good standing and having a
combined capital and surplus of not less than $50,000,000. The combined capital
and surplus of any such new warrant agent shall be deemed to be the combined
capital and surplus as set forth in the most recent annual report of its
condition published by such warrant agent prior to its appointment, provided
that such reports are published at least annually pursuant to law or to the
requirements of a federal or state supervising or examining authority. After
acceptance in writing of such appointment by the new warrant agent, it shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as the Warrant Agent, without any further
assurance, conveyance, act or deed; but if for any reason it shall be necessary
or expedient to execute and deliver any further assurance, conveyance, act or
deed, the same shall be done at the expense of the Company and shall be legally
and validly executed and delivered by the resigning or removed Warrant Agent.
Not later than the effective date of any such appointment, the Company shall
give notice thereof to the resigning or removed Warrant Agent. Failure to give
any notice provided for in this Section 19, however, or any defect therein,
shall not affect the legality or validity of the resignation of the Warrant
Agent or the appointment of a new warrant agent, as the case may be.
-25-
<PAGE>
Section 20. Registration. The Company and the Warrant Agent acknowledge
------------
that Holders shall have the registration rights set forth in the Warrant
Registration Rights Agreement.
Section 21. Reports.
-------
(a) Whether or not required by the rules and regulations of the
Commission, so long as any Warrants are outstanding, the Company will furnish to
the holders of Warrants upon request (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 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 (the information and reports in clauses (i) and (ii), collectively,
"SEC REPORTS").
(b) The Company shall provide the Warrant Agent with a sufficient
number of copies of all SEC Reports that the Warrant Agent may be required to
deliver to the Holders of the Warrants under this Section 21.
Section 22. Rule 144A. The Company hereby agrees with each Holder, for
---------
so long as any Registrable Securities remain outstanding, to make available,
upon request of any Holder of Registrable Securities, to any Holder or
beneficial owner of Registrable Securities in connection with any sale thereof
and any prospective purchaser of such Registrable Securities designated by such
Holder or beneficial owner, the information required by Rule 144A(d)(4) under
the Securities Act in order to permit resales of such Registrable Securities
pursuant to Rule 144A.
Section 23. Notices to Company and Warrant Agent. Any notice or demand
------------------------------------
authorized by this Agreement to be given or made by the Warrant Agent or by the
Holder of any Warrant Certificate to or on the Company shall be sufficiently
given or made when and if deposited in the mail, first class or registered,
postage prepaid, addressed (until another address is filed in writing by the
Company with the Warrant Agent), as follows:
Covad Communications Group, Inc.
3650 Bassett Street
Santa Clara, California 95054
Telecopy: (408) 490-4501
Telephone: (408) 490-4500
Attention: President
with copies to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Telecopy: (650) 493-6811
Telephone: (650) 493-9300
-26-
<PAGE>
Attention: Barry E. Taylor, Esq.
In case the Company shall fail to maintain such office or agency or shall
fail to give such notice of the location or of any change in the location
thereof, presentations may be made and notices and demands may be served at the
principal office of the Warrant Agent.
Any notice pursuant to this Agreement to be given by the Company or by the
Holder(s) of any Warrant Certificate to the Warrant Agent shall be sufficiently
given when and if deposited in the mail, first-class or registered, postage
prepaid, addressed (until another address is filed in writing by the Warrant
Agent with the Company) to the Warrant Agent as follows:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Telecopy: (212) 815-5915
Telephone: (212) 815-5763
Attention: Corporate Trust Trustee Administration
Section 24. Supplements and Amendments. The Company and the Warrant
--------------------------
Agent may from time to time supplement or amend this Agreement without the
approval of any Holders of Warrant Certificates in order to cure any ambiguity
or to correct or supplement any provision contained herein which may be
defective or inconsistent with any other provision herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Warrant Agent may deem necessary or desirable and which shall not in any
way adversely affect the interests of the Holders of Warrant Certificates. Any
amendment or supplement to this Agreement that has a material adverse effect on
the interests of Holders shall require the written consent of Holders
representing a majority of the then outstanding Warrants. The consent of each
Holder of a Warrant affected shall be required for any amendment pursuant to
which the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (other than pursuant to
adjustments provided for in Section 13 hereof or amendments to Section 13 which
can be made by the written consent of Holders representing a majority of the
then outstanding Warrants). The Warrant Agent shall be entitled to receive and,
subject to Section 18, shall be fully protected in relying upon, an officers'
certificate and opinion of counsel as conclusive evidence that any such
amendment or supplement is authorized or permitted hereunder, that it is not
inconsistent herewith, and that it will be valid and binding upon the Company in
accordance with its terms.
Section 25. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 26. Termination. This Agreement (other than any party's
-----------
obligations with respect to Warrants previously exercised and with respect to
indemnification under Section 18) shall terminate at 5:00 p.m., New York City
time on the Expiration Date.
-27-
<PAGE>
Section 27. Governing Law. THIS AGREEMENT AND EACH WARRANT CERTIFICATE
-------------
ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE
STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF SAID STATE, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS
PROVISIONS THEREOF.
Section 28. Benefits of This Agreement.
--------------------------
(a) Nothing in this Agreement shall be construed to give to any
Person other than the Company, the Warrant Agent and the Holders of the Warrant
Certificates any legal or equitable right, remedy or claim under this Agreement;
but this Agreement shall be for the sole and exclusive benefit of the Company,
the Warrant Agent and the Holders of the Warrant Certificates.
(b) Prior to the exercise of the Warrants, no Holder of a Warrant
Certificate, as such, shall be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to receive dividends or
subscription rights, the right to vote, to consent, to exercise any preemptive
right, to receive any notice of meetings of stockholders for the election of
directors of the Company or any other matter or to receive any notice of any
proceedings of the Company, except as may be specifically provided for herein.
The Holders of the Warrants are not entitled to share in the assets of the
Company in the event of the liquidation, dissolution or winding up of the
Company's affairs.
(c) All rights of action in respect of this Agreement are vested in
the Holders of the Warrants, and any Holder of any Warrant, without the consent
of the Warrant Agent or the Holder of any other Warrant, may, on such Holder's
own behalf and for such Holder's own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company suitable to enforce,
or otherwise in respect of, such Holder's rights hereunder, including the right
to exercise, exchange or surrender for purchase such Holder's Warrants in the
manner provided in this Agreement.
Section 29. Counterparts. This Agreement may be executed in any number
------------
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
[Signature Page Follows]
-28-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Timothy P. Laehy
-------------------------------------
Name: Timothy P. Laehy
------------------------------------
Title: Chief Financial Officer, Treasurer
-----------------------------------
and Vice President, Finance
THE BANK OF NEW YORK
By: /s/ Mary Beth Lewicki
-------------------------------------
Name: Mary Beth Lewicki
------------------------------------
Title: Assistant Vice President
-----------------------------------
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
[FACE]
[THIS GLOBAL WARRANT IS HELD BY THE DEPOSITARY (AS DEFINED IN THE WARRANT
AGREEMENT GOVERNING THIS WARRANT) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT
OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON
UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE WARRANT AGENT MAY MAKE SUCH
NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 10 OF THE WARRANT
AGREEMENT, (II) THIS GLOBAL WARRANT MAY BE EXCHANGED IN WHOLE BUT NOT IN
PART PURSUANT TO SECTION 7(a) OF THE WARRANT AGREEMENT, (III) THIS GLOBAL
WARRANT MAY BE DELIVERED TO THE WARRANT AGENT FOR CANCELLATION PURSUANT TO
SECTION 7(h) OF THE WARRANT AGREEMENT AND (IV) THIS GLOBAL WARRANT MAY BE
TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE
COMPANY.
UNLESS THIS WARRANT CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR THE
WARRANT AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF
THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH
THE RESTRICTIONS SET FORTH IN SECTION 7 OF THE WARRANT AGREEMENT.]/1/
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH
__________________
/1/ These paragraphs are to be included only if the Warrant is in global
form.
A-1
<PAGE>
REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO,
REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER,
SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO COVAD
COMMUNICATIONS GROUP, INC. (THE "COMPANY"), (2) PURSUANT TO A REGISTRATION
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (3)
TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS
DEFINED IN RULE 144A IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE
144A, (4) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE
904 UNDER THE SECURITIES ACT, (5) TO AN INSTITUTIONAL "ACCREDITED INVESTOR"
WITHIN THE MEANING OF SUBPARAGRAPH (A)(1),(2),(3) OR (7) OF RULE 501 UNDER
THE SECURITIES ACT IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144
UNDER THE SECURITIES ACT, OR (6) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (AND BASED ON
AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN EACH OF THE
FOREGOING CASES TO APPLICABLE JURISDICTION, AND (B) THAT IT WILL, AND EACH
SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE
SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A)
ABOVE.
THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF
AN ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF ONE 13 1/2% SENIOR DISCOUNT
NOTE DUE 2008 OF COVAD COMMUNICATIONS GROUP, INC. (COLLECTIVELY, THE
"NOTES") AND ONE WARRANT INITIALLY ENTITLING THE HOLDER THEREOF TO PURCHASE
6.4792 SHARES, PAR VALUE $0.001 PER SHARE, OF COVAD COMMUNICATIONS GROUP,
INC. THE NOTES AND THE WARRANTS WILL BE AUTOMATICALLY SEPARATED UPON THE
EARLIEST TO OCCUR OF (i) 90 DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE
AS THE INITIAL PURCHASERS (AS DEFINED IN THE WARRANT REGISTRATION RIGHTS
AGREEMENT REFERRED TO HEREIN) MAY, IN THEIR DISCRETION, DEEM APPROPRIATE,
(iii) IN THE EVENT OF A CHANGE OF CONTROL (AS DEFINED IN THE INDENTURE),
THE DATE THE COMPANY MAILS NOTICE THEREOF TO HOLDERS OF NOTES, (iv) THE
DATE ON WHICH THE EXCHANGE OFFER (AS DEFINED IN THE INDENTURE) IS
CONSUMMATED AND (v) THE DATE ON WHICH THE SHELF REGISTRATION STATEMENT (AS
DEFINED IN THE INDENTURE) IS DECLARED EFFECTIVE, THE WARRANTS EVIDENCED BY
THIS CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT
MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE NOTES UNTIL THE
SEPARATION DATE.
A-2
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
[CUSIP] [CINS] [ISIN] No. _____
No. _____
WARRANTS TO PURCHASE COMMON SHARES
This certifies that Cede & Co., or its registered assigns, is the
owner of up to 260,000/2/ Warrants, each of which initially represents the right
to purchase, after the earliest to occur (the "EXERCISABILITY DATE") of (i)
September 15, 1998, (ii) an initial Public Equity Offering (as defined in the
Warrant Agreement referred to below) of the Company and (iii) in the event a
Change of Control (as defined in the Indenture governing the Notes) occurs, the
date the Company mails notice thereof to holders of Notes and Warrants, from
Covad Communications Group, Inc. (the "COMPANY"), 6.4792 shares of the Common
Stock, par value $.001 per share, of the Company (the "WARRANT SHARES") at an
exercise price (the "EXERCISE PRICE") of $.01 per Common Share (subject to
adjustment as provided in the Warrant Agreement referred to below), upon
surrender hereof at the office of The Bank of New York, or to its successor, as
the warrant agent under the Warrant Agreement (any such warrant agent being
herein called the "WARRANT AGENT"), or such other location contemplated by
Section 23 of the Warrant Agreement, with the Subscription Form on the reverse
hereof duly executed, with signature guaranteed as therein specified and
simultaneous payment in full by Federal wire transfer to the account designated
by the Company or by certified or official bank or bank cashier's check payable
to the order of the Company. Notwithstanding the foregoing, each Holder (as
defined in the Warrant Agreement) may exercise its right to receive Warrant
Shares on a net basis, such that without the exchange of any funds, the Holder
receives that number of Warrant Shares otherwise issuable upon exercise of its
Warrants less that number of Warrant Shares having a fair market value equal to
the aggregate Exercise Price that would otherwise have been paid by the Holder
for the Warrant Shares being issued. At any time after the Exercisability Date
and on or before the Expiration Date, any outstanding Warrants may be exercised
on any Business Day; provided, however, that a Registration Statement relating
to the Warrants is, at the time of exercise, effective and available for the
exercise of Warrants or the exercise of such Warrants is exempt from the
registration requirements of the Securities Act.
This Warrant Certificate is issued under and in accordance with a
Warrant Agreement dated March 11, 1998 (the "WARRANT AGREEMENT"), between the
Company and The Bank of New York, as Warrant Agent, and a Warrant Registration
Rights Agreement dated March 11, 1998 (the "WARRANT REGISTRATION RIGHTS
AGREEMENT"), among the Company and Bear, Stearns & Co. Inc. and BT Alex. Brown,
Incorporated, and is subject to the Certificate of Incorporation and Bylaws of
the Company and to the terms and provisions contained therein, to all of which
terms and provisions the Holder of this Warrant Certificate consents by
acceptance hereof. The terms of the Warrant
__________________
/2/ To evidence initially ________ Warrants, subject to increase and
decrease in accordance with the Schedule of Exchanges related hereto maintained
by the Warrant Agent, and, in combination with the ________ Warrant number
______ identified by CUSIP No. ________, to equal 260,000 Warrants.
A-3
<PAGE>
Agreement and the Warrant Registration Rights Agreement are hereby incorporated
herein by reference and made a part hereof. Reference is hereby made to the
Warrant Agreement and the Warrant Registration Rights Agreement for a full
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Company and the Holders of the Warrants. The
summary of the terms of the Warrant Agreement and the Warrant Registration
Rights Agreement contained in this Warrant Certificate is qualified in its
entirety by express reference to the Warrant Agreement and the Warrant
Registration Rights Agreement. All terms used in this Warrant Certificate that
are defined in the Warrant Agreement and the Warrant Registration Rights
Agreement shall have the meanings assigned to them in such agreements.
The number of Warrant Shares purchasable upon the exercise of each
Warrant and the price per share are subject to adjustment as provided in the
Warrant Agreement. Except as stated in the Warrant Agreement, in the event the
Company merges or consolidates with, or sells all or substantially all of its
assets to, another Person, each Warrant will, upon exercise, entitle the Holder
thereof to receive the number of shares of capital stock or other securities or
the amount of money and other property which the Holder of the number of Warrant
Shares (or other securities or property issuable upon exercise of a Warrant)
purchasable upon the exercise of the Warrant is entitled to receive upon
completion of such merger, consolidation or sale.
As to any final fraction of a share which the same Holder of one or
more Warrant Certificates would otherwise be entitled to purchase upon exercise
thereof in the same transaction, the Company may pay the cash value thereof
determined as provided in the Warrant Agreement.
All Warrant Shares issuable by the Company upon the exercise of
Warrants shall be validly issued, fully paid and not subject to any calls for
funds, and the Company shall pay any taxes and other governmental charges that
may be imposed under the laws of the United States of America or any political
subdivision or taxing authority thereof or therein in respect of the issue or
delivery thereof upon exercise of Warrants (other than income taxes imposed on
the Holder). The Company shall not be required, however, to pay any tax or
other charge imposed in connection with any transfer involved in the issue of
any certificate for Warrant Shares (including other securities or property
issuable upon the exercise of the Warrants) or payment of cash to any Person
other than the Holder of a Warrant Certificate surrendered upon the exercise of
a Warrant and in case of such transfer or payment, the Warrant Agent and the
Company shall not be required to issue any share certificate or pay any cash
until such tax or charge has been paid or it has been established to the Warrant
Agent's and the Company's satisfaction that no such tax or charge is due.
Subject to the restrictions on and conditions to transfer set forth in
Sections 11 and 13 of the Warrant Agreement, this Warrant Certificate and all
rights hereunder are transferable by the registered Holder hereof, in whole or
in part, on the register of the Company maintained by the Warrant Agent for such
purpose at the Warrant Agent's office in New York, New York, upon surrender of
this Warrant Certificate duly endorsed, or accompanied by a written instrument
of transfer in form satisfactory to the Company and the Warrant Agent duly
executed, with signatures guaranteed as specified in the attached Form of
Assignment, by the registered Holder hereof or such Holder's attorney duly
authorized in writing and by such other documentation required pursuant to the
Warrant Agreement and upon payment of any necessary transfer tax or other
governmental
A-4
<PAGE>
charge imposed upon such transfer. Upon any partial transfer, the Company will
sign and issue and the Warrant Agent will countersign and deliver to such Holder
a new Warrant Certificate or Certificates with respect to any portion not so
transferred. Each taker and Holder of this Warrant Certificate, by taking and
holding the same, consents and agrees that prior to the registration of transfer
as provided in the Warrant Agreement, the Company and the Warrant Agent may
treat the Person in whose name the Warrants are registered as the absolute owner
hereof for any purpose and as the Person entitled to exercise the rights
represented hereby, any notice to the contrary notwithstanding. Accordingly, the
Company and/or the Warrant Agent shall not, except as ordered by a court of
competent jurisdiction as required by law, be bound to recognize any equitable
or other claim to or interest in the Warrants on the part of any Person other
than such registered Holder, whether or not it shall have express or other
notice thereof.
This Warrant Certificate may be exchanged at the office of the Warrant
Agent maintained for such purpose in New York, New York, for Warrant
Certificates representing the same aggregate number of Warrants, each new
Warrant Certificate to represent such number of Warrants as the Holder hereof
shall designate at the time of such exchange.
Prior to the exercise of the Warrants represented hereby, the Holder
of this Warrant Certificate, as such, shall not be entitled to any rights of a
shareholder of the Company, including, without limitation, the right to vote or
to consent to any action of the shareholders, to receive any distributions, to
exercise any pre-emptive right or to receive any notice of meetings of
shareholders, and shall not be entitled to receive any notice of any proceedings
of the Company except as provided in the Warrant Agreement.
This Warrant Certificate shall be void and all rights evidenced hereby
shall cease on March 15, 2008, unless sooner terminated by the liquidation,
dissolution or winding-up of the Company or as otherwise provided in the Warrant
Agreement upon the consolidation or merger of the Company with, or sale of the
Company to, another Person or unless such date is extended as provided in the
Warrant Agreement.
A-5
<PAGE>
This Warrant Certificate shall not be valid for any purpose until it
shall have been countersigned by the Warrant Agent.
COVAD COMMUNICATIONS GROUP, INC.
By: __________________________________
Name:
Title:
Dated:
Countersigned:
THE BANK OF NEW YORK,
as Warrant Agent
By: _________________________________
Authorized Signatory
<PAGE>
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
To: The Bank of New York,
as Warrant Agent
101 Barclay Street, 21 West
New York, New York 10286
Attention: Corporate Trust Administration
The undersigned irrevocably exercises ________ of the Warrants
represented by this Warrant Certificate and herewith makes payment of $ _______
(such payment being by Federal wire transfer to the account designated by Covad
Communications Group, Inc. or by certified or official bank or bank cashier's
check payable to the order or at the direction of Covad Communications Group,
Inc.), or each Holder may exercise its right to receive Warrant Shares on a net
basis, such that without the exchange of any funds, the Holder receives that
number of Warrant Shares otherwise issuable upon exercise of its Warrants less
that number of Warrant Shares having a fair market value equal to the aggregate
Exercise Price that would otherwise have been paid by the Holder for the Warrant
Shares being issued, all at the exercise price and on the terms and conditions
specified in this Warrant Certificate and in the Warrant Agreement and the
Warrant Registration Rights Agreement referred to herein and surrenders this
Warrant Certificate and all right, title and interest therein to and directs
that the Common Stock, par value $0.001 per share, of Covad Communications
Group, Inc. deliverable upon the exercise of such Warrants be registered or
placed in the name and at the address specified below and delivered thereto.
Dated: _________________________ __________________________________
(Signature of Owner)
__________________________________
(Street Address)
__________________________________
(City) (State) (Zip Code)
Signature Guaranteed By:
__________________________________
Signatures must be guaranteed by an
"eligible guarantor institution" meeting
the requirements of the Warrant Agent,
which requirements include membership or
participation in the Security Transfer
Agent Medallion Program ("STAMP") or
such other "signature guarantee program"
as may be determined by the Warrant
Agent in addition to, or in
A-7
<PAGE>
substitution for, STAMP, all in
accordance with the Securities Exchange
Act of 1934, as amended.
Securities and/or check or other property to be issued or delivered to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
A-8
<PAGE>
FORM OF ASSIGNMENT
In consideration of monies or other valuable consideration received
from the Assignee(s) named below, the undersigned registered Holder of this
Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s)
named below (including the undersigned with respect to any Warrants constituting
a part of the Warrants evidenced by this Warrant Certificate not being assigned
hereby) all of the right of the undersigned under this Warrant Certificate, with
respect to the number of Warrants set forth below:
Name(s) of Assignee(s): ___________________________________
Address: __________________________________________________
No. of Warrants: __________________________________________
Please insert social security or other identifying number of assignee(s):
and does hereby irrevocably constitute and appoint ________________________ the
undersigned's attorney to make such transfer on the books of __________________
maintained for the purposes, with full power of substitution in the premises.
In connection with any transfer of Warrants, the undersigned confirms
that without utilizing any general solicitation or general advertising that:
[Check One]
----------
[_] (a) these Warrants are being transferred in compliance with the exemption
from registration under the United States Securities Act of 1933, as
amended, provided by Rule 144A thereunder.
or
--
[_] (b) these Warrants are being transferred other than in accordance with (a)
above and documents are being furnished which comply with the
conditions of transfer set forth in this Warrant Certificate and the
Warrant Agreement.
or
--
[_] (c) these Warrants are being transferred pursuant to an effective
registration statement under the United States Securities Act of 1933,
as amended.
If none of the foregoing boxes is checked, the Warrant Agent shall not be
obligated to register the Warrants in the name of any Person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 7 of the Warrant Agreement shall
have been satisfied.
A-9
<PAGE>
Dated:
____________________________
(Signature of Owner)
____________________________
(Street Address)
____________________________
(City) (State) (Zip Code)
Signature Guaranteed By:
____________________________
Signatures must be guaranteed by an "eligible
guarantor institution" meeting the requirements of
the Warrant Agent, which requirements include
membership or participation in the Security
Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be
determined by the Warrant Agent in addition to, or
in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.
A-10
<PAGE>
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing the
Warrant(s) for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the United States
Securities Act of 1933, as amended, and is aware that the sale to it is being
made in reliance on Rule 144A and acknowledges that it has received such
information regarding Covad Communications Group, Inc. as the undersigned has
requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated:________________
_________________________________________________
[NOTE: To be executed by an executive officer]
A-11
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS/3/
----------------------------------------------
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
<TABLE>
<CAPTION>
Number of
Warrants of
Amount of Amount of this Global
decrease in increase in Warrant Signature of
Number of Number of following authorized
Date of Warrants of this Warrants of this such decrease signatory of
Exchange Global Warrant Global Warrant (or increase) Warrant Agent
- ---------- ---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
____________________
/3/ This is to be included only if the Warrant is in global form.
A-12
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF WARRANTS
Re: Warrants to Purchase Common Stock (the "WARRANTS") of COVAD
COMMUNICATIONS GROUP, INC.
This Certificate relates to ____ Warrants held in* ___ book-entry or*
_______ certificated form by ____________________________________ (the
"TRANSFEROR").
The Transferor:*
[_] has requested the Warrant Agent by written order to deliver, in
exchange for its beneficial interest in the Global Warrant held by the
Depositary, a Warrant or Warrants in definitive, registered form of authorized
denominations and an aggregate number equal to its beneficial interest in such
Global Warrant (or the portion thereof indicated above); or
[_] has requested the Warrant Agent by written order to exchange or
register the transfer of a Warrant or Warrants.
In connection with such request and in respect of each such Warrant,
the Transferor does hereby certify that Transferor is familiar with the Warrant
Agreement relating to the above captioned Warrants and the restrictions on
transfers thereof as provided in Section 7 of such Warrant Agreement, and that
the transfer of this Warrant does not require registration under the Securities
Act of 1933, as amended (the "SECURITIES ACT") because[*]:
[_] Such Warrant is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 7(b)(i)(A) or Section 7(c)(y)(i) of
the Warrant Agreement).
[_] Such Warrant is being transferred to a qualified institutional
buyer (as defined in Rule 144A under the Securities Act), in accordance with
Rule 144A.
[_] Such Warrant is being transferred pursuant to an exemption from
registration in accordance with Rule 144 under the Securities Act.
[_] Such Warrant is being transferred to an institutional "accredited
investor," within the meaning of Rule 501(a)(1), (2), (3) or (7) under the
Securities Act pursuant to a private placement exemption from the registration
requirements of the Securities Act.
[_] Such Warrant is being transferred in accordance with Rule 904
under the Securities Act.
B-1
<PAGE>
[_] Such Warrant is being transferred in reliance on and in
compliance with an exemption from the registration requirements of the
Securities Act other than Rule 144A, Rule 144 or Rule 904 under the Securities
Act. An opinion of counsel to the effect that such transfer does not require
registration under the Securities Act accompanies this Certificate.
_______________________________
[INSERT NAME OF TRANSFEROR]
By:____________________________
Date: _____________
*Check applicable box.
B-2
<PAGE>
EXHIBIT 4.4
================================================================================
WARRANT REGISTRATION RIGHTS AGREEMENT
Dated March 11, 1998
By and Among
COVAD COMMUNICATIONS GROUP, INC.
BEAR, STEARNS & CO. INC.
and
BT ALEX. BROWN INCORPORATED
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WARRANT REGISTRATION RIGHTS AGREEMENT
THIS WARRANT REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is made
and entered into March 11, 1998, by and among COVAD COMMUNICATIONS GROUP, INC.,
a Delaware corporation (the "COMPANY"), and BEAR, STEARNS & CO. INC. and BT
ALEX. BROWN INCORPORATED (each an "INITIAL PURCHASER" and collectively, the
"INITIAL PURCHASERS").
This Agreement is made pursuant to the Purchase Agreement dated as of
March 6, 1998 among the Company and the Initial Purchasers (the "PURCHASE
AGREEMENT"), relating to, among other things, the sale by the Company to the
Initial Purchasers of an aggregate of 260,000 Units, each Unit consisting of
$1,000 principal amount at maturity of 13 1/2% Senior Discount Notes due March
15, 2008 and one Warrant, each initially exercisable for 6.4792 shares of Common
Stock, par value $.001 per share, of the Company. In order to induce the
Initial Purchasers to enter into the Purchase Agreement, the Company has agreed
to provide to the Initial Purchasers and the Holders (as defined herein), among
other things, the registration rights for the Warrant Shares (as defined herein)
set forth in this Agreement. The execution and delivery of this Agreement is a
condition to the obligations of the Initial Purchasers under the Purchase
Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
Section 1. Definitions. As used in this Agreement, the following defined
terms shall have the following meanings:
"Advice" has the meaning ascribed to such term in the last paragraph
of Section 4 hereof.
"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, means 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, however, that beneficial ownership of 10% or more of
the Voting Stock (as defined in the Indenture) of a Person shall be deemed
to be control.
"Business Day" means any day other than a Legal Holiday.
"Capital Stock" means, with respect to the Company, any and all
shares, interests, rights to purchase, warrants, options, participations,
or other equivalents of, or interests (however designated) in stock issued
by the Company.
"Common Stock" means the Common Stock, par value $.001 per share, of
the Company.
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"Company" shall have the meaning ascribed to that term in the preamble
of this Agreement and shall also include the Company's permitted successors
and assigns.
"Demand Registration" has the meaning ascribed to such term in Section
2.1(a) hereof.
"DTC" has the meaning ascribed to such term in Section 4(i) hereof.
"Effectiveness Date" means, with respect to any Registration
Statement, the 60th day after the filing date thereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Holder" means each of the Initial Purchasers, for so long as it owns
any Warrant Shares, and each of its successors, assigns and direct and
indirect transferees who become registered owners of such Warrant Shares.
"Included Securities" has the meaning ascribed to such term in Section
2.1(a) hereof.
"indemnified party" has the meaning ascribed to such term in Section
5(c) hereof.
"indemnifying party" has the meaning ascribed to such term in Section
5(c) hereof.
"Indenture" means the Indenture dated as of March 15, 1998, as amended
or supplemented from time to time, between the Company and The Bank of New
York as Trustee, pursuant to which the Notes are issued.
"Initial Purchasers" has the meaning ascribed to such term in the
preamble hereof.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are
authorized by law, regulation or executive order to remain closed. If a
payment date is a Legal Holiday at a place of payment, payment may be made
at that place on the next succeeding day that is not a Legal Holiday, and
no interest shall accrue on such payment for the intervening period.
"Notes" means the aggregate of $260,000,000 principal amount at
maturity of 13 1/2% Senior Discount Notes due March 15, 2008 of the Company
issued under the Indenture.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated
organization or government or agency or political subdivision thereof
(including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or
business).
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"Piggy-Back Registration" has the meaning ascribed to such term in
Section 2.2(a) hereof.
"Prospectus" means the prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to
completion and a prospectus that includes any information previously
omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act),
as amended or supplemented by any prospectus supplement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
"Public Equity Offering" means an underwritten offering of Common
Stock pursuant to a registration statement that has been declared effective
by the SEC 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).
"Purchase Agreement" has the meaning ascribed to such term in the
preamble hereof.
"Registrable Securities" means any of (i) the Warrant Shares and (ii)
any other securities issued or issuable with respect to any Registrable
Securities by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise, unless, in each case, such Warrant Shares have
been offered and sold to the Holder pursuant to an effective Registration
Statement under the Securities Act declared effective prior to the
exercisability of the Warrants and such securities may be sold to the
public pursuant to Rule 144 without any restriction on the amount of
securities which may be sold by such Holder. As to any particular
Registrable Securities held by a Holder, such securities shall cease to be
Registrable Securities when (i) a Registration Statement with respect to
the offering of such securities by the Holder thereof shall have been
declared effective under the Securities Act and such securities shall have
been disposed of by such Holder pursuant to such Registration Statement,
(ii) such securities may at the time of determination be sold to the public
pursuant to Rule 144 without any restriction on the amount of securities
which may be sold by such Holder or Rule 144(k) (or any similar provision
then in force, but not Rule 144A) promulgated under the Securities Act
without the lapse of any further time or the satisfaction of any condition,
(iii) such securities shall have been otherwise transferred by such Holder
and new certificates for such securities not bearing a legend restricting
further transfer shall have been delivered by the Company or its transfer
agent and subsequent disposition of such securities shall not require
registration or qualification under the Securities Act or any similar state
law then in force or (iv) such securities shall have ceased to be
outstanding.
"Registration Expenses" means all expenses incident to the Company's
performance of or compliance with this Agreement, including, without
limitation, all SEC and stock exchange or National Association of
Securities Dealers, Inc. registration and filing fees and expenses, fees
and expenses of compliance with securities or blue sky laws (including,
without limitation,
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reasonable fees and disbursements of counsel for the underwriters in
connection with blue sky qualifications of the Registrable Securities),
printing expenses, messenger, telephone and delivery expenses, fees and
disbursements of counsel for the Company and all independent certified
public accountants, the fees and disbursements of underwriters customarily
paid by issuers or sellers of securities (but not including any
underwriting discounts or commissions or transfer taxes, if any,
attributable to the sale of Registrable Securities by Holders of such
Registrable Securities) and other reasonable out-of-pocket expenses of
Holders (it being understood that Registration Expenses shall not include,
as to the fees and expenses of counsel, the fees and expenses of more than
one counsel for the Holders).
"Registration Statement" means any appropriate registration statement
of the Company filed with the SEC pursuant to the Securities Act which
covers any of the Registrable Securities pursuant to the provisions of this
Agreement and all amendments and supplements to any such Registration
Statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
"Requisite Securities" means a number of Registrable Securities equal
to not less than 25% of the Registrable Securities then outstanding held in
the aggregate by all Holders; provided, however, that with respect to any
action to be taken at the request of the Holders of the Registrable
Securities prior to such time as the Warrants have expired pursuant to the
terms thereof and of the Warrant Agreement, each Warrant outstanding shall
be deemed to represent that number of Registrable Securities for which such
Warrant would be then exercisable.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"SEC" means the Securities and Exchange Commission or any successor.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means a Holder who is selling Registrable Securities
in accordance with the provisions of Section 2.1 or 2.2.
"Stockholder Rights Agreement" means the Amended and Restated
Stockholder Rights Agreement dated as of March 11, 1998 by and among the
Company and the other Persons or entities party thereto, as amended or
supplemented from time to time.
"Warrant Agent" means The Bank of New York and any successor Warrant
Agent for the Warrants pursuant to the Warrant Agreement.
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<PAGE>
"Warrant Agreement" means the Warrant Agreement dated March 11, 1998
between the Company and The Bank of New York, as Warrant Agent, as amended
or supplemented from time to time in accordance with the terms thereof.
"Warrants" means the warrants of the Company issued pursuant to the
Warrant Agreement.
"Warrant Share Prospectus" means the prospectus included in any
Warrant Share Registration Statement (including, without limitation, any
prospectus subject to completion and a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, and all other amendments and supplements to the Warrant Share
Prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference in such
Warrant Share Prospectus.
"Warrant Share Registration Statement" has the meaning ascribed to
that term in Section 5(a) hereof.
"Warrant Shares" means the shares of Common Stock deliverable upon
exercise of the Warrants.
Section 2. Registration Rights.
2.1 (a) Demand Registration After Public Equity Offering.
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Commencing on the earlier of March 15, 2003 or 180 days after an initial Public
Equity Offering, Holders owning, individually or in the aggregate, not less than
the Requisite Securities may make a written request for one registration under
the Securities Act of their Registrable Securities (a "DEMAND REGISTRATION").
Within 120 days of the receipt of such written request for a Demand
Registration, the Company shall file with the SEC and use its best efforts to
cause to become effective under the Securities Act a Registration Statement with
respect to such Registrable Securities. Any such request will specify the
number of Registrable Securities proposed to be sold and will also specify the
intended method of disposition thereof. The Company shall give written notice
of such registration request to all other Holders of Registrable Securities
within 20 days after the receipt thereof. Within 30 days after the date of such
notice from the Company, any Holder may request in writing that such Holder's
Registrable Securities be included in such Registration Statement and the
Company shall include in such Registration Statement the Registrable Securities
of any such Holder requested to be so included (the "INCLUDED SECURITIES").
Each such request by such other Holders shall specify the number of Included
Securities proposed to be sold and the intended method of disposition thereof.
Subject to Sections 2.1(b) and 2.1(f) hereof, the Company shall be required to
register Registrable Securities pursuant to this Section 2.1(a) only once.
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Subject to Section 2.1(f) hereof, no other securities of the Company
except (i) Registrable Securities held by any Holder, (ii) equity securities to
be offered and sold for the account of the Company and (iii) any equity
securities of the Company held by the parties to the Stockholder Rights
Agreement or by any Person having "piggy-back" registration rights pursuant to
any contractual obligation of the Company shall be included in a Demand
Registration; provided, however, that no such securities for the account of the
Company or any other Person (other than the parties to the Stockholder Rights
Agreement) shall be so included unless, in connection with any underwritten
offering, the managing underwriter or underwriters confirm to the Holders of
Registrable Securities to be included in such Demand Registration that the
inclusion of such other securities will not be likely to affect the price at
which the Registrable Securities may be sold. The inclusion of any such
securities for the account of the Company or any other Person shall be on the
same terms as that of the Registrable Securities.
(b) Effective Registration. A Registration Statement will not
----------------------
be deemed to have been effected as a Demand Registration unless it has been
declared effective by the SEC and the Company has complied in a timely manner
and in all material respects with all of its obligations under this Agreement
with respect thereto; provided, however, that if, after such Registration
Statement has become effective, the offering of Registrable Securities pursuant
to such Registration Statement is or becomes the subject of any stop order,
injunction or other order or requirement of the SEC or any other governmental or
administrative agency or court that prevents, restrains or otherwise limits the
sale of Registrable Securities pursuant to such Registration Statement for any
reason not attributable to any Holder participating in such registration and
such Registration Statement has not become effective within a reasonable time
period thereafter (not to exceed 45 days), such Registration Statement will be
deemed not to have been effected. If (i) a registration requested pursuant to
this Section 2.1 is deemed not to have been effected or (ii) a Demand
Registration does not remain effective under the Securities Act until at least
the earlier of (A) an aggregate of 180 days after the effective date thereof or
(B) the consummation of the distribution by the Holders of all of the
Registrable Securities covered thereby, then such registration shall not count
towards determining if the Company has satisfied its obligation to effect one
Demand Registration pursuant to this Section 2.1. For purposes of calculating
the 180-day period referred to in the preceding sentence, any period of time
during which such Registration Statement was not in effect shall be excluded.
The Holders of Registrable Securities shall be permitted to withdraw all or any
part of the Registrable Securities from a Demand Registration at any time prior
to the effective date of such Demand Registration.
(c) Restrictions on Sale by Holders. Each Holder of Registrable
-------------------------------
Securities whose Registrable Securities are covered by a Registration Statement
filed pursuant to this Section 2.1 and are to be sold thereunder agrees, if and
to the extent reasonably requested by the managing underwriter or underwriters
in an underwritten offering, not to effect any public sale or distribution of
Registrable Securities or of securities of the Company of the same class as any
securities included in such Registration Statement, including a sale pursuant to
Rule 144 (except as part of such underwritten offering), during the 180 day
period beginning on the closing date of each underwritten offering made pursuant
to such Registration Statement, to the extent timely notified in writing by the
Company or such managing underwriter or underwriters.
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The foregoing provisions of Section 2.1(c) shall not apply to any
Holder of Registrable Securities if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; provided, however,
that any such Holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any public sale or distribution of any
Registrable Securities commencing on the date of sale of such Registrable
Securities unless it has provided 45 days' prior written notice of such sale or
distribution to the underwriter or underwriters.
(d) Underwritten Registrations. If any of the Registrable
--------------------------
Securities covered by a Demand Registration are to be sold in an underwritten
offering, the investment banker or investment bankers and manager or managers
that will manage the offering will be selected by the Company.
No Holder of Registrable Securities may participate in any
underwritten registration pursuant to a Registration Statement filed under this
Agreement unless such Holder (a) agrees to (i) sell such Holder's Registrable
Securities on the basis provided in and in compliance with any underwriting
arrangements approved by the Holders of not less than a majority of the
Registrable Securities to be sold thereunder and (ii) comply with Regulation M
under the Exchange Act and (b) completes and executes all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements; provided, however,
that no Holder of Registrable Securities shall be required to enter into a
custody or escrow agreement or power of attorney with respect to Registrable
Securities to be sold in connection with such underwriting arrangements.
(e) Expenses. The Company will pay all Registration Expenses in
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connection with the registrations requested pursuant to Section 2.1(a) hereof.
Each Holder of Registrable Securities shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such Holder's Registrable Securities pursuant to a Registration Statement
requested pursuant to this Section 2.1.
(f) Priority in Demand Registration. In a registration pursuant
to Section 2.1 hereof involving an underwritten offering, if the managing
underwriter or underwriters of such underwritten offering have informed, in
writing, the Company and the Selling Holders who have requested such Demand
Registration or who have sought inclusion therein that in such underwriter's or
underwriters' opinion the total number of securities which the Selling 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
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included in such registration by the Holders of Registrable Securities pursuant
to this Agreement, (ii) second, provided that no securities sought to be
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included by the Holders of Registrable Securities have been excluded from such
registration, the securities of the other parties to the Stockholder Rights
Agreement, (iii) third, provided that no securities sought to be included by the
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Holders or the other parties to the Stockholder Rights Agreement have been
excluded from such registration, the securities of other Persons entitled to
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<PAGE>
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 (iv) fourth, provided that no securities of any other
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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 any securities of a Holder have been excluded from a registration
statement pursuant to the provisions of the foregoing paragraph, then such
registration shall not count towards determining whether the Company has
satisfied its obligation to effect one Demand Registration pursuant to Section
2.1 hereof.
2.2 (a) Piggy-Back Registration. If at any time the Company
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proposes to file a Registration Statement under the Securities Act with respect
to an offering by the Company for its own account or for the account of any of
its security holders of Common Stock (other than (i) a Registration Statement on
Form S-4 or S-8 (or any substitute form that may be adopted by the SEC), (ii) a
Registration Statement filed in connection with an offering of securities solely
to the Company's existing security holders or any offer of debt securities or
convertible debt securities or (iii) a Demand Registration), then the Company
shall give written notice of such proposed filing to the Holders of Registrable
Securities as soon as practicable (but in no event fewer than 15 days before the
anticipated filing date or 10 days if the Company is subject to filing reports
under the Exchange Act and able to use Form S-3 under the Securities Act), and
such notice shall offer such Holders the opportunity to register such number of
shares of Registrable Securities as each such Holder may request in writing not
later than 15 days prior to the anticipated effective date of the Registration
Statement (or eight days of the notice of the proposed filing if the Company is
subject to filing reports under the Exchange Act and able to use Form S-3 under
the Securities Act) after receipt of such written notice from the Company (which
request shall specify the Registrable Securities intended to be disposed of by
such Selling Holder and the intended method of distribution thereof) (a "PIGGY-
BACK REGISTRATION"). The Company shall use its best efforts to keep such Piggy-
Back Registration continuously effective under the Securities Act until at least
the earlier of (A) 90 days after the effective date thereof or (B) the
consummation of the distribution by the Holders of all of the Registrable
Securities covered thereby. The Company shall cause the managing underwriter or
underwriters, if any, of such proposed offering to permit the Registrable
Securities requested to be included in a Piggy-Back Registration to be included
on the same terms and conditions as any similar securities of the Company or any
other security holder included therein and to permit the sale or other
disposition of such Registrable Securities in accordance with the intended
method of distribution thereof. Any Selling Holder shall have the right to
withdraw its request for inclusion of its Registrable Securities in any
Registration Statement pursuant to this Section 2.2 by giving written notice to
the Company of its request to withdraw. The Company may withdraw a Piggy-Back
Registration at any time prior to the time it becomes effective or the Company
may elect to delay the registration; provided, however, that the Company shall
give prompt written notice thereof to participating Selling Holders. The Piggy-
Back Registration right of holders of Warrants and Warrant Shares shall not
apply to any Public Equity Offering that is the initial Public Equity Offering
of the Company unless the securities of other Selling Holders are to be included
therein. The Company will pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this Section 2.2,
and each Holder of Registrable Securities shall pay all underwriting discounts
and
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<PAGE>
commissions and transfer taxes, if any, relating to the sale or disposition
of such Holder's Registrable Securities pursuant to a Registration Statement
effected pursuant to this Section 2.2.
No registration effected under this Section 2.2, and no failure to
effect a registration under this Section 2.2, shall relieve the Company of its
obligation to effect a registration upon the request of Holders of Registrable
Securities pursuant to Section 2.1 hereof, and no failure to effect a
registration under this Section 2.2 and to complete the sale of securities
registered thereunder in connection therewith shall relieve the Company of any
other obligation under this Agreement.
(b) Priority in Piggy-Back Registration. In a registration
-----------------------------------
pursuant to Section 2.2 hereof involving an underwritten offering, if the
managing underwriter or underwriters of such underwritten offering have
informed, in writing, the Company and the Selling Holders requesting inclusion
in such offering that in such underwriter's or underwriters' opinion the total
number of securities which the Company, the Selling Holders and any other
Persons desiring to participate in such registration intend to include in such
offering is such as to materially and adversely affect 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: (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)
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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
pursuant to this Agreement and by the other parties to the Stockholder Rights
Agreement pro rata between the Holders and the parties to the Stockholder Rights
Agreement based upon the aggregate amount of securities then held, and (iii)
third, provided that no securities sought to be included by the Company or the
- -----
Holders or the parties to the Stockholder Rights Agreement 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); (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
party to the Stockholder Rights Agreement, securities shall be registered in
such offering in the following order of priority: (i) first, the securities of
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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 Registrable Securities, as among
Holders of Registrable Securities there shall be no priority and Registrable
Securities sought to be included by Holders of Registrable Securities shall be
included pro rata based on the amount 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 pursuant to this Agreement
and by the parties to the Stockholder Rights Agreement pro rata between the
Holders and the parties to the Stockholder Rights Agreement based upon the
aggregate amount of securities held and (iii) third, provided that no securities
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of such Person referred to in the immediately preceding clause (i) or of the
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<PAGE>
Holders or of the other parties to the Stockholder Rights Agreement 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 amount 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 other party to the Stockholder Rights Agreement,
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 pursuant to this
Agreement and by the other parties to the Stockholder Rights Agreement pro rata
between the Holders and the parties to the Stockholder Rights Agreement based
upon the aggregate amount of securities then held, (ii) second, provided that no
------
securities of the Holders or of the parties to the Stockholder Rights Agreement
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 amount 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.
If, as a result of the provisions of this Section 2.2(b), any Selling
Holder shall not be entitled to include all Registrable Securities in a Piggy-
Back Registration that such Selling Holder has requested to be included, such
Selling Holder may elect to withdraw his request to include Registrable
Securities in such registration.
2.3 Limitations, Conditions and Qualifications to Obligations Under
---------------------------------------------------------------
Registration Covenants. The obligations of the Company set forth in Sections
- ----------------------
2.1 and 2.2 hereof are subject to each of the following limitations, conditions
and qualifications:
(i) Subject to the next sentence of this paragraph, the
Company shall be entitled to postpone, for a reasonable period of time, the
filing or effectiveness of, or suspend the rights of any Holders to make sales
pursuant to, any Registration Statement otherwise required to be prepared, filed
and made and kept effective by it hereunder; provided, however, that the
duration of such postponement or suspension may not exceed the earlier to occur
of (A) 15 days after the cessation of the circumstances described in the next
sentence of this paragraph on which such postponement or suspension is based or
(B) 90 days after the date of the determination of the Board of Directors
referred to in the next sentence, and the duration of such postponement or
suspension shall be excluded from the calculation of the 180-day period
described in Section 2.1(b) hereof. Such postponement or suspension may be
effected only if the Board of Directors of the Company determines reasonably and
in good faith that the filing or effectiveness of, or sales pursuant to, such
Registration Statement would materially impede, delay or interfere with any
financing, offer or sale of securities, acquisition, corporate reorganization or
other significant transaction involving the Company or any of its Affiliates or
require disclosure of material information which the Company has a bona fide
business purpose for preserving as confidential, which financing, offer or sale
of securities, acquisition, corporate reorganization or other significant
transaction had been initiated at the time of the filing of such Registration
Statement; provided, however, that the Company shall not be entitled to such
postponement or suspension more than
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<PAGE>
twice in any twelve-month period. If the Company shall so postpone the filing of
a Registration Statement it shall, as promptly as possible, deliver a
certificate signed by the Chief Executive Officer of the Company to the Selling
Holders as to such determination, and the Selling Holders shall (y) have the
right, in the case of a postponement of the filing or effectiveness of a
Registration Statement, upon the affirmative vote of the Holders of not less
than a majority of the Registrable Securities to be included in such
Registration Statement, to withdraw the request for registration by giving
written notice to the Company within 10 days after receipt of such notice or (z)
in the case of a suspension of the right to make sales, receive an extension of
the registration period equal to the number of days of the suspension. Any
Demand Registration as to which the withdrawal election referred to in the
preceding sentence has been effected shall not be counted for purposes of the
single Demand Registration the Company may be required to effect pursuant to
Section 2.1 hereof.
(ii) The Company shall not be required by this Agreement
to effect a Demand Registration within 90 days immediately following the
effective date of any registration statement pertaining to a firmly underwritten
offering of equity securities of the Company for its own account; provided,
however, that this clause (ii) shall not apply if the underwriter of such
offering consents to the request for such Demand Registration pursuant to
Section 2.1(a).
(iii) The Company shall not be required by this Agreement
to effect a Demand Registration within 60 days immediately following the
effective date of any registration statement pertaining to a firmly underwritten
offering of equity securities of the Company for the account of any security
holder of the Company; provided, however, that this clause (ii) shall not apply
if the underwriter of such offering consents to the request for such Demand
Registration pursuant to Section 2.1(a).
(iv) The Company's obligations shall be subject to the
obligations of the Selling Holders, which the Selling Holders acknowledge, to
furnish all information and materials and to take any and all actions as may be
required under applicable federal and state securities laws and regulations to
permit the Company to comply with all applicable requirements of the SEC and to
obtain any acceleration of the effective date of such Registration Statement.
(v) The Company shall not be obligated to cause any
special audit to be undertaken in connection with any registration pursuant to
this Agreement unless such audit is required by the SEC or requested by the
underwriters with respect to such registration.
2.4 Restrictions on Sale by the Company and Others. The Company
----------------------------------------------
covenants and agrees that (i) it shall not, and that it shall not cause or
permit any of its subsidiaries to, effect any public sale or distribution of any
securities of the same class as any of the Registrable Securities or any
securities convertible into or exchangeable or exercisable for such securities
(or any option or other right for such securities) during the 30-day period
prior to, and during the 120-day period beginning on, the commencement of any
underwritten offering of Registrable Securities pursuant to a Demand
Registration which has been requested pursuant to this Agreement, or a Piggy-
Back Registration which has been scheduled, prior to the Company or any of its
subsidiaries publicly announcing its intention to
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effect any such public sale or distribution; (ii) the Company will not, and the
Company will not cause or permit any subsidiary of the Company to, after the
date hereof, enter into any agreement or contract that conflicts with or limits
or prohibits the full and timely exercise by the Holders of Registrable
Securities of the rights herein to request a Demand Registration or to join in
any Piggy-Back Registration subject to the other terms and provisions hereof;
and (iii) that it shall use its reasonable best efforts to secure the written
agreement of each of its officers and directors to not effect any public sale or
distribution of any securities of the same class as the Registrable Securities
(or any securities convertible into or exchangeable or exercisable for any such
securities), or any option or right for such securities during the period
described in clause (i) of this Section 2.4.
2.5 Rule 144 and Rule 144A. The Company covenants that it will file
----------------------
the reports required to be filed by it under the Securities Act and the Exchange
Act and the rules and regulations adopted by the SEC thereunder in a timely
manner and, if at any time the Company is not required to file such reports, it
will, upon the request of any Holder or beneficial owner of Registrable
Securities, make available such information necessary to permit sales pursuant
to Rule 144A under the Securities Act. The Company further covenants that it
will take such further action as any Holder of Registrable Securities may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144(k) and Rule
144A under the Securities Act, as such Rules may be amended from time to time,
or (b) any similar rule or regulation hereafter adopted by the SEC (it being
expressly understood that the foregoing shall not create any obligation on the
part of the Company to file periodic reports or other reports under the Exchange
Act at any time that it is not then required to file such reports pursuant to
the Exchange Act). Upon the request of any Holder of Registrable Securities,
the Company will in a timely manner deliver to such Holder a written statement
as to whether it has complied with such information requirements.
Section 3. "Market Stand-Off" Agreement.
(a) If the Company has complied with all its obligations with
respect to a Demand Registration or a Piggy-Back Registration relating to an
underwritten public offering, all holders of Warrants and Warrant Shares, upon
request of the lead managing underwriter with respect to such underwritten
public offering, will be required to not sell or otherwise dispose of any
Warrants and Warrant Shares owned by them for a period not to exceed 180 days
from the consummation of such underwritten public offering: provided, however,
that except for the initial Public Equity Offering of the Company, such
requirement shall apply to Warrant Shares not sold in a Demand Registration or
Piggy-Back Registration due to a reduction pursuant to Section 2.2(b) hereof for
a period not to exceed 90 days from such date of consummation.
(b) In order to enforce the foregoing covenant, the Company
shall have the right to place restrictive legends on the certificates
representing the shares subject to this Section 3 and to impose stop transfer
instructions with respect to the Registrable Securities and such other shares of
stock of each Holder (and the shares or securities of every other Person subject
to the foregoing restriction)
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until the end of such period. The provisions of this Section 3 shall be binding
upon any transferee of any Registrable Securities.
Section 4. Registration Procedures. In connection with the obligations
of the Company with respect to any Registration Statement pursuant to Sections
2.1, 2.2 and 2.6 hereof, the Company shall, except as otherwise provided:
(a) Prepare and file with the SEC as soon as practicable each
such Registration Statement (but in any event on or prior to the date of filing
thereof required under this Agreement) and cause such Registration Statement to
become effective and remain effective as provided herein; provided, however,
that before filing any such Registration Statement or any Prospectus (for
registrations pursuant to Sections 2.1 and 2.2 hereof) or any amendments or
supplements thereto (only for registrations pursuant to Section 2.1 hereof)
(including documents that would be incorporated or deemed to be incorporated
therein by reference, including such documents filed under the Exchange Act that
would be incorporated therein by reference), the Company shall, upon request,
afford promptly to the Holders of the Registrable Securities covered by such
Registration Statement, their counsel and the managing underwriter or
underwriters, if any, an opportunity to review copies of all such documents
proposed to be filed a reasonable time prior to the proposed filing thereof. The
Company shall not file any Registration Statement or Prospectus (for
registrations pursuant to Sections 2.1 and 2.2 hereof) or any amendments or
supplements thereto (only for registrations pursuant to Section 2.1 hereof) if
the Holders of a majority of the Registrable Securities covered by such
Registration Statement, their counsel, or the managing underwriter or
underwriters, if any, shall reasonably object in writing unless failure to file
any such amendment or supplement would involve a violation of the Securities Act
or other applicable law.
(b) Prepare and file with the SEC such amendments and post-
effective amendments to the Registration Statement as may be necessary to keep
such Registration Statement continuously effective for the time periods
prescribed hereby; cause the related Prospectus to be supplemented by any
required prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; and comply with the provisions of the Securities Act, the
Exchange Act and the rules and regulations of the SEC promulgated thereunder
applicable to it with respect to the disposition of all securities covered by
such Registration Statement as so amended or in such prospectus as so
supplemented.
(c) Notify the Holders of Registrable Securities, their counsel
and the managing underwriter or underwriters, if any, promptly (but in any event
within two (2) Business Days), and confirm such notice in writing, (i) when a
Prospectus or any prospectus supplement or post-effective amendment has been
filed, and, with respect to a Registration Statement or any post-effective
amendment, when the same has become effective (including in such notice a
written statement that any Holder may, upon request, obtain, without charge, one
conformed copy of such Registration Statement or post-effective amendment
including financial statements and schedules and exhibits), (ii) of the issuance
by the SEC of any stop order suspending the effectiveness of such Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus or the initiation or
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threatening of any proceedings for that purpose, (iii) if at any time when a
prospectus is required by the Securities Act to be delivered in connection with
sales of the Registrable Securities the representations and warranties of the
Company contained in any agreement (including any underwriting agreement)
contemplated by Section 4(l) below, to the knowledge of the Company, cease to be
true and correct in any material respect, (iv) of the receipt by the Company of
any notification with respect to (A) the suspension of the qualification or
exemption from qualification of the Registration Statement or any of the
Registrable Securities covered thereby for offer or sale in any jurisdiction, or
(B) the initiation of any proceeding for such purpose, (v) of the happening of
any event, the existence of any condition or information becoming known that
requires the making of any changes in such Registration Statement, Prospectus or
documents so that, in the case of such Registration Statement, it will conform
in all material respects with the requirements of the Securities Act and it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the Prospectus, it will conform
in all material respects with the requirements of the Securities Act and it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (vi) of the Company's reasonable determination that a post-
effective amendment to such Registration Statement would be appropriate.
(d) Use every reasonable effort to prevent the issuance of any
order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of a Prospectus or suspending the qualification
(or exemption from qualification) of any of the Registrable Securities covered
thereby for sale in any jurisdiction, and, if any such order is issued, to
obtain the withdrawal of any such order as soon as practicable.
(e) If requested by the managing underwriter or underwriters, if
any, or the Holders of a majority of the Registrable Securities being sold in
connection with an underwriting offering (only for registrations pursuant to
Section 2.1 hereof), (i) promptly incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriter or
underwriters, if any, or such Holders reasonably request to be included therein
to comply with applicable law, (ii) make all required filings of such prospectus
supplement or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in such
prospectus supplement or post-effective amendment, and (iii) supplement or make
amendments to such Registration Statement.
(f) Furnish to each Holder of Registrable Securities who so
requests and to counsel for the Holders of Registrable Securities and each
managing underwriter, if any, without charge, upon request, one conformed copy
of the Registration Statement and each post-effective amendment thereto,
including financial statements and schedules, and of all documents incorporated
or deemed to be incorporated therein by reference and all exhibits (including
exhibits incorporated by reference).
(g) Deliver to each Holder of Registrable Securities, their
counsel and each underwriter, if any, without charge, as many copies of each
Prospectus (including each form of
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prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and, subject to the last paragraph of this Section 4, the
Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the Holders of Registrable Securities and the
underwriter or underwriters or agents, if any, in connection with the offering
and sale of the Registrable Securities covered by such Prospectus and any
amendment or supplement thereto.
(h) Prior to any offering of Registrable Securities, to register
or qualify, and cooperate with the Holders of Registrable Securities, the
underwriter or underwriters, if any, and their respective counsel in connection
with the registration or qualification (or exemption from such registration or
qualification) of, such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions within the United States as
the managing underwriter or underwriters reasonably request in writing, or, in
the event of a non-underwritten offering, as the Holders of a majority of the
Registrable Securities may request; provided, however, that where Registrable
Securities are offered other than through an underwritten offering, the Company
agrees to cause its counsel to perform blue sky investigations and file
registrations and qualifications required to be filed pursuant to this Section
4(h); keep each such registration or qualification (or exemption therefrom)
effective during the Effectiveness Period and do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions of
the securities covered thereby; provided, however, that the Company will not be
required to (A) qualify generally to do business in any jurisdiction where it is
not then so qualified, (B) take any action that would subject it to general
service of process in any such jurisdiction where it is not then so subject or
(C) become subject to taxation in any jurisdiction where it is not then so
subject.
(i) Cooperate with the Holders of Registrable Securities and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold, which certificates shall not bear any restrictive legends whatsoever
and shall be in a form eligible for deposit with The Depository Trust Company
("DTC"); and enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if any, or
Holders may reasonably request at least two Business Days prior to any sale of
Registrable Securities in a firm commitment underwritten public offering.
(j) Upon the occurrence of any event contemplated by Section
4(c)(v) or 4(c)(vi) above, as promptly as practicable prepare a supplement or
post-effective amendment to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and, subject to Section 4(a) hereof, file such with the
SEC so that, as thereafter delivered to the purchasers of Registrable Securities
being sold thereunder, such Prospectus will not contain 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, in light of the circumstances under
which they were made, not misleading.
(k) Prior to the effective date of a Registration Statement, (i)
provide the registrar for the Registrable Securities with certificates for such
securities in a form eligible for deposit with DTC and (ii) provide a CUSIP
number for such securities.
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(l) Enter into an underwriting agreement in form, scope and
substance as is customary in underwritten offerings and take all such other
actions as are reasonably requested by the managing underwriter or underwriters
in order to expedite or facilitate the registration or disposition of such
Registrable Securities in any underwritten offering to be made of the
Registrable Securities in accordance with this Agreement, and in such
connection, (i) make such representations and warranties to the underwriter or
underwriters, with respect to the business of the Company and the subsidiaries
of the Company, and the Registration Statement, Prospectus and documents, if
any, incorporated or deemed to be incorporated by reference therein, in each
case, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings, and confirm the same if and when
requested; (ii) use reasonable efforts to obtain opinions of counsel to the
Company and updates thereof, addressed to the underwriter or underwriters
covering the matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by underwriters;
(iii) use reasonable efforts to obtain "cold comfort" letters and updates
thereof from the independent certified public accountants of the Company (and,
if applicable, the subsidiaries of the Company) and, if necessary, any other
independent certified public accountants of any subsidiary of the Company or of
any business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Registration
Statement, addressed to each of the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters in connection with underwritten offerings and such other
matters as reasonably requested by the managing underwriter or underwriters and
as permitted by the Statement of Auditing Standards No.72; and (iv) if an
underwriting agreement is entered into, the same shall contain customary
indemnification provisions and procedures (or such other provisions and
procedures acceptable to Holders of a majority of Registrable Securities covered
by such Registration Statement and the managing underwriter or underwriters or
agents) with respect to all parties to be indemnified pursuant to such
agreement. The above shall be done at each closing under such underwriting
agreement, or as and to the extent required thereunder.
(m) Make available for inspection by a representative of the
Holders of Registrable Securities being sold, any underwriter participating in
any such disposition of Registrable Securities, if any, and any attorney or
accountant retained by such representative of the Holders or underwriter, at the
offices where normally kept, during reasonable business hours, all financial and
other records, pertinent corporate documents and properties of the Company and
the subsidiaries of the Company, and cause the officers, directors and employees
of the Company and the subsidiaries of the Company to supply all information in
each case reasonably requested by any such Person in connection with such
Registration Statement; provided, however, that all material non-public
information shall be kept confidential by such Person, except to the extent that
(i) the disclosure of such information is necessary or advisable to avoid or
correct a misstatement or omission in the Registration Statement or in any
Prospectus; provided, however, that prior notice is given to the Company, and
the Company's legal counsel and such Holder's legal counsel concur that
disclosure is required, (ii) the release of such information is ordered pursuant
to a subpoena or other order from a court of competent jurisdiction, (iii)
disclosure of such information is necessary in connection with any action,
claim, suit or proceeding, directly or indirectly, involving or potentially
involving such Person and arising out of, based upon, relating to or involving
this Agreement or any of the transactions contemplated hereby or arising
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hereunder; provided, however, that prior notice shall be provided as soon as
practicable to the Company of the potential disclosure of any information by
such Person pursuant to clauses (ii) or (iii) of this sentence to permit the
Company to obtain a protective order (or waive the provisions of this paragraph
(m)) and that such Person shall take all actions as are reasonably necessary to
protect the confidentiality of such information (if practicable) to the extent
such action is otherwise not inconsistent with, an impairment of or in
derogation of the rights and interests of the Holder or any such Person, or (iv)
such information has been made generally available to the public.
(n) Comply with all applicable rules and regulations of the SEC
and make generally available to its security holders earnings statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder (or any similar rule promulgated under the Securities Act) no later
than forty-five (45) days after the end of any 12-month period (or ninety (90)
days after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to an underwriter or to underwriters in a firm commitment or best efforts
underwritten offering and (ii) if not sold to an underwriter or to underwriters
in such an offering, commencing on the first day of the first fiscal quarter of
the Company after the effective date of the relevant Registration Statement,
which statements shall cover such 12-month periods.
(o) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on each securities
exchange, if any, on which similar securities issued by the Company are then
listed.
(p) Cooperate with the Selling Holders of Registrable Securities
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any restrictive legends and
registered in such names as the selling Holders may reasonably request at least
two Business Days prior to the closing of any sale of Registrable Securities.
Each seller of Registrable Securities as to which any registration is
being effected agrees, as a condition to the registration obligations with
respect to such Holder provided herein, to furnish to the Company such
information regarding such seller and the distribution of such Registrable
Securities as the Company may, from time to time, reasonably request in writing
to comply with the Securities Act and other applicable law. The Company may
exclude from such registration the Registrable Securities of any seller for so
long as such seller fails to furnish such information within a reasonable time
after receiving such request. If the identity of a seller of Registrable
Securities is to be disclosed in the Registration Statement, such seller shall
be permitted to include all information regarding such seller as it shall
reasonably request.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 4(c)(ii), 4(c)(iv),
4(c)(v), or 4(c)(vi) hereof, such Holder will forthwith discontinue disposition
of such Registrable Securities covered by the Registration Statement or
Prospectus until such Holder's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 4(j) hereof), or until it is advised
in writing (the "ADVICE") by the Company that the use of the applicable
prospectus
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may be resumed, and has received copies of any amendments or supplements
thereto, and, if so directed by the Company, such Holder will, at the Company's
expense, deliver to the Company all copies, other than permanent file copies,
then in such Holder's actual possession of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice; provided,
however, that nothing herein shall create any obligation on the part of any
Holder to undertake to retrieve or return any such Prospectus not within the
actual possession of such Holder. In the event the Company shall give any such
notice, the period of time for which a Registration Statement is required
hereunder to be effective shall be extended by the number of days during such
periods from and including the date of the giving of such notice to and
including the date when each seller of Registrable Securities covered by such
Registration Statement shall have received (x) the copies of the supplemented or
amended Prospectus contemplated by Section 4(j) hereof or (y) the Advice.
Section 5. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Holder and each Person, if any, who controls such Holder within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act, or is
under common control with, or is controlled by, such Holder, from and against
all losses, claims, damages and liabilities (including, without limitation, and
subject to clause (c) of this Section 5 below, the reasonable legal fees and
other reasonable out-of-pocket expenses actually incurred by any Holder or any
such controlling or affiliated Person in connection with any suit, action or
proceeding or any claim asserted), caused by, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement (or any amendment thereto) pursuant to which Registrable
Securities were registered under the Securities Act or in any registration
statement filed by the Company covering the issuance of Warrant Shares and
resales thereof (a "WARRANT SHARE REGISTRATION STATEMENT"), or caused by any
omission or alleged omission to state in any such Registration Statement or
Warrant Share Registration Statement a material fact required to be stated
therein or necessary to make the statements therein not misleading, or caused by
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus, Prospectus or Warrant Share Prospectus (as amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to state in
any such preliminary prospectus, Prospectus or Warrant Share Prospectus a
material fact required to be stated in any such preliminary prospectus,
Prospectus or Warrant Share Prospectus or necessary to make the statements in
any such preliminary prospectus, Prospectus or Warrant Share Prospectus in light
of the circumstances under which they were made not misleading, except insofar
as such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information relating to any Holder furnished to the
Company in writing by such Holder expressly for use in any such Registration
Statement, Warrant Share Registration Statement or Prospectus; provided,
however, that the Company shall not be required to indemnify any such Person if
such untrue statement or omission or alleged untrue statement or omission was
contained or made in any preliminary prospectus and corrected in the Prospectus
or such Warrant Share Prospectus, as the case may be, or any amendment or
supplement thereto and the Prospectus or such Warrant Share Prospectus, as the
case may be, does not contain any other untrue statement or omission or alleged
untrue statement or omission of a material fact that was
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the subject matter of the related proceeding and any such loss, liability,
claim, damage or expense suffered or incurred by such indemnified Person
resulted from any action, claim or suit by any Person who purchased Registrable
Securities which are the subject thereof from such indemnified Person and it is
established in the related proceeding that such indemnified Person failed to
deliver or provide a copy of the Prospectus or Warrant Share Prospectus, as the
case may be (as amended or supplemented) to such Person with or prior to the
confirmation of the sale of such Registrable Securities sold to such Person if
required by applicable law, unless such failure to deliver or provide a copy of
the Prospectus or Warrant Share Prospectus, as the case may be (as amended or
supplemented) was a result of noncompliance by the Company with Section 4 hereof
or as a result of the failure of the Company to provide such Prospectus or
Warrant Share Prospectus, as the case may be.
(b) Each Holder agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign any
Registration Statement or Warrant Share Registration Statement, as the case may
be, and each Person, if any, who controls the Company within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act to the
same extent as the foregoing indemnity from the Company to such Holder, but only
with reference to information relating to such Holder furnished to the Company
in writing by such Holder expressly for use in any Registration Statement or
Warrant Share Registration Statement, as the case may be (or any amendment
thereto) or any Prospectus or Warrant Share Prospectus, as the case may be (or
any amendment or supplement thereto). The liability of any Holder under this
paragraph shall in no event exceed the proceeds received by such Holder from
sales of Registrable Securities giving rise to such obligations.
(c) In case any suit, action, proceeding (including any
governmental or regulatory investigation), claim or demand shall be instituted
involving any Person in respect of which indemnity may be sought pursuant to
either paragraph (a) or (b) above, such Person (the "INDEMNIFIED PARTY") shall
promptly notify the Person against which such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may reasonably designate in such proceeding and shall pay the
reasonable fees and expenses actually incurred of such counsel relating to such
proceeding; provided, however, that the failure to so notify the indemnifying
party shall not relieve it of any obligation or liability which it may have
hereunder or otherwise. In any such proceeding, any indemnified party shall have
the right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the indemnifying
party and the indemnified party shall have mutually agreed to the contrary, (ii)
the indemnifying party shall have failed to retain within a reasonable period of
time counsel reasonably satisfactory to such indemnified party or parties or
(iii) the named parties to any such proceeding (including any impleaded parties)
include both such indemnified party or parties and the indemnifying parties or
an Affiliate of the indemnifying parties or such indemnified parties and
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between the indemnifying party or
parties and the indemnified party or parties. It is understood that the
indemnifying parties shall not, in connection with any one such proceeding or
separate but substantially similar or related proceedings in the same
jurisdiction, arising out of the same
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general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with appropriate
local counsel) at any time for such indemnified party or parties and that all
such fees and expenses shall be reimbursed within reasonable time of the request
after the incurrence thereof. Any such separate firm for the Holders and such
control Persons of the Holders shall be designated in writing by Holders who
sold a majority in interest of Registrable Securities sold by all such Holders
and reasonably acceptable to the Company and any such separate firm for the
Company, its directors, its officers and such control Persons of the Company
shall be designated in writing by the Company and reasonably acceptable to the
Holders. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its prior written consent (which consent shall not
be unreasonably withheld or delayed) but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify and hold harmless the indemnified party from and against any loss or
liability by reason of such settlement or judgment. No indemnifying party shall,
without the prior written consent of the indemnified party (which consent shall
not be unreasonably withheld), effect any settlement or compliance of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party, or indemnity could have been sought hereunder by such
indemnified party, unless such settlement or compliance includes an
unconditional written release of such indemnified party in form and substance
reasonably satisfactory to such indemnified party of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in paragraph
(a) or (b) of this Section 5 is unavailable to, or insufficient to hold
harmless, an indemnified party in respect of any losses, claims, damages or
liabilities, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder and in order to provide for just
and equitable contribution, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect (i) the relative
benefits received by the Company on the one hand and the Holders on the other
hand from the offering of such Registrable Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, not only such
relative benefits but also the relative fault of the Company on the one hand and
the Holders on the other hand in connection with the statements or omissions or
alleged statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Holders on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (net of discounts and
commissions but before deducting expenses) of the Warrants sold pursuant to the
Purchase Agreement received by the Company bears to the total proceeds received
by such Holder from the sale of Registrable Securities, as the case may be. The
relative fault of the Company on the one hand and the Holders on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Holders and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances.
20
<PAGE>
(e) The Company and each Holder agree that it would not be just
or equitable if contribution pursuant to this Section 5 were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in Section 5(d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in Section 5(d) above shall be deemed to
include, subject to the limitations set forth above, any reasonable legal or
other expenses actually incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 5, in no event shall a Holder be required to
contribute any amount in excess of the amount by which proceeds received by such
Holder from sales of Registrable Securities exceeds the amount of any damages
that such Holder has otherwise been required to pay or has paid by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation. The remedies provided
for in this Section 5 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any indemnified party at law or in
equity.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 5 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 5 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Initial Purchaser or any Person who
controls an Initial Purchaser, the Company, their respective directors or
officers or any Person controlling the Company and (ii) any termination of this
Agreement.
Section 6. Miscellaneous.
(a) No Inconsistent Agreements. The Company represents and
--------------------------
warrants to the Holders that it has not entered into nor will the Company on or
after the date of this Agreement enter into, or cause or permit any of its
subsidiaries to enter into, any agreement which is inconsistent with the rights
granted to the Holders of Registrable Securities in this Agreement or otherwise
conflicts with the provisions hereof. The rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to the holders of the Company's other issued and outstanding
securities, if any, under any such agreements.
(b) Amendments and Waivers. The provisions of this Agreement
----------------------
may not be amended, modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given unless the Company has
obtained the prior written consent of Holders of not less than a majority of the
outstanding Registrable Securities affected by such amendment, modification,
supplement, waiver or consent; provided, however, that Section 5 hereof and this
Section 6(b) may not be amended, modified or supplemented without the prior
written consent of each Holder (including any Person who was a Holder of
Registrable Securities disposed of pursuant to any Registration Statement or a
Warrant Share Registration Statement) affected by such amendment, modification
or supplement.
21
<PAGE>
Notwithstanding the foregoing, a waiver or consent to departure from the
provisions hereof that relates exclusively to the rights of Holders of
Registrable Securities whose securities are being sold pursuant to a
Registration Statement and that does not directly or indirectly affect, impair,
limit or compromise the rights of other Holders of Registrable Securities may be
given by the Holders of not less than a majority of the Registrable Securities
proposed to be sold by such Holders pursuant to such Registration Statement.
(c) Notices. All notices and other communications provided for
-------
or permitted hereunder shall be made in writing by hand delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address of Holder as set forth
in the register for the Warrants or the Warrant Shares, which address initially
is, with respect to the Initial Purchasers, the address set forth in the
Purchase Agreement; and (ii) if to the Company, initially at the address set
forth below the Company's name on the signature pages hereto and thereafter at
such other address, notice of which is given in accordance with the provisions
of this Section 6(c), with a copy to Wilson Sonsini Goodrich & Rosati, P.C., 650
Page Mill Road, Palo Alto, California 94304-1050, Attention: Barry E. Taylor,
Esq., and thereafter at such other address notice of which is given in
accordance with the provisions of this Section 6(c).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next Business Day, if timely delivered to an air courier guaranteeing
overnight delivery.
(d) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors, assigns and transferees of each
of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders. If any transferee of any Holder shall
acquire Warrants and/or Registrable Securities, in any manner, whether by
operation of law or otherwise, such Warrants and/or Registrable Securities shall
be held subject to all of the terms of this Agreement, and by taking and holding
such Warrants and/or Registrable Securities such Person shall be conclusively
deemed to have agreed to be bound by and to perform all of the terms and
provisions of this Agreement and such Person shall be entitled to receive the
benefits hereof.
(e) Counterparts. This Agreement may be executed in any number
------------
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE
---------------------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY
22
<PAGE>
WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(h) Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(i) Entire Agreement. This Agreement, together with the
----------------
Purchase Agreement and the Warrant Agreement, is intended by the parties as a
final expression of their agreement, and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein. This Agreement, the
Purchase Agreement and the Warrant Agreement supersede all prior agreements and
understandings between the parties with respect to such subject matter.
(j) Attorneys' Fees. As between the parties to this Agreement,
---------------
in any action or proceeding brought to enforce any provision of this Agreement,
or where any provision hereof is validly asserted as a defense, the successful
party shall be entitled to recover reasonable attorneys' fees in addition to its
costs and expenses and any other available remedy.
(k) Securities Held by the Company or Its Affiliates. Whenever
------------------------------------------------
the consent or approval of Holders of a specified percentage of Registrable
Securities or Warrants is required hereunder, Registrable Securities or Warrants
held by the Company or by any of its affiliates (as such term is defined in Rule
405 under the Securities Act) shall not be counted (in either the numerator or
the denominator) in determining whether such consent or approval was given by
the Holders of such required percentage.
(l) Remedies. In the event of a breach by the Company of any of
--------
its obligations under this Agreement, each Holder, in addition to being entitled
to exercise all rights provided herein, in the Purchase Agreement or granted by
law, including recovery of damages, will be entitled to specific performance of
its rights under this Agreement. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of any of the provisions of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Timothy P. Laehy
--------------------------------------------
Name: Timothy P. Laehy
Title: Chief Financial Officer, Treasurer
also Vice President, Finance
Address for Notices:
3650 Bassett Street
Santa Clara, California 95054
Telecopier: (408) 490-4501
Telephone: (408) 490-4500
BEAR, STEARNS & CO. INC.
By: /s/ James C. Diao
--------------------------------------------
Name: James C. Diao
Title: Senior Managing Director
Bear, Stearns & Co. Inc.
BT ALEX. BROWN INCORPORATED
By: /s/ Anne Martin
--------------------------------------------
Name: Anne Martin
Title: Principal
24
<PAGE>
EXHIBIT 4.5
(Face of Note)
================================================================================
"FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT;
NOT LATER THAN 10 DAYS AFTER MARCH 11, 1998, INFORMATION TO INCLUDE THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, AND YIELD TO MATURITY OF
THE SECURITY WILL BE MADE AVAILABLE TO HOLDERS UPON REQUEST TO TIMOTHY LAEHY,
CHIEF FINANCIAL OFFICER, COVAD COMMUNICATIONS GROUP, INC., (408) 490-4550.
(i) CUSIP/CINS _________________________________
13 1/2 % Series B Senior Discount Notes due 2008
No. _______ $_________________/1/
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to______________________________________________________________
or registered assigns,
the principal sum of_______________________________________________________
Dollars on March 15, 2008.
Interest Payment Dates: March 15 and September 15
Record Dates: March 1 and September 1
________________________
/1/ To be initially $______ aggregate principal amount at maturity, subject
to increase and decrease in accordance with the Schedule of Exchanges of
Interest in the Global Note attached hereto and, in combination with Global Note
number[s] _______ [and _______] identified by CUSIP No. ____, and Regulations S
Temporary Global Note number ________ identified by CUSIP No. _____, to equal
$_____ in aggregate principal amount at maturity.
1
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed manually
or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
By:_________________________________________
Name:
Title:
By:_________________________________________
Name:
Title:
Dated: _________, 1998
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
The Bank of New York,
as Trustee
By:____________________________________________
Authorized Signatory
================================================================================
2
<PAGE>
(Back of Note)
==============
13 1/2 % Series B Senior Discount Notes due 2008
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSIST OF $1,000 PRINCIPAL AMOUNT AT MATURITY
OF THE NOTES AND ONE WARRANT (EACH, A "WARRANT") INITIALLY ENTITLING THE HOLDER
THEREOF TO PURCHASE 6.4792 SHARES, PAR VALUE $0.001 PER SHARE, OF THE COMPANY.
THE NOTES AND WARRANTS WILL BE AUTOMATICALLY SEPARATED UPON THE EARLIEST TO
OCCUR OF (i) 90 DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS THE INITIAL
PURCHASERS MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, (iii) IN THE EVENT OF A
CHANGE OF CONTROL (AS DEFINED IN THE INDENTURE), THE DATE THE COMPANY MAILS
NOTICE THEREOF TO HOLDERS OF NOTES, (iv) THE DATE ON WHICH THE EXCHANGE OFFER
(AS DEFINED IN THE INDENTURE) IS CONSUMMATED AND (v) THE DATE ON WHICH THE SHELF
REGISTRATION STATEMENT (AS DEFINED IN THE INDENTURE) IS
3
<PAGE>
DECLARED EFFECTIVE. THE NOTES EVIDENCED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED OR SEPARATED FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY
TOGETHER, WITH THE WARRANTS UNTIL THE SEPARATION DATE.
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. INTEREST. Covad Communications Group, Inc., a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at 13 1/2 % per annum. Interest will not accrue until March 15, 2003.
Thereafter, the Company shall pay interest and additional Interest, if any,
semi-annually on March 15 and September 15, commencing on September 15, 2003, or
if any such day is not a Business Day, on the next succeeding Business Day (each
an "Interest Payment Date"). 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; provided that if there is no existing Default in
the payment of interest, and if this Note is authenticated between a record date
referred to on the face hereof and the next succeeding Interest Payment Date,
interest shall accrue from such next succeeding Interest Payment Date; provided,
further, that the first Interest Payment Date shall be September 15, 2003. The
Company shall pay interest (including post-petition interest in any proceeding
under any Bankruptcy Law) on overdue principal and premium, if any, from time to
time on demand at a rate that is 1% per annum in excess of the rate then in
effect; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace periods) from time to time on demand at
the same rate to the extent lawful. Interest will be computed on the basis of a
360-day year of twelve 30-day months. The Accreted Value will accrete between
the date hereof and March 15, 2003, on a semi-annual bond equivalent basis using
a 360-day year comprised of twelve 30-day months. All references in this Note
and in the Indenture to "interest" shall be deemed to include any Additional
Interest that may become payable thereon according to the provisions of the
Indenture.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except
defaulted interest) to the Persons who are registered Holders of Notes at the
close of business on March 1 or September 1 preceding the Interest Payment Date,
even if such Notes are cancelled after such record date and on or before such
Interest Payment Date, except as provided in Section 2.12 of the Indenture with
respect to defaulted interest. The Notes will be payable as to principal,
premium and interest at the office or agency of the Company maintained for such
purpose within or without 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 at
their addresses set forth in the register of Holders, and provided that payment
by wire transfer of immediately available funds will be required with respect to
principal of and interest, premium on, all Global Notes and all other Notes the
Holders of which shall have provided wire transfer instructions to the Company
or the Paying Agent. Such payment shall be in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.
4
<PAGE>
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the
Trustee under the Indenture, will act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any Holder.
The Company or any of its Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated as
of March 15, 1998 ("Indenture") between the Company and the Trustee. The terms
of the 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 (15 U.S.
Code (S)(S) 77aaa-77bbbb). The Notes are subject to all such terms, and Holders
are referred to the Indenture and such Act for a statement of such terms. To
the extent any provision of this Note conflicts with the express provisions of
the Indenture, the provisions of the Indenture shall govern and be controlling.
The Notes are obligations of the Company limited to $185,000,000 in aggregate
initial Accreted Value.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to March 15, 2003.
Thereafter, the Company shall have the option to redeem the Notes, in whole or
in part, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon, if any, 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......................... 106.750%
2004......................... 104.500%
2005......................... 102.250%
2006 and thereafter.......... 100.000%
</TABLE>
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time 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 issued on the Issue Date under the Indenture at a redemption price of
113.5 % of the Accreted Value, plus with accrued and unpaid interest, if any, to
the date of redemption; provided that at least $87.8 million of Accreted Value
of 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 (as
defined in the Equity Commitment) shall constitute an investment or any part of
any investment by a Strategic Equity Investor.
5
<PAGE>
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall not be required
to make mandatory redemption payments with respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be required to
make an offer (a "Change of Control Offer") to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase
price equal to 101% of the Accreted Value thereof on the date of purchase (if
prior to March 15, 2003) or 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (if on or after March 15,
2003) (in either case, the "Change of Control Payment"). Within 10 days
following any Change of Control, the Company shall mail a notice to each Holder
setting forth the procedures governing the Change of Control Offer as required
by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $5 million, the Company shall commence an offer to all Holders
of Notes (as "Asset Sale Offer") pursuant to Section 3.09 of the Indenture to
purchase 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
Accreted Value thereof on the date fixed for the closing of such offer (if prior
to March 15, 2003) or 100% of the principal amount thereof plus accrued and
unpaid interest and Additional Interest thereon, if any, to the date fixed for
the closing of such offer (if on or after March 15, 2003), in accordance with
the procedures set forth in the Indenture. To the extent that the aggregate
amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company (or such Restricted Subsidiary) may use such deficiency
for general corporate purposes. If the aggregate Accreted Value or principal
amount, as the case may be, of Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on
a pro rata basis. Holders of Notes that are the subject of an offer to purchase
will receive an Asset Sale Offer from the Company prior to any related purchase
date and may elect to have such Notes purchased by completing the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each Holder whose
Notes are to be redeemed at its registered address. Notes in denominations
larger than $1,000 may be redeemed in part but only in whole multiples of
$1,000, unless all of the Notes held by a Holder are to be redeemed. On and
after the redemption date interest ceases to accrue on Notes or portions thereof
called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000.
The transfer of Notes may be registered and Notes may be exchanged as provided
in the Indenture. The Registrar and the Trustee may require a Holder, among
other things, to furnish appropriate endorsements and transfer
6
<PAGE>
documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. The Company need not exchange or
register the transfer of any Note or portion of a Note selected for redemption,
except for the unredeemed portion of any Note being redeemed in part. Also, the
Company need not exchange or register the transfer of any Notes for a period of
15 days before a selection of Notes to be redeemed or during the period between
a record date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated
as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, 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 then outstanding Notes
voting as a single class, and any existing 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 principal amount of the then outstanding Notes voting
as a single class. Without the consent of any Holder of a Note, the Indenture or
the Notes may be amended or supplemented 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 the Notes in 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 the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act, otherwise
comply with applicable law.
12. DEFAULTS AND REMEDIES. Events of Default include: (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 principal of or premium, if any,
on the Notes when the same becomes due and payable at maturity, upon redemption
(including in connection with an offer to purchase) or otherwise, (iii) failure
by the Company or any of its Restricted Subsidiaries to comply with Section
4.07, 4.09, 4.10 or 5.01 of the Indenture; (iv) failure by the Company or any of
its Restricted Subsidiaries for 30 days after notice to the Company by the
Trustee or the Holders of at least 25% in principal amount of the Notes then
outstanding voting as a single class to comply with certain other agreements in
the Indenture or the Notes; (v) default under certain other agreements relating
to Debt of the Company which default is caused by a failure to pay principal of
or premium, if any, or interest on such Debt prior to the grace period provided
in such Debt on the date of such default (a "Payment Default") or results in the
acceleration of such Debt prior to its express maturity and, in each case, the
principal amount of any 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) certain final judgments for the payment of money that remain
undischarged 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 Financial Investors of their respective obligations
under the Equity Commitment; (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
7
<PAGE>
Trustee or the Holders of at least 25% in 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 bankruptcy or insolvency, all outstanding Notes
will become due and payable without further action or notice. Holders 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. The Holders of a majority in aggregate principal amount 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.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any
other capacity, may make loans to, accept deposits from, and perform services
for the Company or its Affiliates, and may otherwise deal with the Company or
its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not 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 by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
15. AUTHENTICATION. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND RESTRICTED
DEFINITIVE NOTES. In addition to the rights provided to Holders of Notes under
the Indenture, Holders of Restricted Global Notes and Restricted Definitive
Notes shall have all the rights set forth in the Registration Rights Agreement
dated as of March 15, 1998, between the Company and the parties named on the
signature pages thereof (the "Registration Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to
8
<PAGE>
Holders. No representation is made as to the accuracy of such numbers either as
printed on the Notes or as contained in any notice of redemption and reliance
may be placed only on the other identification numbers placed thereon.
9
<PAGE>
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
Attention: Chief Executive Officer
10
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
________________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint_________________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
________________________________________________________________________________
Date:___________________
Your Signature:_____________________________
(Sign exactly as your name appears on the
face of this Note)
SIGNATURE GUARANTEE.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.10 or 4.15 of the Indenture, check the box below:
[_] Section 4.10 [_] Section 4.15
If you want to elect to have only part of the Note purchased by the Company
pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you
elect to have purchased: $________
Date:______________ Your Signature:_______________________
(Sign exactly as your name appears on
the Note)
Tax Identification No:____________________________
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
12
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE
The following exchanges of a part of this Global Note for an interest in
another Global Note or for a Definitive Note, or exchanges of a part of another
Global Note or Definitive Note for an interest in this Global Note, have been
made:
<TABLE>
<CAPTION>
AMOUNT OF PRINCIPAL AMOUNT
AMOUNT OF INCREASE AT MATURITY OF
DECREASE IN IN PRINCIPAL THIS GLOBAL NOTE SIGNATURE OF
PRINCIPAL AMOUNT AMOUNT FOLLOWING SUCH AUTHORIZED OFFICER
AT MATURITY OF AT MATURITY OF DECREASE (OR OF TRUSTEE OR NOTE
DATE OF EXCHANGE THIS GLOBAL NOTE THIS GLOBAL NOTE INCREASE) CUSTODIAN
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
(Face of Regulation S Temporary Global Note)
================================================================================
"FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT;
NOT LATER THAN 10 DAYS AFTER MARCH 11, 1998, INFORMATION TO INCLUDE THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, AND YIELD TO MATURITY OF
THE SECURITY WILL BE MADE AVAILABLE TO HOLDERS UPON REQUEST TO TIMOTHY LAEHY,
CHIEF FINANCIAL OFFICER, COVAD COMMUNICATIONS GROUP, INC., (408) 490-4550.
(i) CUSIP/CINS _________________________________
13 1/2 % Series B Senior Discount Notes due 2008
No._____________ $____________________/1/
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to______________________________________________________________
or registered assigns,
the principal sum of_______________________________________________________
Dollars on March 15, 2008.
Interest Payment Dates: March 15 and September 15
Record Dates: March 1 and September 1
____________________
/1/ To be initially $______ aggregate principal amount at maturity, subject to
increase and decrease in accordance with the Schedule of Exchanges of Interest
in the Global Note attached hereto and, in combination with Global Note
number[s] _______ [and _______] identified by CUSIP No. ____, and Regulations S
Temporary Global Note number ________ identified by CUSIP No. _____, to equal
$_____ in aggregate principal amount at maturity.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed manually
or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
By:_________________________________________
Name:
Title:
By:_________________________________________
Name:
Title:
Dated: _______ __, 1998
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
The Bank of New York,
as Trustee
By:________________________________
Authorized Signatory
================================================================================
<PAGE>
(Back of Regulation S Temporary Global Note)
13 1/2 % Series B Senior Discount Notes due 2008
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFI CATED NOTES, ARE
AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEI THER THE HOLDER NOR THE
BENEFICIAL OWNERS OF THIS REGULATION S TEMPO RARY GLOBAL NOTE SHALL BE ENTITLED
TO RECEIVE PAYMENT OF INTEREST HEREON.
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDEN TURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED
TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRE SENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COM PANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSIST OF $1,000 PRINCIPAL AMOUNT AT MATURITY
OF THE NOTES AND ONE WARRANT (EACH, A "WARRANT") INITIALLY ENTITLING THE HOLDER
THEREOF TO PURCHASE 6.4792 SHARES, PAR VALUE $0.001
<PAGE>
PER SHARE, OF THE COMPANY. THE NOTES AND WARRANTS WILL BE AUTOMATICALLY
SEPARATED UPON THE EARLIEST TO OCCUR OF (i) 90 DAYS FROM THE DATE OF ISSUANCE,
(ii) SUCH DATE AS THE INITIAL PURCHASERS MAY, IN THEIR DISCRETION, DEEM
APPROPRIATE, (iii) IN THE EVENT OF A CHANGE OF CONTROL (AS DEFINED IN THE
INDENTURE), THE DATE THE COMPANY MAILS NOTICE THEREOF TO HOLDERS OF NOTES, (iv)
THE DATE ON WHICH THE EXCHANGE OFFER (AS DEFINED IN THE INDENTURE) IS
CONSUMMATED AND (v) THE DATE ON WHICH THE SHELF REGISTRATION STATEMENT (AS
DEFINED IN THE INDENTURE) IS DECLARED EFFECTIVE. THE NOTES EVIDENCED BY THIS
CERTIFICATE MAY NOT BE TRANSFERRED OR SEPARATED FROM, BUT MAY BE TRANSFERRED OR
EXCHANGED ONLY TOGETHER, WITH THE WARRANTS UNTIL THE SEPARATION DATE.
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. INTEREST. Covad Communications Group, Inc., a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at 13 1/2 % per annum. Interest will not accrue until March 15, 2003.
Thereafter, the Company shall pay interest and additional Interest, if any,
semi-annually on March 15 and September 15, commencing on September 15, 2003,
and Additional Interest , or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). 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; provided that if
there is no existing Default in the payment of interest, and if this Note is
authenticated between a record date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date; provided, further, that the first Interest
Payment Date shall be September 15, 2003. The Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue principal and premium, if any, from time to time on demand at a rate
that is 1% per annum in excess of the rate then in effect; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the same rate to the extent lawful.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Accreted Value will accrete between the date hereof and March 15,
2003, on a semi-annual bond equivalent basis using a 360-day year comprised of
twelve 30-day months. All references in this Note and in the Indenture to
"interest" shall be deemed to include any Additional Interest that may become
payable thereon according to the provisions of the Indenture.
Until this Regulation S Temporary Global Note is exchanged for one or more
Regulation S Permanent Global Notes, the Holder hereof shall not be entitled to
receive payments of interest hereon; until so exchanged in full, this Regulation
S Temporary Global Note shall in all other respects be entitled to the same
benefits as other Senior Subordinated Notes under the Indenture.
<PAGE>
2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except
defaulted interest) to the Persons who are registered Holders of Notes at the
close of business on March 1 or September 1 preceding the Interest Payment Date,
even if such Notes are cancelled after such record date and on or before such
Interest Payment Date, except as provided in Section 2.12 of the Indenture with
respect to defaulted interest. The Notes will be payable as to principal,
premium and interest at the office or agency of the Company maintained for such
purpose within or without 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 at
their addresses set forth in the register of Holders, and provided that payment
by wire transfer of immediately available funds will be required with respect to
principal of and interest, premium on, all Global Notes and all other Notes the
Holders of which shall have provided wire transfer instructions to the Company
or the Paying Agent. Such payment shall be in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the
Trustee under the Indenture, will act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any Holder.
The Company or any of its Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated as
of March 15, 1998 ("Indenture") between the Company and the Trustee. The terms
of the 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 (15 U.S.
Code (S)(S) 77aaa-77bbbb). The Notes are subject to all such terms, and Holders
are referred to the Indenture and such Act for a statement of such terms. To
the extent any provision of this Note conflicts with the express provisions of
the Indenture, the provisions of the Indenture shall govern and be controlling.
The Notes are obligations of the Company limited to $185,000,000 in aggregate
initial Accreted Value.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to March 15, 2003.
Thereafter, the Company shall have the option to redeem the Notes, in whole or
in part, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon, if any, 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........................ 106.750%
2004........................ 104.500%
2005........................ 102.250%
2006 and thereafter......... 100.000%
</TABLE>
<PAGE>
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time 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
a 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 issued on the Issue Date under the Indenture at a redemption price of
113.5% of the Accreted Value, plus with accrued and unpaid interest, if any, to
the date of redemption; provided that at least $ 87.8 million of Accreted Value
of 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 (as
defined in the Equity Commitment) shall constitute an investment or any part of
any investment by a Strategic Equity Investor.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall not be required
to make mandatory redemption payments with respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be required to
make an offer (a "Change of Control Offer") to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase
price equal to 101% of the Accreted Value thereof on the date of purchase (if
prior to March 15, 2003) or 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (if on or after March 15,
2003) (in either case, the "Change of Control Payment"). Within 10 days
following any Change of Control, the Company shall mail a notice to each Holder
setting forth the procedures governing the Change of Control Offer as required
by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $5 million, the Company shall commence an offer to all Holders
of Notes (as "Asset Sale Offer") pursuant to Section 3.09 of the Indenture to
purchase 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
Accreted Value thereof on the date fixed for the closing of such offer (if prior
to March 15, 2003) or 100% of the principal amount thereof plus accrued and
unpaid interest to the date fixed for the closing of such offer (if on or after
March 15, 2003), in accordance with the procedures set forth in the Indenture.
To the extent that the aggregate amount of Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company (or such Restricted
Subsidiary) may use such deficiency for general corporate purposes. If the
aggregate Accreted Value or principal amount, as the case may be, of Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds,
<PAGE>
the Trustee shall select the Notes to be purchased on a pro rata basis. Holders
of Notes that are the subject of an offer to purchase will receive an Asset Sale
Offer from the Company prior to any related purchase date and may elect to have
such Notes purchased by completing the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each Holder whose
Notes are to be redeemed at its registered address. Notes in denominations
larger than $1,000 may be redeemed in part but only in whole multiples of
$1,000, unless all of the Notes held by a Holder are to be redeemed. On and
after the redemption date interest ceases to accrue on Notes or portions thereof
called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000.
The transfer of Notes may be registered and Notes may be exchanged as provided
in 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 need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a period of 15 days
before a selection of Notes to be redeemed or during the period between a record
date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated
as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, 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 then outstanding Notes
voting as a single class, and any existing 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 principal amount of the then outstanding Notes voting
as a single class. Without the consent of any Holder of a Note, the Indenture or
the Notes may be amended or supplemented 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 the Notes in 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 the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act, otherwise
comply with applicable law.
12. DEFAULTS AND REMEDIES. Events of Default include: (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 principal of or premium, if any,
on the Notes when the same becomes due and
<PAGE>
payable at maturity, upon redemption (including in connection with an offer to
purchase) or otherwise, (iii) failure by the Company or any of its Restricted
Subsidiaries to comply with Section 4.07, 4.09, 4.10 or 5.01 of the Indenture;
(iv) failure by the Company or any of its Restricted Subsidiaries for 30 days
after notice to the Company by the Trustee or the Holders of at least 25% in
principal amount of the Notes then outstanding voting as a single class to
comply with certain other agreements in the Indenture or the Notes; (v) default
under certain other agreements relating to Debt of the Company which default is
caused by a failure to pay principal of or premium, if any, or interest on such
Debt prior to the grace period provided in such Debt on the date of such default
(a "Payment Default") or results in the acceleration of such Debt prior to its
express maturity and, in each case, the principal amount of any 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) certain final judgments for
the payment of money that remain undischarged 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 Financial Investors of their
respective obligations under the Equity Commitment; (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 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 bankruptcy or insolvency, all outstanding Notes will become
due and payable without further action or notice. Holders 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. The Holders of a majority in aggregate principal amount 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.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any
other capacity, may make loans to, accept deposits from, and perform services
for the Company or its Affiliates, and may otherwise deal with the Company or
its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not 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 by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
<PAGE>
15. AUTHENTICATION. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND RESTRICTED
DEFINITIVE NOTES. In addition to the rights provided to Holders of Notes under
the Indenture, Holders of Restricted Global Notes and Restricted Definitive
Notes shall have all the rights set forth in the Registration Rights Agreement
dated as of March 15, 1998, between the Company and the parties named on the
signature pages thereof (the "Registration Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, California 95054
Attention: Chief Executive Officer
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
________________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint_________________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date:_________________
Your Signature:_____________________________
(Sign exactly as your name appears on the face of this Note)
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.10 or 4.15 of the Indenture, check the appropriate box below:
[_] Section 4.10 [_] Section 4.15
If you want to elect to have only part of the Note purchased by the Company
pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you
elect to have purchased: $___________
Date:______________ Your Signature:_____________________________
(Sign exactly as your name appears on the Note)
Tax Identification No.:_____________________
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
<PAGE>
SCHEDULE OF EXCHANGES OF REGULATION S TEMPORARY GLOBAL NOTE
The following exchanges of a part of this Regulation S Temporary Global
Note for an interest in another Global Note, or of other Restricted Global Notes
for an interest in this Regulation S Temporary Global Note, have been made:
<TABLE>
<CAPTION>
AMOUNT OF PRINCIPAL AMOUNT
AMOUNT OF INCREASE AT MATURITY OF
DECREASE IN IN PRINCIPAL THIS GLOBAL NOTE SIGNATURE OF
PRINCIPAL AMOUNT AMOUNT FOLLOWING SUCH AUTHORIZED OFFICER
AT MATURITY OF AT MATURITY OF DECREASE (OR OF TRUSTEE OR NOTE
DATE OF EXCHANGE THIS GLOBAL NOTE THIS GLOBAL NOTE INCREASE) CUSTODIAN
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
</TABLE>
<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).
-2-
<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.
-3-
<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.
-4-
<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
-7-
<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.
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<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 10.1
COVAD COMMUNICATIONS GROUP, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("AGREEMENT") is made as of this ___ day of
_________, 1998, by and between Covad Communications Group, Inc., a Delaware
corporation (the "COMPANY"), and ______________________ ("INDEMNITEE").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's services as an officer or
director of the Company, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit, proceeding or any alternative
dispute resolution mechanism, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that Indemnitee is or was a director, officer, employee or agent of
the Company, or any subsidiary of the Company, or by reason of the fact that
Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that Indemnitee did not act in good faith and in a manner
which Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that Indemnitee's conduct was
unlawful.
<PAGE>
(b) Proceedings By or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, or by reason
of the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
and, to the fullest extent permitted by law, amounts paid in settlement actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, except that no indemnification shall be made in
respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged to be liable to the Company unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery of the State of Delaware or such other court shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Subsections (a) and (b) of this Section 1, or in
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. AGREEMENT TO SERVE. In consideration of the protection afforded by
this Agreement, if Indemnitee is a director of the Company he agrees to serve at
least for the 90 days after the effective date of this Agreement as a director
and not to resign voluntarily during such period without the written consent of
a majority of the Board of Directors. If Indemnitee is an officer of the Company
not serving under an employment contract, he agrees to serve in such capacity at
least for 90 days and not to resign voluntarily during such period without the
written consent of a majority of the Board of Directors. Following the
applicable period set forth above, Indemnitee agrees to continue to serve in
such capacity at the will of the Company (or under separate agreement, if such
agreement exists) so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing. Nothing contained in this Agreement is intended to create in
Indemnitee any right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE.
(a) Advancement of Expenses. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any
such action, suit or proceeding). Indemnitee hereby undertakes to repay
-2-
<PAGE>
such amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee within thirty (30) days following delivery of a written
request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the President of the
Company at the address shown on the signature page of this Agreement (or such
other address as the Company shall designate in writing to Indemnitee and given
as provided in Section 14). In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
Section 1 and this Section 3 shall be made no later than thirty (30) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within thirty (30) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 14 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed. However, Indemnitee
shall be entitled to receive interim payments of expenses pursuant to Subsection
3(a) unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the court to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including it Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
-3-
<PAGE>
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ his counsel in any such proceeding at Indemnitee's expense; and
(ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (C) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company.
4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) Scope. Notwithstanding any other provision of this Agreement, the
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be, ipso facto, within
the purview of Indemnitee's rights and Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested Directors, the General Corporation Law of
the State of Delaware, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he may have ceased to serve in such capacity at the time of any action,
suit or other covered proceeding.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or
-4-
<PAGE>
settlement of any civil or criminal action, suit or proceeding, but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such expenses, judgments, fines or penalties to
which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of director and officer liability insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
8. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to
-5-
<PAGE>
indemnification under this Agreement or any other statute or law or otherwise as
required under Section 145 of the Delaware General Corporation Law, but such
indemnification or advancement of expenses may be provided by the Company in
specific cases if the Board of Directors has approved the initiation or bringing
of such suit; or
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
opposed to the best interests of the Company" as referred to in this Agreement.
11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
-6-
<PAGE>
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. NOTICE. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
16. CHOICE OF LAW. This Agreement shall be governed by and its provisions
construed in accordance with the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware without regard to the conflict of law principles thereof.
17. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
18. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall
-7-
<PAGE>
execute all documents required and shall do all acts that may be necessary to
secure such rights and to enable the Company effectively to bring suit to
enforce such rights.
19. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
COVAD COMMUNICATIONS GROUP, INC.
_____________________________________
Signature of Authorized Signatory
_____________________________________
Print Name and Title
Address: 3560 Bassett Street
Santa Clara, CA 95054
AGREED TO AND ACCEPTED:
INDEMNITEE:
______________________________
Signature
______________________________
Print Name and Title
Address: __________________
__________________
__________________
-9-
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into by and between
Covad Communications Group, Inc. (the "Company") and Rex Cardinale
("Executive").
1. Duties and Scope of Employment. The Company agrees to employ Executive
------------------------------
as Vice President-Engineering and Executive agrees to perform such reasonable
responsibilities and duties as may be required of the Executive by the Company;
provided, however, that the Company shall have the right to normally revise such
responsibilities from time to time as the Company may deem appropriate. The
Executive shall carry out his duties and responsibilities hereunder in a
diligent and competent manner and shall devote his full business time, attention
and energy thereto. Executive shall report directly to the Chief Executive
Officer of the Company.
2. Term of Agreement. Executive's term of employment by the Company
-----------------
shall commence on July 15, 1997 (the "Effective Date"), and continue for a
period of two (2) years (the "Two-Year Term"). During the Two-Year Term,
Executive's employment relationship with the Company can only be terminated as
provided herein. At the end of the Two-Year Term, the employment relationship
between the Executive and the Company shall become at-will and either party will
be able to terminate the employment relationship with or without Cause (as
defined below) at any time upon thirty days' notice to the other party. Upon
any termination of Executive's employment by the Company without cause, the
Company shall continue to pay to and provide the Executive with such salaray and
benefits as Executive received immediately prior to termination of his
employment for a period of six months after the the date of termination of
Executive's employment. Executive's obligations, covenants and duties under
Sections 6, 7, 8, 11 and 13 shall survive the termination of Executive's
employment under this Agreement.
3. Compensation and Employee Benefits.
----------------------------------
(a) Base Salary. The Company shall pay the Executive as compensation
-----------
for his services a base salary at the annualized rate of $140,000 (the "Base
Salary"). The Base Salary shall be paid periodically in accordance with normal
Company payroll practices and subject to the usual, required withholding.
Executive understands and agrees that neither his job performance nor
promotions, commendations, bonuses or the like from the Company give rise to or
in any way serve as the basis for modification, amendment, or extension, by
implication or otherwise, of this Agreement, except that the Board of Directors
may approve salary increases based on performance in a manner consistent with
chnages in the salaries of similarly situated officers of the Company.
(b) Bonus. Executive shall be eligible to receive bonuses as
-----
determined by the Board or its Compensation Committee; and the determination and
payment of any and all bonuses shall be commensurate with determinations and
payments to other similarly situated officers of the Company. The Company shall
pay any and all bonuses referred to in this Agreement only at the same time as
bonuses are normally paid to senior management of the Company.
<PAGE>
(c) Employee Benefits. Executive shall be eligible to participate in
-----------------
(i) all employee benefit plans currently and hereafter maintained by the Company
for senior management according to their terms, and (ii) such other employee
benefits as are set forth in this Agreement.
(d) Vacation. Executive shall be entitled to three (3) weeks paid
--------
vacation and Company holidays in accordance with the Company's policies in
effect from time to time for senior management of the Company.
4. Expenses. The Company will pay or reimburse Executive for reasonable
--------
travel, entertainment or other expenses incurred by Executive in the furtherance
of or in connection with the performance of Executive's duties hereunder in
accordance with the Company's established policies.
5. Termination of Employment. If the Executive's employment is
-------------------------
terminated for Cause prior to the end of the Two-Year Period, Executive shall
not be entitled to any additional benefits or compensation hereunder, and
Executive shall only be eligible for benefits in accordance with the Company's
established policies as is then in effect.
For purposes of this Agreement, "Cause" shall mean (i) any act of
personal dishonesty taken by the Executive in connection with his
responsibilities as an Executive and intended to result in substantial personal
enrichment of the Executive, (ii) conviction of a felony that is injurious to
the Company, (iii) a willful act by the Executive which constitutes gross
misconduct and which is injurious to the Company, (iv) continued violations by
the Executive of the Executive's obligations under Section 1 of this Agreement
that are demonstrably willful and deliberate on the Executive's part after there
has been delivered to the Executive a written demand for performance from the
Company which describes the basis for the Company's belief that the Executive
has not substantially performed his duties, (v) the death of the Executive or
(vi) the total and permanent disability of Executive.
6. Confidential Information. Executive acknowledges that the
------------------------
information, observations and data obtained by him while employed by the Company
pursuant to this Agreement concerning the business or affairs of the Company
("Confidential Information") are the property of the Company. Executive agrees
that he shall not disclose to any unauthorized person or use for any purpose
whatsoever other than the performance of his employment duties any Confidential
Information without the prior written consent of the Board unless and except to
the extent that the aforementioned matters become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions to act. If Executive receives legal process, he may comply with it
provided he promptly notifies the Company and cooperates with the Company in
obtaining a protective order. Executive shall deliver to the Company at the
termination of his employment, or at any other time the Company may request, all
memoranda, notes, plans, records, reports, computer tapes and software and other
documents and data and copies thereof relating to the Confidential Information,
the work product or the business of the Company which he may then possess or
have under his control. As used in this Section 6, "Company" includes the
Company, its parent and their direct and indirect subsidiaries.
2
<PAGE>
7. Inventions and Other Intellectual Property. Executive acknowledges
------------------------------------------
that Executive and the Company have entered into the Proprietary Information and
Invention Agreement, dated May 29, 1997, and Executive agrees to comply with the
terms of that agreement.
8. Covenant Not to Compete.
-----------------------
(a) Non-Competition. During the term of his employment, Executive
---------------
agrees that Executive will not, either for himself or on behalf of any other
person, partnership, firm, association or corporation in any territory in which
the Company is actively engaged in business (i) open or operate a business which
is then in competition with any business of 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, or do anything reasonably intended to,
divert business from the Company or influence or attempt to 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. As used in this
Section 8, "Company" includes the Company, its parent and their direct and
indirect subsidiaries.
(b) Geographic Area. The geographical areas in which the restrictions
---------------
provided for in this Agreement apply include all cities, counties and states of
the United States, and all other countries, in which the Company has engaged in
sales or otherwise conducted business or selling efforts at any time during the
six months prior to the Effective Date hereof or during the term of this
Agreement.
(c) Severability. The scope of the geographic, time and subject
------------
matter restrictions set forth in this Section 8 are intended to conform to
applicable law. If, however, a court determines that the scope of any such
restriction exceeds what is permitted by law, then such restriction shall be
limited or otherwise reformed as necessary to comply with and be enforceable
under applicable law. If a court determines that any provision of this Section 8
is unenforceable and cannot be reformed, then such provision shall be deemed
eliminated from this Section to the extent necessary to permit the remaining
provisions of this Section to be enforced.
9. Absence of Conflict. Executive represents and warrants that his
-------------------
employment by the Company as described herein shall not conflict with and will
not be constrained by any prior employment or consulting agreement or
relationship.
10. Assignment. Executive's rights and obligations under this Agreement
----------
shall not be assignable by Executive. The Company's rights and obligations
under this Agreement shall not be assignable by the Company except as incident
to the transfer, by merger, liquidation, or otherwise, of all or substantially
all of the business of the Company.
11. Notices. Any notice required or permitted under this Agreement shall
-------
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if sent by facsimile, or mailed or sent via Federal
Express to the other party at its address set forth below in
3
<PAGE>
this Section 11, or at such other address as such party may designate by written
notice to the other party hereto. Any effective notice hereunder shall be deemed
given on the date personally delivered or on the date sent by facsimile or
deposited in the United States mail (sent by certified mail, return receipt
requested), as the case may be, at the following addresses:
(i) If to the Company:
Covad Communications Group, Inc.
20823 Stevens Creek Blvd., Suite 300
Cupertino, CA 95014
Attn: Chief Executive Officer
----
(ii) If to Executive:
Rex Cardinale
___________________
___________________
12. Arbitration. The parties hereto agree that any dispute or controversy
-----------
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof, shall be finally settled by binding arbitration to be held in Santa
Clara County, California under the Employment Dispute Resolution Rules of the
American Arbitration Association as then in effect (the "Rules").
Notwithstanding anything to the contrary herein, arbitration shall not be the
sole and exclusive remedy for any claim by the Company or the Executive for
violations of the provisions of Sections 6, 7, or 8 of this Agreement.
The arbitrator(s) may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator(s) shall be final,
conclusive and binding on the parties to the arbitration, and judgment may be
entered on the decision of the arbitrator(s) in any court having jurisdiction.
The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to rules of conflicts of law, and the
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law.
The parties shall each pay one-half of the costs and expenses of such
arbitration, and each party shall pay its own counsel fees and expenses.
EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION 12, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF,
4
<PAGE>
RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION,
VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING
ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF
EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES
RELATING TO EXECUTIVE'S RELATIONSHIP WITH THE COMPANY INCLUDING, BUT NOT LIMITED
TO, ANY AND ALL CLAIMS RELATING TO EMPLOYMENT DISCRIMINATION, HARASSMENT AND
WRONGFUL TERMINATION.
13. Waiver. Either party's failure to enforce any provision or provisions
------
of this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
14. Enforcement. Executive and the Company recognize and acknowledge that
-----------
Executive is employed under this Agreement to render personal services of a
unique character, requiring special expertise and experience by Executive. In
addition, Executive acknowledges that his compensation will be greater than
$6,000.00 per year. Executive agrees that a breach by him of Sections 6, 7 or
8 could not reasonably or adequately be compensated in damages in an action at
law and that the Company shall be entitled to injunctive relief, which may
include but shall not be limited to restraining Executive from rendering any
service that would breach this Agreement. However, no remedy conferred by any
of the specific provisions of this Agreement (including this Section) is
intended to be exclusive of any other remedy, and each and every remedy shall be
cumulative and in addition to every other remedy given under this Agreement or
now or hereafter existing at law or in equity or by statute or otherwise. The
election of any one or more remedies by the Company shall not constitute a
waiver of the right to pursue other available remedies.
15. Withholding. The Company shall be entitled to withhold, or cause to
-----------
be withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
16. Severability. If any term or provision of this Agreement shall to any
------------
extent be declared illegal or unenforceable by arbitrator(s) or by a duly
authorized court of competent jurisdiction, then the remainder of this Agreement
or the application of such term or provision in circumstances other than those
as to which it is so declared illegal or unenforceable, shall not be affected
thereby, each term and provision of this Agreement shall be valid and
enforceable to the fullest extent permitted by law and the illegal or
unenforceable term or provision shall be deemed replaced by a term or provision
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term of provision.
17. Entire Agreement. This Agreement and any agreements referenced herein
----------------
represent the entire agreement of the parties with respect to the matters set
forth herein, and to the extent inconsistent with other prior contracts,
arrangements or understandings between the parties, supersedes all such previous
contracts, arrangements or understandings between the Company and
5
<PAGE>
Executive. The Agreement may be amended at any time only by mutual written
agreement signed by the parties hereto.
18. Governing Law. This Agreement shall be construed, interpreted, and
-------------
governed in accordance with the laws of the State of California without
reference to rules relating to conflict of law (other than any such rules
directing application of California law).
19. Headings. The headings of sections herein are included solely for
--------
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
20. Counterparts. This Agreement may be executed by either of the parties
------------
hereto in counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
EXECUTIVE
/s/ Rex Cardinale
-------------------------------
SIGNATURE
Rex Cardinale
-------------------------------
PRINT NAME OF EXECUTIVE
COVAD COMMUNICATIONS GROUP, INC.
BY: /s/ Charles J. McMinn
---------------------------
NAME: _________________________
TITLE: ________________________
6
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into by and between
Covad Communications Group, Inc. (the "Company") and Dhruv Khanna ("Executive").
1. Duties and Scope of Employment. The Company agrees to employ Executive
------------------------------
as Vice President and General Counsel and Executive agrees to perform such
reasonable responsibilities and duties as may be required of the Executive by
the Company; provided, however, that the Company shall have the right to
normally revise such responsibilities from time to time as the Company may deem
appropriate. The Executive shall carry out his duties and responsibilities
hereunder in a diligent and competent manner and shall devote his full business
time, attention and energy thereto. Executive shall report directly to the Chief
Executive Officer of the Company.
2. Term of Agreement. Executive's term of employment by the Company
-----------------
shall commence on July 15, 1997 (the "Effective Date"), and continue for a
period of two (2) years (the "Two-Year Term"). During the Two-Year Term,
Executive's employment relationship with the Company can only be terminated as
provided herein. At the end of the Two-Year Term, the employment relationship
between the Executive and the Company shall become at-will and either party will
be able to terminate the employment relationship with or without Cause (as
defined below) at any time upon thirty days' notice to the other party. Upon
any termination of Executive's employment by the Company without cause, the
Company shall continue to pay to and provide the Executive with such salary and
benefits as Executive received immediately prior to termination of his
employment for a period of six months after the date of termination of
Executive's employment. Executive's obligations, covenants and duties under
Sections 6, 7, 8, 11 and 13 shall survive the termination of Executive's
employment under this Agreement.
3. Compensation and Employee Benefits.
----------------------------------
(a) Base Salary. The Company shall pay the Executive as compensation
-----------
for his services a base salary at the annualized rate of $120,000 (the "Base
Salary"). The Base Salary shall be paid periodically in accordance with normal
Company payroll practices and subject to the usual, required withholding.
Executive understands and agrees that neither his job performance nor
promotions, commendations, bonuses or the like from the Company give rise to or
in any way serve as the basis for modification, amendment, or extension, by
implication or otherwise, of this Agreement, except that the Board of Directors
may approve salary increases based on performance in a manner consistent with
changes in the salaries of similarly situated officers of the Company.
(b) Bonus. Executive shall be eligible to receive bonuses as
-----
determined by the Board or its Compensation Committee; and the determination and
payment of any and all bonuses shall be commensurate with determinations and
payments to other similarly situated officers of the Company. The Company shall
pay any and all bonuses referred to in this Agreement only at the same time as
bonuses are normally paid to senior management of the Company.
<PAGE>
(c) Employee Benefits. Executive shall be eligible to participate in
-----------------
(i) all employee benefit plans currently and hereafter maintained by the Company
for senior management according to their terms, and (ii) such other employee
benefits as are set forth in this Agreement.
(d) Vacation. Executive shall be entitled to three (3) weeks paid
--------
vacation and Company holidays in accordance with the Company's policies in
effect from time to time for senior management of the Company.
4. Expenses. The Company will pay or reimburse Executive for reasonable
--------
travel, entertainment or other expenses incurred by Executive in the furtherance
of or in connection with the performance of Executive's duties hereunder in
accordance with the Company's established policies.
5. Termination of Employment. If the Executive's employment is
-------------------------
terminated for Cause prior to the end of the Two-Year Period, Executive shall
not be entitled to any additional benefits or compensation hereunder, and
Executive shall only be eligible for benefits in accordance with the Company's
established policies as is then in effect.
For purposes of this Agreement, "Cause" shall mean (i) any act of
personal dishonesty taken by the Executive in connection with his
responsibilities as an Executive and intended to result in substantial personal
enrichment of the Executive, (ii) conviction of a felony that is injurious to
the Company, (iii) a willful act by the Executive which constitutes gross
misconduct and which is injurious to the Company, (iv) continued violations by
the Executive of the Executive's obligations under Section 1 of this Agreement
that are demonstrably willful and deliberate on the Executive's part after there
has been delivered to the Executive a written demand for performance from the
Company which describes the basis for the Company's belief that the Executive
has not substantially performed his duties, (v) the death of the Executive or
(vi) the total and permanent disability of Executive.
6. Confidential Information. Executive acknowledges that the
------------------------
information, observations and data obtained by him while employed by the Company
pursuant to this Agreement concerning the business or affairs of the Company
("Confidential Information") are the property of the Company. Executive agrees
that he shall not disclose to any unauthorized person or use for any purpose
whatsoever other than the performance of his employment duties any Confidential
Information without the prior written consent of the Board unless and except to
the extent that the aforementioned matters become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions to act. If Executive receives legal process, he may comply with it
provided he promptly notifies the Company and cooperates with the Company in
obtaining a protective order. Executive shall deliver to the Company at the
termination of his employment, or at any other time the Company may request, all
memoranda, notes, plans, records, reports, computer tapes and software and other
documents and data and copies thereof relating to the Confidential Information,
the work product or the business of the Company which he may then possess or
have under his control. As used in this Section 6, "Company" includes the
Company, its parent and their direct and indirect subsidiaries.
2
<PAGE>
7. Inventions and Other Intellectual Property. Executive acknowledges
------------------------------------------
that Executive and the Company have entered into the Proprietary Information and
Invention Agreement, dated May 29, 1997, and Executive agrees to comply with the
terms of that agreement.
8. Covenant Not to Compete.
-----------------------
(a) Non-Competition. During the term of his employment, Executive
---------------
agrees that Executive will not, either for himself or on behalf of any other
person, partnership, firm, association or corporation in any territory in which
the Company is actively engaged in business (i) open or operate a business which
is then in competition with any business of 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, or do anything reasonably intended to,
divert business from the Company or influence or attempt to 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. As used in this
Section 8, "Company" includes the Company, its parent and their direct and
indirect subsidiaries.
(b) Geographic Area. The geographical areas in which the restrictions
---------------
provided for in this Agreement apply include all cities, counties and states of
the United States, and all other countries, in which the Company has engaged in
sales or otherwise conducted business or selling efforts at any time during the
six months prior to the Effective Date hereof or during the term of this
Agreement.
(c) Severability. The scope of the geographic, time and subject
------------
matter restrictions set forth in this Section 8 are intended to conform to
applicable law. If, however, a court determines that the scope of any such
restriction exceeds what is permitted by law, then such restriction shall be
limited or otherwise reformed as necessary to comply with and be enforceable
under applicable law. If a court determines that any provision of this Section 8
is unenforceable and cannot be reformed, then such provision shall be deemed
eliminated from this Section to the extent necessary to permit the remaining
provisions of this Section to be enforced.
9. Absence of Conflict. Executive represents and warrants that his
-------------------
employment by the Company as described herein shall not conflict with and will
not be constrained by any prior employment or consulting agreement or
relationship.
10. Assignment. Executive's rights and obligations under this Agreement
----------
shall not be assignable by Executive. The Company's rights and obligations
under this Agreement shall not be assignable by the Company except as incident
to the transfer, by merger, liquidation, or otherwise, of all or substantially
all of the business of the Company.
11. Notices. Any notice required or permitted under this Agreement shall
-------
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if sent by facsimile, or mailed or sent via Federal
Express to the other party at its address set forth below in
3
<PAGE>
this Section 11, or at such other address as such party may designate by written
notice to the other party hereto. Any effective notice hereunder shall be deemed
given on the date personally delivered or on the date sent by facsimile or
deposited in the United States mail (sent by certified mail, return receipt
requested), as the case may be, at the following addresses:
(i) If to the Company:
Covad Communications Group, Inc.
20823 Stevens Creek Blvd., Suite 300
Cupertino, CA 95014
Attn: Chief Executive Officer
----
(ii) If to Executive:
Dhruv Khanna
742 Alester Avenue
Palo Alto, CA 94303
12. Arbitration. The parties hereto agree that any dispute or controversy
-----------
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof, shall be finally settled by binding arbitration to be held in Santa
Clara County, California under the Employment Dispute Resolution Rules of the
American Arbitration Association as then in effect (the "Rules").
Notwithstanding anything to the contrary herein, arbitration shall not be the
sole and exclusive remedy for any claim by the Company or the Executive for
violations of the provisions of Sections 6, 7, or 8 of this Agreement.
The arbitrator(s) may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator(s) shall be final,
conclusive and binding on the parties to the arbitration, and judgment may be
entered on the decision of the arbitrator(s) in any court having jurisdiction.
The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to rules of conflicts of law, and the
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law.
The parties shall each pay one-half of the costs and expenses of such
arbitration, and each party shall pay its own counsel fees and expenses.
EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION 12, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH
THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH OR TERMINATION
4
<PAGE>
THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A
WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL
DISPUTES RELATING TO EXECUTIVE'S RELATIONSHIP WITH THE COMPANY INCLUDING, BUT
NOT LIMITED TO, ANY AND ALL CLAIMS RELATING TO EMPLOYMENT DISCRIMINATION,
HARASSMENT AND WRONGFUL TERMINATION.
13. Waiver. Either party's failure to enforce any provision or provisions
------
of this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
14. Enforcement. Executive and the Company recognize and acknowledge that
-----------
Executive is employed under this Agreement to render personal services of a
unique character, requiring special expertise and experience by Executive. In
addition, Executive acknowledges that his compensation will be greater than
$6,000.00 per year. Executive agrees that a breach by him of Sections 6, 7 or
8 could not reasonably or adequately be compensated in damages in an action at
law and that the Company shall be entitled to injunctive relief, which may
include but shall not be limited to restraining Executive from rendering any
service that would breach this Agreement. However, no remedy conferred by any
of the specific provisions of this Agreement (including this Section) is
intended to be exclusive of any other remedy, and each and every remedy shall be
cumulative and in addition to every other remedy given under this Agreement or
now or hereafter existing at law or in equity or by statute or otherwise. The
election of any one or more remedies by the Company shall not constitute a
waiver of the right to pursue other available remedies.
15. Withholding. The Company shall be entitled to withhold, or cause to
-----------
be withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
16. Severability. If any term or provision of this Agreement shall to any
------------
extent be declared illegal or unenforceable by arbitrator(s) or by a duly
authorized court of competent jurisdiction, then the remainder of this Agreement
or the application of such term or provision in circumstances other than those
as to which it is so declared illegal or unenforceable, shall not be affected
thereby, each term and provision of this Agreement shall be valid and
enforceable to the fullest extent permitted by law and the illegal or
unenforceable term or provision shall be deemed replaced by a term or provision
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term of provision.
17. Entire Agreement. This Agreement and any agreements referenced herein
----------------
represent the entire agreement of the parties with respect to the matters set
forth herein, and to the extent inconsistent with other prior contracts,
arrangements or understandings between the parties, supersedes all such previous
contracts, arrangements or understandings between the Company and Executive.
The Agreement may be amended at any time only by mutual written agreement signed
by the parties hereto.
5
<PAGE>
18. Governing Law. This Agreement shall be construed, interpreted, and
-------------
governed in accordance with the laws of the State of California without
reference to rules relating to conflict of law (other than any such rules
directing application of California law).
19. Headings. The headings of sections herein are included solely for
--------
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
20. Counterparts. This Agreement may be executed by either of the parties
------------
hereto in counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
EXECUTIVE
/s/ Dhruv Khanna
-------------------------------
SIGNATURE
Dhruv Khanna
-------------------------------
PRINT NAME OF EXECUTIVE
COVAD COMMUNICATIONS GROUP, INC.
/s/ Charles J. McMinn
BY: -------------------------------
NAME:------------------------------
TITLE:-----------------------------
6
<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
-3-
<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-
<PAGE>
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
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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;
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<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
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<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.
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<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
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<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.
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<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:
-19-
<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
-22-
<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>
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: /s/ Timothy Laehy
---------------------------------------------
Name: Timothy Laehy
-------------------------------------------
Title: CFO
------------------------------------------
WARBURG, PINCUS VENTURES, L.P.
By: Warburg, Pincus & Co.,
its General Partner
By: /s/ Joesph P. Landy
------------------------------------
Partner
CROSSPOINT VENTURE PARTNERS 1996
By: /s/ Rich Shapero
---------------------------------------------
Name: Rich Shapero
-------------------------------------------
Title: General Partner
------------------------------------------
ROBERT HAWK
/s/ 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 10.7
SUBLEASE AGREEMENT
------------------
DATED: July 6, 1998
-------------
ARTICLE 1: FUNDAMENTAL SUBLEASE PROVISIONS.
1.1 PARTIES: Sublessor: AUSPEX SYSTEMS, INC., a Delaware corporation
Sublessee: COVAD COMMUNICATIONS GROUP, INC., a Delaware
corporation
1.2 MASTER LEASE: (Article 3): Sublessor, as tenant, is leasing from Master
Lessor (set forth below), as landlord, approximately 171,382 feet of leasable
area consisting of three (3) two (2) story buildings located on the Central
Expressway in the City of Santa Clara, State California (the "Premises") on the
terms and subject to the conditions of that certain lease and amendments thereto
(if any) dated JANUARY 14, 1997 collectively, the "Master Lease"). A copy of the
Master Lease is attached hereto as EXHIBIT A. The Premises are located within a
complex which consists of multiple buildings (including the Premises), together
with related driveways, parking areas and related fixtures and improvements
(collectively, the "Complex").
Master Lessor: SOUTH BAY/SAN TOMAS ASSOCIATES,
a California general partnership
1.3 SUBLEASE PREMISES: (Article 2): The Sublease Premises constitutes a part
of the Premises, contains approximately 62,504 square feet of leasable area and
is commonly known as 2330 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA (the
"Sublease Premises"). The Sublease Premises is further described on the drawing
attached hereto as EXHIBIT B.
1.4 SUBLEASE TERM: (Article 4): Approximately FORTY-EIGHT (48) months,
beginning on the Commencement Date and ending on the Termination Date described
below, unless commenced later or terminated earlier pursuant to the terms of
this Sublease.
1.5 COMMENCEMENT DATE: (Article 4.1): JULY 15, 1998
1.6 TERMINATION DATE: (Article 4.1): JULY 14, 2002
1.7 SUBLESSEE'S PRO RATA SHARE: (Article 5.3): 36.47% (62,504/171,382)
1.8 RENTAL COMMENCEMENT DATE: (Article 5.2): JULY 15, 1998
1.9 MINIMUM MONTHLY RENT: (Article 5.2):
Dates (inclusive) NNN/sf/month NNN/total/month
---------------- ------------ ---------------
July 15, 1998- June 30, 1999 2.00 $125,008.00
July 1, 1999- June 30, 2000 2.05 $128,133.20
July 1, 2000- June 30, 2001 2.10 $131,258.40
July 1, 2001- July 14, 2002 2.15 $134,383.60
1.10 PREPAID RENT: (Article 5.4): $750,048.00
1.11 SECURITY DEPOSIT: (Article 6): $125,000.00
1.12 PERMITTED USE: (Article 7): SUBJECT TO THE LIMITATIONS SET FORTH IN
ARTICLE 7, GENERAL OFFICE, ENGINEERING, RESEARCH AND DEVELOPMENT, LIGHT
ASSEMBLY, WAREHOUSING AND RELATED LAWFUL USES
1.13 GUARANTOR: N/A
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1.14 ADDRESSES FOR NOTICES: (Article 11):
Master Lessor: SOUTH BAY DEVELOPMENT COMPANY, INC.
511 DIVISION STREET
CAMPBELL, CA 95008
ATTN: SCOTT TROBBE
FAX NO.: (408) 379-3229
SUBLESSOR: AUSPEX SYSTEMS, INC.
2300 CENTRAL EXPRESSWAY
SANTA CLARA, CA 95050
ATTN: ELIZABETH PICENO
FAX NO.: (408) 566-2525
SUBLESSEE: COVAD COMMUNICATIONS GROUP, INC
3560 BASSET STREET, SANTA CLARA, CA 95054
ATTN: WALT PIENKOS, VP H.R. AND ADMINISTRATION
Fax No.: (408) 490-4507
1.15 SUBLESSOR'S BROKER: (Article 24.4): DAVID TIPTON AND JOHN BRADY,
COOPER/BRADY*CRESA
1.16 SUBLESSEE'S BROKER: (Article 24.4): TOM MCGOVERN AND CHUCK TAYLOR,
COOPER/BRADY*CRESA
1.17 EXHIBITS AND ADDENDA: The following exhibits and any addenda are
annexed to this Sublease:
Exhibit A -- Master Lease
Exhibit B -- Description of Sublease Premises
Exhibit C -- Cafeteria Use Agreement
Exhibit D -- Furniture Inventory
Each reference in this Sublease Agreement ("Sublease") to any provision in
Article 1 shall be construed to incorporate all of the terms of each such
provision. In the event of any conflict between this Article 1 and the balance
of the Sublease, the balance of the Sublease shall control.
ARTICLE 2: SUBLEASE PREMISES.
2.1 SUBLEASE. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the Sublease Term (hereinafter defined), at the
Rent and upon the terms and conditions hereinafter set forth, the Sublease
Premises, and all common areas related thereto. Sublessee acknowledges that the
leasable area of the Premises as specified in Article 1 is an estimate and that
Sublessor does not warrant the exact leasable area of the Premises. By taking
possession of the Premises, Sublessee accepts the leasable area of the Premises
as that specified in Article 1.
2.2 CONDITION OF THE SUBLEASE PREMISES. Sublessee shall accept possession of
the Sublease Premises on the Commencement Date in its "As Is" condition;
provided, however, Sublessor shall professionally clean the Sublease Premises
prior to delivery thereof to Sublessee and , to the extent provided in the
Master Lease, Sublessee shall receive the benefit of any warranties applicable
to the Sublease Premises. Sublessee acknowledges that except as expressly
stated in this Sublease, (i) Sublessor makes no warranties or representations
regarding the physical condition of the Sublease Premises; (ii) Sublessee has
had an opportunity to inspect the Sublease Premises, including the roof and
structural components of the building; the electrical, plumbing, HVAC, and other
building systems serving the Sublease Premises; and the environmental condition
of the Sublease Premises and related common areas; and to hire experts to
conduct such inspections on its behalf; and (iii) Sublessee is leasing the
Sublease Premises based on its own inspection of the Sublease Premises and those
of its agents, and is not relying on any statements, representations or
warranties of Sublessor regarding the physical condition of the Sublease
Premises. Sublessee's taking of possession of the Sublease Premises shall
constitute conclusive evidence that the Sublease Premises are in good, clean and
tenantable condition.
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ARTICLE 3: TERMS OF THE MASTER LEASE.
3.1 SUBLEASE SUBORDINATE. This Sublease is subordinate and subject to all of
the terms and conditions of the Master Lease. If the Master Lease terminates
for any reason whatsoever, this Sublease shall terminate concurrently, and the
parties hereto shall be relieved of any liability thereafter accruing under this
Sublease, except for the liabilities of Sublessee which by the terms of this
Sublease survive the expiration or earlier termination of this Sublease.
3.2 ASSUMPTION OF OBLIGATIONS. To the extent applicable to the Sublease
Premises and Sublessee's use of the common areas, Sublessee hereby expressly
assumes and agrees to perform and discharge, as and when required by the Master
Lease, all debts, duties and obligations to be paid, performed or discharged by
Sublessor under the terms, covenants and conditions of the Master Lease from and
after the Commencement Date, except as specifically set forth in this Sublease.
Sublessee shall not commit or suffer at any time any act or omission that would
violate any provision of the Master Lease. So long as Sublessee complies with
all of its obligations under this Sublease, Sublessor shall not commit any act
or omission during the Sublease Term which would lead to the termination of the
Master Lease by Master Lessor. Notwithstanding the foregoing, if Sublessee
fails to comply with any of its obligations under this Sublease, and does not
cure such failure within the applicable cure period, then Sublessor shall have
no obligation to Sublessee to maintain the Master Lease for Sublessee's benefit.
3.3 MASTER LESSOR'S OBLIGATIONS. Sublessor shall not be responsible to
Sublessee for furnishing any service, maintenance or repairs to the Sublease
Premises which are the obligation of the Master Lessor under the Master Lease,
it being understood that Sublessee shall look solely to Master Lessor for
performance of any such service, maintenance or repairs. However, if Master
Lessor shall fail to perform its obligations under the Masters Lease, Sublessor,
upon receipt of written notice from Sublessee, shall use commercially reasonable
efforts to attempt to enforce the obligations of Master Lessor under the Master
Lease; provided, however, that Sublessor shall not be required to incur any
costs or expenses in connection therewith unless Sublessee agrees to reimburse
Sublessor for any such costs and expenses as Additional Rent hereunder.
3.4 SUBLESSOR'S OBLIGATIONS. Notwithstanding anything to the contrary
contained in this Sublease, Sublessor shall keep and maintain, at the sole cost
of Sublessee as provided in Article 5.3, the Sublease Premises (including
appurtenances) to the extent required of the "Tenant" by the Master Lease;
provided, however, Sublessee shall, at its sole cost and expense, provide for
customary janitorial services for the Sublease Premises. Sublessor shall have no
obligation to perform under this paragraph until a reasonable time after receipt
of written notice from Sublessee of such need.
3.5 SUBLESSOR'S RIGHTS AND REMEDIES. In addition to all the rights and
remedies provided to Sublessor at law or in equity, (a) if Sublessee fails,
within any applicable grace periods provided herein, to perform any act on its
part to be performed pursuant to the requirements of the Master Lease or as
otherwise required by this Sublease, then Sublessor may, but shall not be
obligated to, enter the Sublease Premises to perform such act, and all costs and
expenses incurred by Sublessor in doing so shall be deemed Additional Rent
payable by Sublessee to Sublessor upon demand; and (b) in the event of any
breach by Sublessee of any of its obligations under this Sublease, Sublessor
shall have all of the rights with respect to such default which are available to
Master Lessor under the Master Lease.
ARTICLE 4: SUBLEASE TERM.
4.1 COMMENCEMENT AND TERMINATION DATES. The term of this Sublease ("Sublease
Term") shall be for the period of time commencing on the commencement date
described in Article 1 (the "Commencement Date") and ending on the termination
date described in Article 1 or on such earlier date of termination as provided
herein (the "Termination Date").
4.2 DELAY IN COMMENCEMENT. If for any reason possession of the Sublease
Premises has not been delivered to Sublessee by the scheduled Commencement Date
or any other date, Sublessor shall not be liable to Sublessee or any other
person or entity for any loss or damage resulting therefrom. In the event of
such delay, the Commencement Date shall be delayed until possession of the
Sublease Premises is delivered to Sublessee, but the Termination Date shall not
be extended. If Sublessor is unable to deliver possession of the Sublease
Premises to Sublessee within thirty (30) days after the Commencement Date, then
Sublessee may terminate this Sublease by giving written notice to Sublessor at
any time after that date, and the parties shall have no further liability
thereafter accruing
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under this Sublease; provided, however, that if Sublessor tenders possession to
Sublessee within five (5) days after receipt of Sublessee's notice of
termination, such notice shall be void.
4.3 EARLY OCCUPANCY. Sublessee shall be permitted to occupy the Sublease
Premises prior to the Rental Commencement Date for the purpose of planning its
relocation and installing its personal property and equipment; provided,
however, such occupancy shall be subject to all of the provisions of this
Sublease, except for the payment of Minimum Monthly Rent. Early occupancy of
the Sublease Premises shall not advance the Termination Date. Sublessee shall,
prior to entering the Sublease Premises, deliver to Sublessor certificates of
insurance evidencing the policies required of Sublessee under this Sublease.
ARTICLE 5: RENT AND ADDITIONAL EXPENSES.
5.1 PAYMENT OF RENT. All monies payable by Sublessee under this Sublease
shall constitute "Rent." All Rent shall be paid in lawful money of the United
States, without any deduction or offset, to Sublessor at the address of
Sublessor specified in Article 1 or such other place as Sublessor may designate
in writing. No payment by Sublessee of a lesser amount than the Rent herein
stipulated shall be deemed to be other than on account of the earliest
stipulated Rent, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment of Rent be deemed an accord and
satisfaction, and Sublessor may accept such check or payment without prejudice
to its right to recover the balance of such Rent or to pursue any other remedy.
Rent for any partial calendar months at the beginning or end of the Sublease
Term shall be prorated based on a thirty (30) day month.
5.2 MINIMUM MONTHLY RENT. Sublessee shall pay to Sublessor the sums set forth
in Article 1 hereof as Minimum Monthly Rent, in advance, on the first day of
each calendar month throughout the Sublease Term, commencing on the Rental
Commencement Date.
5.3 ADDITIONAL RENT. In addition to Minimum Monthly Rent, Sublessee shall pay
to Sublessor from time to time upon demand, the amount of real property taxes,
maintenance, insurance, utilities and other charges to the extent applicable to
the Sublease Premises and Sublessee's Pro Rata Share (as specified in Article 1)
of all costs incurred by Sublessor with respect to the operation, protection,
maintenance, repair and replacement of the common areas, and the responsibility
of or payable by Sublessor under the Master Lease. Notwithstanding the
foregoing, Sublessee shall pay promptly, as the same become due, for utilities,
materials or services which are furnished and billed directly to Sublessee. It
is the parties' intent that this Sublease shall be an absolute net-net-net
sublease, and Sublessee agrees that any and all charges, fees, impositions and
payments of any kind whatsoever attributable to the Sublease Premises and due or
owing by or to be performed by Sublessor under the Master Lease shall be passed
through to Sublessee as Additional Rent hereunder. To the extent that real
property taxes are not separately assessed, Sublessee shall pay Sublessee's Pro
Rata Share of real property taxes assessed against the Complex.
5.4 PREPAID RENT. Concurrently with Sublessee's execution of this Sublease,
Sublessee shall pay to Sublessor the first month's Minimum Monthly Rent due
under the Sublease equal to $125,008. Upon approval of the Sublease by Master
Lessor, Sublessee shall pay to Sublessor the balance of the Prepaid Rent
specified in Article 1 in the amount of $625,040 which shall be applied to the
installments of Minimum Monthly Rent for months 2 through 6 of the Sublease
Term.
5.5 LATE CHARGE. If Sublessee fails to pay any Rent due hereunder within five
(5) days after Sublessor notifies Sublessee that such amount is past due, then
Sublessee shall pay Sublessor a late charge equal to six percent (6%) of such
delinquent amount as liquidated damages for Sublessee's failure to make timely
payment. Any notice given by Sublessor pursuant to any statute governing
unlawful detainer actions shall be deemed to be concurrent with, and not in
addition to, the notice required herein. This provision for a late charge shall
not be deemed to grant Sublessee a grace period or extension of time for
performance. If any Rent remains delinquent for a period in excess of thirty
(30) days then, in addition to such late charge, Sublessee shall pay to
Sublessor interest on the delinquent amount from the end of such thirty (30) day
period until paid, at the rate of ten percent (10%) per annum or the maximum
rate permitted by law.
ARTICLE 6: SECURITY DEPOSIT. Upon execution of this Sublease, Sublessee shall
deposit with Sublessor in cash the sum specified in Article 1 hereof as a
"Security Deposit." The Security Deposit shall be held by Sublessor as security
for Sublessee's faithful performance under this Sublease. If Sublessee fails to
pay any Rent as and when due under this Sublease or otherwise fails to perform
its
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obligations hereunder, then Sublessor may, at its option and without prejudice
to any other remedy which Sublessor may have, apply, use or retain all or any
portion of the Security Deposit toward the payment of delinquent Rent or for any
loss or damage sustained by Sublessor due to such failure by Sublessee.
Sublessee shall upon demand restore the Security Deposit to the original sum
deposited. The Security Deposit shall not bear interest nor shall Sublessor be
required to keep such sum separate from its general funds. To the extent not
otherwise applied by Sublessor as provided herein, the Security Deposit shall be
returned to Sublessee within thirty (30) days after the Termination Date. In the
event of bankruptcy or other debtor-creditor proceedings filed by or against
Sublessee, such Security Deposit shall be deemed to be applied first to the
payment of Rent due Sublessor for the period immediately prior to the filing of
such proceedings.
ARTICLE 7: USE.
7.1 USE OF THE SUBLEASE PREMISES. Sublessee shall use the Sublease Premises
solely for the purposes specified in Article 1 in strict conformance with the
applicable requirements of the Master Lease, and for no other purpose
whatsoever.
7.2 SUITABILITY. Sublessee acknowledges that neither Sublessor nor any agent
of Sublessor has made any representation or warranty with respect to the
Sublease Premises, the permitted uses that can be made of the Sublease Premises
under existing laws, or the suitability of the Sublease Premises for the conduct
of Sublessee's business, nor has Sublessor agreed to undertake any modification,
alteration or improvement to the Sublease Premises.
7.3 HAZARDOUS MATERIALS.
7.3.1 DEFINITIONS. As used herein, the term "Hazardous Material Law"
shall mean any statute, law, ordinance, or regulation of any governmental body
or agency which regulates the use, storage, generation, discharge, treatment,
transportation, release, or disposal of any Hazardous Material (as defined in
the Master Lease).
7.3.2 USE RESTRICTION. Sublessee shall not cause or permit any Hazardous
Material to be used, stored, generated, discharged, treated, transported to or
from, released or disposed of in, on, over, through, or about the Sublease
Premises, or any other land or improvements in the vicinity of the Sublease
Premises, without the prior written consent of Master Lessor and Sublessor,
which consent may be withheld in the sole and absolute discretion of Master
Lessor and/or Sublessor. Without limiting the generality of the foregoing, (a)
any use, storage, generation, discharge, treatment, transportation, release, or
disposal of Hazardous Material by Sublessee shall strictly comply with all
applicable Hazardous Material Laws, and (b) if the presence of Hazardous
Material on the Sublease Premises caused or permitted by Sublessee or its
agents, employees, invitees, visitors or contractors results in contamination of
the Sublease Premises or any soil, air, ground or surface waters under, through,
over, on, in or about the Sublease Premises, Sublessee, at its expense, shall
promptly take all actions necessary to return the Sublease Premises to the
condition existing prior to the existence of such Hazardous Material.
ARTICLE 8: SURRENDER. Upon the expiration or earlier termination of this
Sublease, Sublessee shall surrender the Sublease Premises in the same condition
and repair as the Sublease Premises were delivered to Sublessee on the
Commencement Date, excepting only ordinary wear and tear and damage by fire,
earthquake, act of God or the elements and all alterations, improvements or
additions which Sublessee is not required to remove pursuant to the terms of
this Sublease. Sublessee shall professionally clean the Sublease Premises prior
to surrender thereof to Sublessor. Sublessee agrees to repair any damage to the
Sublease Premises, or the building of which the Sublease Premises are a part,
caused by or related to the removal of any articles of personal property,
business or trade fixtures, machinery, equipment, cabinetwork, signs, furniture,
movable partitions or permanent improvements or additions which Sublessor allows
or requires Sublessee to remove, including, without limitation, repairing the
floor and patching and/or painting the walls where required by Sublessor to the
reasonable satisfaction of Sublessor and/or Master Lessor, all at Sublessee's
sole cost and expense. Sublessee shall indemnify Sublessor against any loss or
liability resulting from delay by Sublessee in so surrendering the Sublease
Premises, including, without limitation, any claims made by the Master Lessor
and/or any succeeding tenant founded on such delay. Such indemnity obligation
shall survive the expiration or earlier termination of this Sublease.
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ARTICLE 9: CONSENT. Whenever the consent or approval of Master Lessor is
required pursuant to the terms of the Master Lease, for the purposes of this
Sublease, Sublessee, in each such instance, shall be required to obtain the
written consent or approval of both Master Lessor and Sublessor. If Master
Lessor refuses to grant its consent or approval, Sublessor may withhold its
consent or approval and Sublessee agrees that such action by Sublessor shall be
deemed reasonable. Unless otherwise provided in this Sublease, Sublessor's
consent shall not be unreasonably withheld or delayed.
ARTICLE 10: INSURANCE. All insurance policies required to be carried by
Sublessor under the Master Lease shall be maintained by Sublessee pursuant to
the terms of the Master Lease, and shall name Sublessor and Master Lessor (and
such other lenders, persons, firms, or corporations as are designated by
Sublessor or Master Lessor) as additional insureds by endorsement. All policies
shall be written as primary policies with respect to the interests of Master
Lessor and Sublessor and such other additional insureds and shall provide that
any insurance carried by Master Lessor or Sublessor or such other additional
insureds is excess and not contributing insurance with respect to the insurance
required hereunder. All policies shall also contain "cross liability" or
"severability of interest" provisions, shall insure the performance of the
indemnity set forth in Article 14 of this Sublease, and shall contain a waiver
of subrogation provision in favor of Sublessor. Sublessee shall provide Master
Lessor and Sublessor with copies or certificates of all policies, including in
each instance an endorsement providing that such insurance shall not be
cancelled or amended except after thirty (30) days prior written notice to
Master Lessor and Sublessor. All deductibles, if any, under any such insurance
policies shall be subject to the prior reasonable approval of Sublessor, and all
certificates delivered to Master Lessor and Sublessor shall specify the limits
of the policy and all deductibles thereunder.
ARTICLE 11: NOTICES.
11.1 NOTICE REQUIREMENTS. All notices, demands, consents, and approvals which
may or are required to be given by either party to the other under this Sublease
shall be in writing and may be personally delivered or given or made by
overnight courier such as Federal Express, by facsimile transmission or made by
United States registered or certified mail addressed as shown in Article 1. Any
notice or demand so given shall be deemed to be delivered or made on the date
personal service is effected or, on the next business day if sent by overnight
courier, or the same day as given if sent by facsimile transmission and received
by 5:00 p.m. Pacific time or on the second business day after the same is
deposited in the United States Mail as registered or certified and addressed as
above provided with postage thereon fully prepaid. Either party hereto may
change its address at any time by giving written notice of such change to the
other party in the manner provided herein at least ten (10) calendar days prior
to the date such change is desired to be effective.
11.2 NOTICES FROM MASTER LESSOR. Each party shall provide to the other party a
copy of any notice or demand received from or delivered to Master Lessor within
twenty four (24) hours of receiving or delivering such notice or demand.
ARTICLE 12: DAMAGE, DESTRUCTION, CONDEMNATION. To the extent that the Master
Lease gives Sublessor any rights following the occurrence of any damage,
destruction or condemnation to terminate the Master Lease, to repair or restore
the Sublease Premises, to contribute toward such repair or restoration costs to
avoid termination, to obtain and utilize insurance or condemnation proceeds to
repair or restore the Sublease Premises, or any similar rights, such rights
shall be reserved to and exercisable solely by Sublessor, in its sole and
absolute discretion, and not by Sublessee. The exercise of any such right by
Sublessor shall under no circumstances constitute a default or breach under this
Sublease or subject Sublessor to any liability therefor.
ARTICLE 13: INSPECTION OF THE SUBLEASE PREMISES. Sublessee shall permit
Sublessor and its agents to enter the Sublease Premises at any reasonable time
for the purpose of inspecting the same or posting a notice of non-responsibility
for alterations, additions or repairs, provided that Sublessor provides at least
twenty-four (24) hours prior notice (except in the case of emergency).
ARTICLE 14: INDEMNITY; EXEMPTION OF SUBLESSOR FROM LIABILITY.
14.1 SUBLESSEE INDEMNITY. Except in connection with damage or injury caused by
the gross negligence or willful misconduct of Sublessor or its authorized
agents, Sublessee shall indemnify, defend (with counsel reasonably satisfactory
to Sublessor), protect and hold harmless Sublessor and its agents, employees,
contractors, stockholders, officers, directors, successors and assigns from and
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against any and all claims, demands, actions, suits, proceedings, liabilities,
obligations, losses, damages, judgments, costs, penalties, fines, and expenses
(including, but not limited to, attorneys', consultants' and expert witness
fees) arising out of, resulting from, or related to (i) any injury or death to
any person or injury or damage to property caused by, arising out of, or
involving (A) Sublessee's use of the Sublease Premises, the conduct of
Sublessee's business therein, or any activity, work or thing done, permitted or
suffered by Sublessee in or about the Sublease Premises or the common areas, (B)
a breach by Sublessee in the performance in a timely manner of any obligation of
Sublessee to be performed under this Sublease, or (C) the negligence or
intentional acts of Sublessee or Sublessee's agents, contractors, employees,
subtenants, licensees, or invitees, and/or (ii) the storage, use, generation,
discharge, treatment, transportation, release or disposal of Hazardous Material
by Sublessee or its agents, employees, invitees, visitors or contractors in, on,
over, through, from, about, or beneath the Sublease Premises or any nearby
premises. This indemnity shall survive the expiration or earlier termination of
this Sublease.
14.2 SUBLESSEE WAIVER. Sublessee, as a material part of the consideration to
Sublessor, hereby assumes all risk of damage to property or injury to persons
in, upon or about the Sublease Premises arising from any cause and Sublessee
hereby waives all claims in respect thereof against Sublessor, except in
connection with damage or injury caused solely by the gross negligence or
willful misconduct of Sublessor or its authorized agents; provided, however,
that in no event shall Sublessor be liable for any loss of profits or any
special, indirect, incidental, consequential or punitive damages, however caused
and on any theory of liability. This waiver shall survive the expiration or
earlier termination of this Sublease.
14.3 MUTUAL WAIVER OF SUBROGATION. Each party (the "First Party") hereby
releases the other party (the "Second Party"), and its partners, officers,
agents, employees, and servants, from any and all claims, demands, loss,
expense, or injury to the Sublease Premises or to the furnishings, fixtures,
equipment, inventory, or other property in, about, or upon the Sublease
Premises, which is caused by or results from perils, events, or happenings which
are the subject of fire or other casualty insurance carried by the First Party
at the time of such loss or which would have been in force had the First Party
carried the insurance required hereunder or by the Master Lease (collectively,
the "Effective Coverage") irrespective of any negligence on the part of the
Second Party that may have contributed to or caused such loss; subject to the
following limitations: (i) the Second Party shall not be released from any
liability to the extent that such damages are not covered by the insurance
recovery under the Effective Coverage or are the result of willful acts by the
Second Party, and (ii) the Second Party shall be responsible for reimbursing the
First Party for any deductible owed as a result of such damages. Each party
shall use commercially reasonable efforts to obtain, if needed, appropriate
endorsements to its policies of insurance with respect to the foregoing
releases; provided, however, that failure to obtain such endorsements shall not
affect the releases hereinabove given.
ARTICLE 15: ASSIGNMENT AND SUBLETTING.
15.1 RESTRICTION ON ASSIGNMENT, SUBLETTING AND TRANSFER. Sublessee shall not
voluntarily or by operation of law assign this Sublease or enter into license or
concession agreement, sublet all or any part of the Sublease Premises, or
otherwise transfer, mortgage, pledge, hypothecate or encumber all or any part of
Sublessee's interest in this Sublease or in the Sublease Premises or any part
thereof, without the prior written consent of Master Lessor (pursuant to the
terms of the Master Lease) and Sublessor. Any attempt to do so without such
consent being first had and obtained shall be wholly void and shall constitute a
default by Sublessee under this Sublease. Sublessee hereby irrevocably assigns
to Sublessor all Rent and other sums or consideration in any form, from any such
subletting or assignment, and agrees that Sublessor, as assignee and as
attorney-in-fact for Sublessee, or a receiver for Sublessee appointed upon
Sublessor's application, may collect such Rent and other sums and apply the same
against amounts owing to Sublessor in the event of Sublessee's default;
provided, however, that until the occurrence of any act of default by Sublessee
or Sublessee's subtenant, Sublessee shall have the right to collect such sums,
provided that all sums in excess of the Minimum Monthly Rent set forth herein
(the "Excess") which any subtenant covenants to pay shall be paid as follows:
twenty-five percent (25%) of the Excess to Sublessee and the balance of the
Excess to Sublessor as Additional Rent (of which, twenty-five percent (25%) of
the Excess shall be retained by Sublessor and fifty percent (50%) of the Excess
shall be delivered to Master Lessor pursuant to the terms of the Master Lease.)
15.2 CONSENT TO ASSIGNMENT AND SUBLETTING. Sublessor's consent to an
assignment or sublease of all or part of the Sublease Premises shall not be
unreasonably withheld or delayed; provided, however, such consent shall be
subject to the prior approval of Master Lessor and shall be conditioned upon
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Sublessee's compliance with all terms, conditions, approvals and requirements
applicable to such assignment or sublease as set forth in the Master Lease and
all conditions imposed by Master Lessor. Subject to the terms of the preceding
sentence, Sublessor shall deliver its consent within five (5) business days
after receipt of Master Lessor's written consent to an assignment or sublease by
Sublessee.
15.3 CONSENT TO OTHER TRANSFERS. Sublessor's consent to a transfer, mortgage,
pledge, hypothecation or encumbrance of all or any part of Sublessee's interest
in this Sublease or in the Sublease Premises or any part thereof may be withheld
in Sublessor's sole discretion.
ARTICLE 16: DELIVERY OF DOCUMENTS. Sublessee shall execute and deliver any
document or other instrument required by Master Lessor or Sublessor pursuant to
the Master Lease within five (5) days following receipt of a written request
from Master Lessor or Sublessor. Failure to comply with this provision shall
constitute a default by Sublessee under this Sublease.
ARTICLE 17: HOLDING OVER. Any holding over by Sublessee after the Termination
Date, without the prior written consent of Master Lessor and Sublessor, shall
not constitute a renewal or extension of this Sublease or give Sublessee any
rights in or to the Sublease Premises. Any holding over by Sublessee after the
Termination Date, with the prior written consent of Master Lessor and Sublessor,
shall be construed as a month-to-month tenancy on the same terms and conditions
as specified in this Sublease, except that Sublessee shall pay to Sublessor as
Minimum Monthly Rent during such tenancy an amount equal to One Hundred Fifty
Percent (150%) of the most recent applicable Minimum Monthly Rent amount.
ARTICLE 18: OPTIONS. Any right of Sublessor to extend or renew the term of the
Master Lease or to expand the Premises (if any), shall be reserved to and
exercisable solely by Sublessor, in its sole discretion, and not by Sublessee.
Sublessor agrees to exercise such rights to extend or renew the Master Lease
only to the extent necessary to fulfill its obligations under this Sublease.
ARTICLE 19: RIGHT OF FIRST OFFER.
19.1 ONE-TIME OFFER TO LEASE EXPANSION SPACE. If at any time during the
Sublease Term, Sublessor desires to lease one or more complete floors located
within Premises (the "Expansion Space") to other than an affiliated third party,
then Sublessor shall give Sublessee written notice ("Lease Notice") of all
material terms pursuant to which Sublessor would be willing to lease such
Expansion Space. Sublessee shall have the first right, by giving written notice
to Sublessor within five (5) business days after receipt of Sublessor's Lease
Notice, to lease the Expansion Space pursuant to the terms contained in the
Lease Notice. For purposes of this paragraph, an "affiliated third party" shall
mean any corporation or entity with which Sublessee may merge or consolidate or
become affiliated as a parent, subsidiary, holding company or otherwise, or any
corporation or entity with which Sublessee has a strategic business
relationship.
19.2 ACCEPTANCE OF EXPANSION SPACE BY SUBLESSEE. If Sublessee exercises its
right by giving notice within the five (5) business day period described above,
Sublessor and Sublessee shall, within ten (10) business days thereafter, enter
into an amendment to the Sublease incorporating the Expansion Space as part of
the Sublease Premises, amended to set forth all of the terms provided in the
Lease Notice. The lease of the Expansion Space shall be subject to the approval
of the Master Lessor as provided in the Master Lease.
19.3 SUBLESSEE'S REJECTION OF EXPANSION SPACE. If Sublessee rejects the
Expansion Space, or fails to give notice of its intention to exercise its right
of first offer within the requisite five (5) business day period, then Landlord
may lease the Expansion Space to any prospective tenant, provided, however, that
the net present value of the Rent and other economic terms, is not,
collectively, greater than ten percent (10%) more favorable to the prospective
tenant than the terms in Sublessor's Expansion Notice. If such terms are
greater than ten percent (10%) more favorable to the prospective tenant than
those terms contained in Sublessor's Expansion Notice, then Sublessor shall send
Sublessee another Expansion Notice containing such terms, conditions, and
covenants, and this Article 19 shall again apply.
19.4 TERMINATION OF RIGHT OF FIRST OFFER. The right of first offer set forth in
this Article 19 to lease Expansion Space is a one-time offer. Upon the
execution of a lease of the Expansion Space between Sublessor and Sublessee or
another tenant, or if Sublessee rejects the Expansion Space, or fails to give
Page 8 of 11
<PAGE>
notice of its intention to exercise its right of first offer within the
requisite time period, then Sublessee shall no longer have the right of first
offer, and this Article 19 shall be of no further force or effect
ARTICLE 20: PARKING. Subject to reasonable Rules and Regulations that may be
promulgated by Master Lessor and/or Sublessor from time to time, Sublessee shall
have the non-exclusive right in common with other tenants and occupants of the
Complex to use, free of a monthly fee during the term of the Sublease, two
hundred fifty (250) parking spaces located in the Complex that are appurtenant
to the Sublease Premises. Of the two hundred fifty (250) parking spaces,
Sublessee shall have the right to designate and mark up to twelve (12) visitor
parking spaces, subject to the prior approval of Master Lessor and Sublessor.
Sublessee shall not, at any time, park, or permit to be parked, any trucks or
vehicles adjacent to the loading areas so as to interfere in any way with the
use of such areas, nor shall Sublessee at any time park, or permit the parking
of Sublessee's trucks or other vehicles or the trucks or other vehicles of
Sublessee's suppliers or others, in any portion of the Complex not designated by
Sublessor for such use by Sublessee. Sublessee shall not park nor permit to be
parked, any inoperative vehicles or equipment on any portion of the parking area
or outside areas of the Complex, or use the same for storage. Sublessee agrees
to assume responsibility for compliance by its employees with the parking
provisions contained herein.
ARTICLE 21: SIGNAGE. Subject to the prior approval of all applicable
governmental agencies, Master Lessor and Sublessor, Sublessee shall have the
right to the following signage:
1. Building facade signage on the upper portion of the Sublease Premises
facing the San Tomas Expressway;
2. Shared monument signage on the driveway entrance along San Tomas
Expressway;
3. Signage on the glass entry doors to the Sublease Premises;
4. Directional signage; and
5. Lobby signage.
Upon expiration or other sooner termination of this Sublease, Sublessee at
Sublessee's sole cost and expense shall remove the foregoing signs and repair
all damage in such a manner as to restore all aspects of the appearance of the
Sublease Premises to the condition prior to the placement of said signs.
ARTICLE 22: CAFETERIA USE AGREEMENT. Sublessee shall have the right to use the
cafeteria located in the Complex in accordance with the Cafeteria Use Agreement,
a copy of which is attached hereto as EXHIBIT C.
ARTICLE 23: FURNITURE. Prior to the Commencement Date, the parties agree to
attach an inventory of furniture (the "Furniture") to the Sublease as EXHIBIT D.
The furniture is owned by Sublessor and may be used by Sublessee during the
Sublease Term without rental charge. Sublessee agrees, at its sole cost and
expense, to maintain the Furniture in good condition and repair, allowing for
reasonable wear and tear. In the event that the Furniture is damaged during the
Sublease Term, Sublessee shall, at Sublessor's option, either repair or replace
such damaged Furniture at Sublessee's sole cost and expense. Any installations,
replacements, and substitutions of parts or accessories with respect to any of
the Furniture shall constitute accessions and shall become part of the Furniture
and shall be owned by Sublessor. Sublessor shall not be under any liability or
obligation in any manner to provide service, maintenance, or repairs for the
Furniture. Upon the expiration or earlier termination of this Sublease,
Sublessee shall return the Furniture in the same condition and repair as the
Furniture was delivered to Sublessee on the Commencement Date, excepting only
ordinary wear and tear.
ARTICLE 24: GENERAL PROVISIONS.
24.1 SEVERABILITY. If any term or provision of this Sublease shall, to any
extent, be determined by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this Sublease shall not be affected thereby, and
each term and provision of this Sublease shall be valid and enforceable to the
fullest extent permitted by law.
24.2 ATTORNEYS' FEES; COSTS OF SUIT. If Sublessee or Sublessor shall bring any
action for any relief against the other, declaratory or otherwise, arising out
of this Sublease, including any suit by Sublessor for the recovery of Rent or
possession of the Sublease Premises or upon appeal, the prevailing party shall
be entitled to recover its reasonable attorneys' fees and costs of suit.
Page 9 of 11
<PAGE>
24.3 WAIVER. No covenant, term or condition or the breach thereof shall be
deemed waived, except by written consent of the party against whom the waiver is
claimed, and any waiver of the breach of any covenant, term or condition shall
not be deemed to be a waiver of any other covenant, term or condition.
Acceptance by Sublessor of any performance by Sublessee after the time the same
shall have become due shall not constitute a waiver by Sublessor of the breach
or default of any covenant, term or condition unless otherwise expressly agreed
to by Sublessor in writing.
24.4 BROKERAGE COMMISSIONS. The parties represent and warrant to each other
that they have dealt with no brokers, finders, agents or other person in
connection with the transaction contemplated hereby to whom a brokerage or other
commission or fee may be payable, except for the brokers named in Article 1.
Each party shall indemnify, defend and hold the other harmless from any claims
arising from any breach by the indemnifying party of the representation and
warranty in this paragraph.
24.5 BINDING EFFECT. Preparation of this Sublease by Sublessor or Sublessor's
agent and submission of the same to Sublessee shall not be deemed an offer to
lease. This Sublease shall become binding upon Sublessor and Sublessee only
when fully executed by Sublessor and Sublessee and approved in writing by Master
Lessor. If Master Lessor fails to approve this Sublease within 30 days
following its submission to Master Lessor, then either Sublessor or Sublessee
may terminate this Sublease by giving written notice to the other party prior to
the date that Master Lessor approve this Sublease in writing. In the event that
this Sublease is terminated under this paragraph, the parties shall have no
further liability thereafter accruing under this Sublease.
24.6 ENTIRE AGREEMENT. This instrument, along with any exhibits and addenda
hereto, constitutes the entire agreement between Sublessor and Sublessee
relative to the Sublease Premises. This Sublease may be altered, amended or
revoked only by an instrument in writing signed by both Sublessor and Sublessee.
There are no oral agreements or representations between the parties affecting
this Sublease, and this Sublease supersedes and cancels any and all previous
negotiations, arrangements, brochures, agreements, representations and
understandings, if any, between the parties hereto.
24.7 EXECUTION. This Sublease may be executed in one or more counterparts,
each of which shall be considered an original counterpart, and all of which
together shall constitute one and the same instrument. Each person executing
this Sublease represents that the execution of this Sublease has been duly
authorized by the party on whose behalf the person is executing this Sublease.
24.8 WAIVER TO TRIAL BY JURY. To the full extent permitted by law, Sublessee
hereby waives the right to trial by jury in any action, proceeding or
counterclaim brought by Sublessee on any matter whatsoever arising out of or in
any way connected with this Sublease, the relationship of Sublessee and
Sublessor, Sublessee's use or occupancy of the Sublease Premises and/or any
claim of injury or damage.
ARTICLE 25: OPTION TO EXTEND.
25.1 DEFINITIONS. The phrase "Sublease Term" as used in this Article shall
mean the Sublease Term and any Extension Period (as defined below) for which
Sublessee has exercised its extension rights pursuant to this Article 25, and
the expiration date of the Sublease Term shall be the expiration date of such
Extension Period.
25.2 OPTION TO EXTEND. Subject to the terms and conditions set forth below,
Sublessee shall have the option to extend the Sublease Term for two additional
periods of one (1) year each ("Extension Periods"). The Extension Periods shall
commence upon the expiration of the Sublease Term. The option to extend shall
be personal to Sublessee, and shall not be transferable or assignable to any
other person or entity. Sublessee's option to extend shall be subject to the
following conditions:
i. Sublessee shall not have committed an uncured breach of the Sublease
either at the time it gives Sublessor notice of its intent to extend or at the
commencement of the Extension Period;
ii. Sublessee shall be operating in the Sublease Premises in a manner
consistent in all respects with the Sublease;
Page 10 of 11
<PAGE>
iii. Sublessee shall have exercised all prior options to extend the
term of the Sublease;
iv. Sublessee shall give Sublessor unconditional written notice of the
exercise of its option at least nine (9) months prior to the expiration of the
Sublease Term, time being strictly of the essence, and any failure to give said
notice within the required time period shall be deemed an election by Sublessee
not to extend the term of the Sublease for the Extension Period; and
v. Within sixty (60) days after Sublessor receives Sublessee's notice
of its intent to exercise the option to extend, Sublessor shall give Sublessee
written notice of its consent or disapproval of such option. Sublessor's consent
to such option may be withheld in Sublessor's sole and absolute discretion.
25.3 TERMS OF THE EXTENSION PERIOD. The Extension Periods shall be upon the
same terms and conditions as are contained in the Sublease, except that
Sublessee shall not have any further options to extend the Sublease beyond the
Extension Periods and the Minimum Monthly Rent for the Extension Periods shall
be as follows:
Dates (inclusive) NNN/sf/month NNN/total/month
----------------- ------------ ---------------
July 15, 2002- July 14, 2003 $2.20 $137,508.80
July 15, 2003- July 14, 2004 $2.25 $140,634.00
ARTICLE 26: ALTERATIONS AND ADDITIONS. Sublessee shall not make, or suffer to
be made, any alteration, improvement or addition to the Sublease Premises, or
any part thereof, without the prior written consent of Sublessor and Master
Lessor (pursuant to the terms of the Master Lease) and without a valid building
permit issued by the appropriate governmental authority. Sublessor's consent
shall not be unreasonably withheld or delayed; provided, however, such consent
may be conditioned upon the requirement that Sublessee remove any such
alteration, addition or improvement at the expiration or earlier termination of
the Sublease. Sublessor shall notify Sublessee concurrently with its consent to
any such alteration, addition or improvement whether or not removal of such
alteration, addition or improvement will be required at the expiration or
earlier termination of the Sublease.
"SUBLESSOR"
AUSPEX SYSTEMS, INC.,
A DELAWARE CORPORATION
By: /s/ R. Marshall Case
-------------------------------
Name: R. Marshall Case
------------------------------
Its: VP & CFO
-------------------------------
"SUBLESSEE"
COVAD COMMUNICATIONS GROUP, INC.,
A DELAWARE CORPORATION
By: /s/ Timothy Laehy
--------------------------------
Name: Timothy Laehy 7/6/98
------------------------------
Its: CFO
-------------------------------
Page 11 of 11
<PAGE>
LEASE AGREEMENT
BY AND BETWEEN
SOUTH BAY/SAN TOMAS ASSOCIATES
AND
AUSPEX SYSTEMS, INC.
DATED AS OF JANUARY 14, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
1. Parties..................................................................1
2. Demise of Premises.......................................................1
3. Lease Term...............................................................1
A. Lease Term.........................................................1
B. Commencement Date..................................................1
C. Commencement Date Memorandum.......................................2
D. Delay in Completion of Buildings...................................2
E. Options to Extend..................................................2
F. Early Entry........................................................3
4. Rent.....................................................................3
A. Time of Payment....................................................3
B. Monthly Installment................................................4
C. Tenant Improvement Allowance.......................................5
D. Late Charge........................................................6
E. Additional Rent....................................................6
F. Place of Payment...................................................7
G. Advance Payment....................................................7
5. Security Deposit.........................................................7
6. Use of Premises..........................................................8
A. Restrictions on Use................................................8
B. Initial Occupancy..................................................8
7. Taxes and Assessments....................................................8
A. Tenant's Property..................................................8
B. Property Taxes.....................................................8
C. Property Taxes Defined.............................................9
D. Other Taxes........................................................9
E. Tenant's Right to Contest..........................................9
8. Insurance...............................................................10
A. Indemnity.........................................................10
B. Liability Insurance...............................................10
C. Property Insurance................................................11
D. Tenant's Property Insurance.......................................11
E. Mutual Waiver of Subrogation......................................11
9. Utilities...............................................................12
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<PAGE>
10. Repairs and Maintenance.................................................12
A. Landlord's Repairs................................................12
B. Tenant's Repairs..................................................13
11. Alterations.............................................................15
A. Limitations.......................................................15
B. Tenant's Rights...................................................15
C. Alterations Required by Law.......................................15
12. Acceptance of the Premises..............................................16
13. Default.................................................................16
A. Events of Default.................................................16
B. Remedies..........................................................17
C. Waivers...........................................................19
14. Destruction.............................................................19
A. Landlord's Duty to Restore........................................19
B. Landlord's Right to Terminate.....................................20
C. Tenant's Right to Terminate.......................................20
D. Abatement of Rent.................................................21
15. Condemnation............................................................22
A. Definition of Terms...............................................22
B. Rights............................................................22
C. Total Taking......................................................22
D. Partial Taking....................................................22
16. Mechanics' Lien.........................................................22
17. Inspection of the Premises..............................................23
18. Compliance with Laws....................................................23
19. Subordination...........................................................23
A. Priority..........................................................23
B. Subsequent Security Instruments...................................24
C. Documents.........................................................24
D. Tenant's Attornment...............................................24
20. Holding Over............................................................24
21. Notices.................................................................25
-ii-
<PAGE>
22. Attorneys' Fees.........................................................25
23. Subleasing and Assignment...............................................26
A. Landlord's Consent Required.......................................26
B. Transferee Information Required...................................26
C. Landlord's Rights.................................................26
D. Permitted Transfers...............................................27
24. Successors..............................................................28
25. Mortgagee Protection....................................................28
26. Estoppel Certificate....................................................28
27. Surrender of Lease Not Merger...........................................28
28. Waiver..................................................................29
29. General.................................................................29
A. Captions..........................................................29
B. Definition of Landlord............................................29
C. Time of Essence...................................................29
D. Severability......................................................29
E. Quiet Enjoyment...................................................29
F. Law...............................................................30
G. Agent.............................................................30
H. Lender............................................................30
I. Force Majeure.....................................................30
30. Sign....................................................................30
31. Interest on Past Due Obligations........................................30
32. Surrender of the Premises...............................................31
33. Authority...............................................................31
34. CC&Rs...................................................................31
35. Brokers.................................................................31
36. Limitation on Landlord's Liability......................................32
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<PAGE>
37. Hazardous Material......................................................32
A. Definitions.......................................................32
B. Landlord's Obligation.............................................33
C. Permitted Use.....................................................33
D. Hazardous Materials Management Plan...............................34
E. Use Restriction...................................................34
F. Tenant Indemnity..................................................35
G. Compliance........................................................35
H. Assignment and Subletting.........................................36
I. Surrender.........................................................36
J. Right to Appoint Consultant.......................................36
K. Holding Over......................................................36
L. Existing Environmental Reports....................................37
M. Provisions Survive Termination....................................37
N. Controlling Provisions............................................37
38. Landlord's Default......................................................37
39. Condition to Effectiveness..............................................38
-iv-
<PAGE>
LIST OF EXHIBITS
Exhibit "A" - Legal Description of Parcel..................................40
Exhibit "B" - Site Plan....................................................42
Exhibit "C" - Improvement Agreement........................................43
Exhibit "D" - Commencement Date Memorandum.................................60
Exhibit "E" - List of Hazardous Materials Tenant Will Use on The Premises..61
Exhibit "F" - Description of Existing Environmental Reports................62
Exhibit "G" - Preliminary Title Report.....................................67
Exhibit "H" - CCR's and Excluded Obligations...............................78
-v-
<PAGE>
LEASE AGREEMENT
---------------
1. Parties. This Lease, dated for reference purposes as of January 14,
-------
1997, is made by and between South Bay/San Tomas Associates, a California
general partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware
--------
corporation ("TENANT").
------
2. Demise of Premises. Landlord hereby leases to Tenant and Tenant
------------------
hereby leases from Landlord, upon the terms and conditions hereinafter set
forth, those certain premises (the" PREMISES") situated in the City of Santa
--------
Clara, County of Santa Clara, State of California, described as follows:
A. That Parcel of real property more particularly described in
Exhibit "A"attached hereto (the "PARCEL");
- ----------- ------
B. Three (3) buildings two (2) stories high to be constructed by
Landlord and located on the Parcel as shown on the site plan attached hereto
as Exhibit "B" containing approximately one hundred seventy one thousand three
----------
hundred eighty two (171,382) square feet (collectively, the "BUILDINGS" and
---------
individually,"BUILDING").
--------
C. The shells and the associated site improvements for all Buildings
(the "BUILDING SHELLS") to be constructed by Landlord in accordance with the
---------------
provisions of the Improvement Agreement attached hereto as Exhibit "C" (the
-----------
"IMPROVEMENT AGREEMENT").
- ----------------------
D. The improvements (the "TENANT IMPROVEMENTS") to be constructed by
-------------------
Landlord in and about the Buildings in accordance with the provisions of the
Improvement Agreement. The Building Shells and the Tenant Improvements are
collectively referred to in this Lease as the "IMPROVEMENTS".
------------
3. Lease Term.
----------
A. Lease Term. The term of this Lease (the "INITIAL LEASE TERM")
---------- ------------------
shall be for twelve (12) years commencing on the Commencement Date (as defined
below) and ending twelve (12) years thereafter unless sooner terminated
pursuant to any provision hereof.
B. Commencement Date. As used in this Lease, the term "COMMENCEMENT
----------------- ------------
DATE" shall mean the later of March 1, 1998, or the date when all of the
- ----
following have occurred with respect to the Improvements :
(i) The construction of all of the Improvements has been
substantially completed in accordance with the provisions of the Improvement
Agreement attached hereto and the Final Plans therefor (except for minor
punchlist items which do not substantially interfere with Tenant's use of the
Premises), and all utilities are connected and available for Tenant's use;
-1-
<PAGE>
(ii) A certificate of occupancy or its equivalent (including a
final building inspection) with respect to the Improvements has been issued by
the City of Santa Clara; and
(iii) Landlord has given Tenant written notice that the events
described in (i) and (ii) above have occurred.
C. Commencement Date Memorandum. Within thirty (30) days following
----------------------------
the Commencement Date, Tenant shall execute and deliver to Landlord a
Commencement Date Memorandum in the form attached hereto as Exhibit "D"
-----------
acknowledging the actual Commencement Date, the Expiration Date and the initial
Monthly Installment (as defined in Subparagraph 4.A. hereof) of rent.
D. Delay in Completion of Buildings. Notwithstanding the
--------------------------------
Commencement Date set forth in Subparagraph 3.B. above, if the construction of
the Improvements to the Buildings have not been substantially completed in
accordance with the provisions of the Improvement Agreement attached hereto
and the Final Plans therefor (except for minor punchlist items which do not
substantially interfere with Tenant's use of the Premises) by the later of (i)
January 31, 1998, or (ii) eleven (11) months following the issuance of all
required building permits for the construction of the Improvements to the
Building (provided such time periods in (i) and (ii) shall be extended by
force majeure delays and Tenant Delays as defined in Exhibit "C" hereto)
-----------
(the "BUILDING COMPLETION DATE"), Tenant shall have the option to terminate
------------------------
this Lease (which shall be Tenant's sole remedy for such an event), which
option may be exercised only by delivery to Landlord of a written notice of
election to terminate within fifteen (15) days after the Building Completion
Date and prior to substantial completion of the Improvements to the Buildings.
E. Options to Extend.
-----------------
(i) Tenant shall have three (3) successive options (the
"OPTIONS") the Initial Lease Term for successive terms of sixty (60) months each
-------
(collectively, the "EXTENDED TERMS" and individually, the "FIRST EXTENDED
-------------- --------------
TERM", the "SECOND EXTENDED TERM" and the "THIRD EXTENDED TERM"). The
- ---- -------------------- -------------------
Initial Term as may be extended by Tenant shall be referred to herein as the
"LEASE TERM."
----------
(ii) Tenant shall exercise each Option, if at all, by giving
Landlord notice of Tenant's intention to do so at least two hundred seventy
(270) days prior to the expiration of the then existing Lease Term. In no
event shall any purported exercise of the Option by Tenant be effective if (a)
an Event of Default (as defined in Subparagraph 13.A. hereof) exists at the
time of such exercise or at the time such Extended Term would otherwise have
commenced, or (b) Tenant had not timely exercised each previous Option(s) to
extend the Lease. The Extended Terms shall be upon all of the terms and
conditions hereof, except that the
-2-
<PAGE>
Monthly Installment and method of rental adjustment for each Extended Term shall
be determined as set forth in Subparagraph 4.B.(iii) hereof. Unless expressly
mentioned and approved in the written consent of Landlord referred to in
Paragraph 23 hereof, the option rights of Tenant under this paragraph are
granted for Tenant's personal benefit and may not be assigned or transferred by
Tenant.
F. Early Entry. Tenant may enter the Premises prior to the
-----------
Commencement Date to install fixtures and equipment therein, provided Tenant
first obtains the prior written approval of Landlord for such entry, which
approval shall not be unreasonably withheld but which Landlord may withhold if
Landlord determines in its reasonable discretion that such entry will delay
completion of construction of the Improvements which Landlord is required to
construct pursuant to Exhibit "C". If Landlord permits Tenant to so enter upon
-----------
the Premises, such entry shall be subject to all of the terms and conditions
of this Lease, excepting only the obligation to pay the Monthly Installment of
rent or Additional Rent (as defined in Subparagraph 4.E. below), and the duty
to pay utility consumption costs and insurance. Tenant shall coordinate its
entry onto the Premises with Landlord and the contractors and other personnel
employed by Landlord. At all times during Tenant's right of entry, Landlord
and Tenant shall reasonably cooperate to refrain from interfering with the
construction activities of the other party's personnel; provided, Landlord
shall not be required to cooperate with Tenant if such cooperation results in
a delay in completing the Improvements. In any case, Tenant shall repair any
damage to the Improvements constructed by Landlord resulting from the entry
upon the Premises by Tenant or Tenant's Agents (as that term is defined in
Subparagraph 29.G.) prior to the Commencement Date or caused by the
installation of fixtures and equipment by Tenant or Tenant's Agents. If the
entry by Tenant or Tenant's Agents upon the Premises prior to the Commencement
Date interferes with Landlord's construction activities, then Landlord shall
give Tenant written notice requesting that Tenant cease such interference. If
Tenant does not immediately comply with such notice from Landlord requesting
that Tenant cease interference with Landlord's construction activities, and if
such failure to comply causes a delay in completing the construction of the
Improvements, then the Commencement Date shall be deemed to have occurred on
the date the Improvements would have been completed had there been no such
delay caused by Tenant or its Agents.
4. Rent.
----
A. Time of Payment. Tenant shall pay to Landlord as rent for the
---------------
Premises the respective sums specified in Subparagraph 4.B. below (the
"MONTHLY INSTALLMENT") each month in advance on the first day of each calendar
-------------------
month, without deduction or offset, prior notice or demand, commencing on the
Commencement Date and continuing through the Lease Term, together with such
additional rents as are payable by Tenant to Landlord under the terms of this
Lease. The Monthly Installment for any period during the Lease Term which is
less than one (1) full month shall be a pro rata portion of the Monthly
Installment based upon a thirty (30) day month.
-3-
<PAGE>
B. Monthly Installment.
-------------------
(i) The Monthly Installment of rent for the first thirty (30)
months following the Commencement Date shall be Two Hundred Sixty Five
Thousand Six Hundred Forty Two and 10/100 Dollars ($265,642.10).
(ii) Rental Adjustment. The Monthly Installment shall be
-----------------
adjusted at the beginning of the thirty-first (31st) month following the
Commencement Date and every thirty (30) months thereafter during the Initial
Lease Term (the "RENTAL ADJUSTMENT DATES"), to reflect any increase in the cost
-----------------------
of living. The adjustment or adjustments, if any, shall be calculated upon the
basis of the United States Department of Labor, Bureau of Labor Statistics
Consumer Price Index for All-Urban Consumers, for San Francisco-Oakland-San
Jose (1982 - 1984 = 100), hereafter referred to as the "INDEX." The last
-----
published Index in effect on the Commencement Date shall be considered the
"BASE". On each Rental Adjustment Date, the Monthly Installment then in effect
----
shall be increased to an amount equal to the Monthly Installment in effect as
of the first full month of the Lease Term multiplied by a fraction, the
numerator of which is the Index as of such Rental Adjustment Date, and the
denominator of which is the "Base"; provided, the Monthly Installment shall
not increase by less than three percent (3%) per annum compounded annually or
greater than seven percent (7%) per annum compounded annually on each Rental
Adjustment Date. When the adjusted Monthly Installment is determined upon each
Rental Adjustment Date, Landlord shall give Tenant written notice to that
effect indicating how the new Monthly Installment figure was computed in
accordance with this Subparagraph 4.B.(ii). If the Index does not exist on any
Rental Adjustment Date in the same format as referred to in this paragraph,
Landlord shall substitute (using conversion factors, as appropriate) in lieu
thereof the index most nearly comparable to the Index then published by the
Bureau of Labor Statistics, or successor or similar governmental agency, or if
no governmental agency then publishes an index, Landlord shall substitute
therefor the most nearly comparable index then published by a reputable
private organization.
(iii) Extended Term Rent.
------------------
(a) As of the commencement of each Extended Term, the
Monthly Installment and the method of rental adjustment (including the timing
of adjustments and the basis for calculating the adjustments) for each
Extended Term shall be the fair market rental, as of the commencement date of
the Extended Term, for the Premises, as improved, and a method and timing of
rental adjustments consistent with rental adjustment practices then prevailing
in the marketplace for comparably sized projects designed for similar uses
within a three (3) mile radius of the Premises. In the event the parties fail
to agree upon the amount of the Monthly Installment and the method of rental
adjustment for any of the Extended Terms within thirty (30) days after
Landlord's receipt of Tenant's notice exercising the Option for such Extended
Term, the Monthly Installment and the method of rental adjustment for such
Extended Term shall be determined by appraisal in the manner hereafter set
forth.
-4-
<PAGE>
(b) In the event it becomes necessary under this
Subparagraph 4.B.(iii)(b) to determine the fair market rent to be used as the
Monthly Installment and the method and timing of rental adjustments of the
Premises by appraisal, Landlord and Tenant each shall appoint a real estate
appraiser who shall be a member of The Appraisal Institute ("TAI") and who
shall have a minimum of five (5) years of commercial appraisal experience in
Santa Clara County and such appraisers shall each determine the fair market
rent for the Premises, and the method and timing of rental adjustments taking
into account the value of the Premises (excluding Tenant's Property (as
defined below) which Tenant shall be allowed to remove upon the expiration of
this Lease), the amenities provided and prevailing comparable rentals and
rental adjustment practices then prevailing in the marketplace for comparably
sized projects designed for similar uses within a three (3) mile radius of the
Premises. Such appraisers shall, within twenty (20) business days after their
appointment, complete their appraisals and submit their appraisal reports to
Landlord and Tenant. If the fair market rent of the Premises established in
the two (2) appraisals varies by five percent (5%) or less of the higher
rental, the average of the two shall be controlling. If said fair market rent
varies by more than five percent (5%) of the higher rental, said appraisers,
within ten (10) days after submission of the last appraisal, shall appoint a
third appraiser who shall be a member of TAI and who shall have a minimum of
five (5) years of commercial appraisal experience in Santa Clara County. Such
third appraiser shall, within twenty (20) business days after his appointment,
determine by appraisal the fair market rent of the Premises, taking into
account the same factors referred to above, and submit his appraisal report to
Landlord and Tenant. The fair market rent determined by the third appraiser
for the Premises shall be averaged with the fair market rent determined by the
one o the initial two appraisers that is closest to that of the third
appraiser, unless the third appraiser's determination of the rent is less than
that set forth in the lower appraisal previously obtained, in which case the
value set forth in said lower appraisal shall be controlling, or unless it is
greater than that set forth in the higher appraisal previously obtained, in
which case the rental set forth in said higher appraisal shall be controlling.
The method of adjusting rental periodically, including the manner and timing
of such adjustments, shall be as determined by the initial two appraisers, if
they agree on a single method; otherwise, it shall be as determined by the
third appraiser. If either Landlord or Tenant fails to appoint an appraiser,
or if an appraiser appointed by either of them fails, after his appointment,
to submit his appraisal within the required period in accordance with the
foregoing, the appraisal submitted by the appraiser properly appointed and
timely submitting his appraisal shall be controlling. If the two appraisers
appointed by Landlord and Tenant are unable to agree upon a third appraiser
within the required period in accordance with the foregoing, application shall
be made within twenty (20) days thereafter by either Landlord or Tenant to
TAI, which shall appoint a member of said institute willing to serve as
appraiser. Each party shall bear the cost of their own appraiser and the cost
of the third appraiser under this Subparagraph shall be borne equally by
Landlord and Tenant.
C. Tenant Improvement Allowance.
----------------------------
(i) Landlord shall make available for the payment of all TI
Costs (as defined in the Improvement Agreement) an amount equal to Four
Million Two Hundred Eighty
-5-
<PAGE>
Four Thousand Five Hundred Fifty Dollars ($4,284,550) (the "TI ALLOWANCE"). To
------------
the extent that TI Costs exceed the total TI Allowance, Tenant shall pay the
amount of such excess (with such excess referred to herein as "TENANT'S TI
-----------
CONTRIBUTION"). After Landlord has expended the total TI Allowance, Tenant's TI
- ------------
Contribution shall be paid by Tenant to Landlord in installments as and when
needed by Landlord to pay TI Costs that have been incurred by Landlord for the
Buildings, with each installment to be paid within five (5) days after Landlord
notifies Tenant that a progress payment toward TI Costs is to be made and
supplies to Tenant an appropriate accounting of all TI Costs incurred by
Landlord and such other documentation as a construction lender might reasonably
request. Such progress payments shall not be requested any more frequently than
every thirty (30) days.
(ii) Prior to the commencement of construction of the Tenant
Improvements, Tenant shall, if requested to do so by Landlord, provide
reasonable assurances to Landlord's Lender (as that term is defined in
Subparagraph 29.H.) that the funds necessary to pay Tenant's TI Contribution
will be immediately available to Landlord as and when needed to pay all TI Costs
after Landlord has expended the TI Allowance, which assurances shall be
reasonably satisfactory to Landlord and Landlord's Lender.
D. Late Charge. Tenant acknowledges that late payment by Tenant to
-----------
Landlord of rent and other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or deed of trust covering the Premises.
Accordingly, if any Monthly Installment, Additional Rent or any other sum due
from Tenant shall not be received by Landlord within ten (10) days after
Landlord's delivery to Tenant of written notice stating that such amount has
not been paid when due, then Tenant shall pay to Landlord, as additional rent,
a late charge equal to six percent (6%) of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate
of the costs Landlord will incur by reason of late payment by Tenant.
Acceptance of such late charge by Landlord without payment of the overdue
amount shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of its other
rights and remedies granted hereunder.
E. Additional Rent. All taxes, insurance premiums, late charges,
---------------
costs, expenses and other sums which Tenant is required to pay under this
Lease, together with all interest and penalties that may accrue thereon in the
event of Tenant's failure to pay such amounts, and all reasonable damages,
costs, and attorneys' fees and expenses which Landlord may incur by reason of
any default of Tenant or failure on Tenant's part to comply with the terms of
this Lease, shall be deemed to be additional rent ("ADDITIONAL RENT") and
---------------
shall be paid in addition to the Monthly Installment of rent, and, in the
event of nonpayment by Tenant, Landlord shall have all of the rights and
remedies with respect thereto as Landlord has for the nonpayment of the
Monthly Installment of rent. All items of Additional Rent, but excluding such
taxes and assessment, utilities and insurance costs which are to be paid
directly by Tenant or reimbursed by
-6-
<PAGE>
Tenant to Landlord, shall include an additional two percent (2%) of the actual
expenditure or amount due in order to compensate Landlord for accounting,
management and processing services.
F. Place of Payment. Rent shall be payable in lawful money of the
----------------
United States of America to Landlord at 511 Division Street, Campbell,
California 95008 or to such other person(s) or at such other place(s) as
Landlord may designate in writing.
G. Advance Payment. Concurrently with the execution of this Lease,
---------------
Tenant shall pay to Landlord the sum of Two Hundred Sixty Five Thousand Six
Hundred Forty Two and 10/100 Dollars ($265,642.10) to be applied to the
Monthly Installment of rent first accruing under this Lease.
5. Security Deposit. Concurrently with the execution of this Lease,
----------------
Tenant shall pay to Landlord the sum of Two Hundred Sixty Five Thousand Six
Hundred Forty Two and 10/100 Dollars ($265,642.10) (the "SECURITY DEPOSIT") to
----------------
secure the faithful performance by Tenant of each term, covenant and condition
of this Lease. If Tenant shall at any time fail to make any payment or fail to
keep or perform any term, covenant or condition on its part to be made or
performed or kept under this Lease, Landlord may, but shall not be obligated
to and without waiving or releasing Tenant from any obligation under this
Lease, use, apply or retain the whole or any part of the Security Deposit (A)
to the extent of any sum due to Landlord; (B) to make any required payment on
Tenant's behalf; or (C) to compensate Landlord for any loss, damages,
attorneys' fees or expense sustained by Landlord due to Tenant's default. In
such event, Tenant shall, within five (5) days of written demand by Landlord,
remit to Landlord sufficient funds to restore the Security Deposit to its
original sum. No interest shall accrue on the Security Deposit. Landlord shall
not be required to keep the Security Deposit separate from its general funds.
The Security Deposit, less any sums owing to Landlord or which Landlord is
otherwise entitled to retain, shall be returned to Tenant within thirty (30)
days after the termination of this Lease and vacancy of the Premises by
Tenant.
-7-
<PAGE>
6. Use of Premises.
---------------
A. Restrictions on Use. Tenant shall use the Premises only in
-------------------
conformance with applicable governmental laws, for general office,
engineering, research and development, light assembly, testing, warehousing
and related lawful uses, and for no other purpose without the consent of
Landlord. Tenant shall indemnify, defend and hold Landlord harmless against
any loss, expense, damage, attorneys' fees or liabilities to the extent the
foregoing arises out of the failure of Tenant to comply with any Law (as
defined in Subparagraph 29.F.) applicable to Tenant's use and occupancy of the
Premises. Tenant shall not commit or suffer to be committed, any waste upon
the Premises, or any nuisance, or other acts or things which may disturb the
quiet enjoyment of any other occupant of buildings adjacent to the Premises,
or allow any sale by auction upon the Premises, or allow the Premises to be
used for any unlawful purpose, or place any loads upon the floor, walls or
ceiling which would endanger the structure, or place any harmful liquids in
the drainage system of the Premises. No waste materials or refuse shall be
dumped upon or permitted to remain upon any part of the Premises outside of
the Buildings, except in trash containers placed inside exterior enclosures
designated for that purpose by Landlord and except in compliance with all
applicable Law. No materials, supplies, equipment, finished products or
semifinished products, raw materials or articles of any nature shall be stored
upon or permitted to remain on any portion of the Parcel outside of the
Buildings. Tenant shall strictly comply with the provisions of Paragraph 37
below.
B. Initial Occupancy. Tenant shall be obligated to take possession
-----------------
and enter into occupancy of two (2) of the three (3) Buildings of the Premises
within thirty (30) days following the Commencement Date.
7. Taxes and Assessments.
---------------------
A. Tenant's Property. Tenant shall pay before delinquency any and
-----------------
all taxes and assessments, license fees and public charges levied, assessed or
imposed upon or against Tenant's fixtures, equipment, furnishings, furniture,
appliances and personal property installed or located on or within the
Premises ("Tenant's Property"). Tenant shall use its best efforts to cause all
Tenant's Property to be assessed and billed separately from the real property
of Landlord. If any of Tenant's Property shall be assessed with the Premises,
Tenant shall pay Landlord the taxes attributable to Tenant within ten (10)
days after receipt of a written statement from Landlord setting forth the
taxes applicable to Tenant's Property.
B. Property Taxes. Tenant shall pay, as Additional Rent, one
--------------
hundred percent (100%) of all property taxes (as defined in Subparagraph 7.C.
below) levied or assessed with respect to the Premises which are attributable
to the Lease Term. Tenant shall pay such Property Taxes to Landlord not later
than (i) ten (10) days prior to the delinquency date of such Property Taxes,
or (ii) twenty (20) days after receipt of billing, whichever is later. If
Tenant fails to do so, Tenant shall reimburse Landlord, on demand, for all
interest, late fees and penalties that the taxing authority charges Landlord.
In the event Landlord's Lender requires an impound for
-8-
<PAGE>
Property Taxes, then on the first day of each month during the Lease Term,
Tenant shall pay Landlord one twelfth (1/12) of the annual Property Taxes.
Tenant's liability hereunder shall be prorated to reflect the commencement and
termination dates of this Lease.
C. Property Taxes Defined. For the purpose of this Lease,
----------------------
"PROPERTY TAXES" means and includes all taxes, assessments (including, but not
--------------
limited to, assessments for public improvements or benefits), taxes based on
vehicles utilizing parking areas, taxes based or measured by the rent paid,
payable or received under this Lease, taxes on the value, use, or occupancy of
the Premises, the Buildings and/or the Parcel, and all other governmental
impositions and charges of every kind and nature whatsoever, whether or not
customary or within the contemplation of the parties hereto and regardless of
whether the same shall be extraordinary or ordinary, general or special,
unforeseen or foreseen, or similar or dissimilar to any of the foregoing which,
at any time during the Lease Term, shall be applicable to the Premises, the
Buildings and/or the Parcel or assessed, levied or imposed upon the Premises,
the Buildings and/or the Parcel, or become due and payable and a lien or charge
upon the Premises, the Buildings and/or the Parcel, or any part thereof, under
or by virtue of any present or future laws, statutes, ordinances, regulations or
other requirements of any governmental authority whatsoever. The term "Property
Taxes" shall not include any federal, state or local net income, documentary
transfer (unrelated to any transfer made of Tenant's interest under this Lease),
franchise (unrelated to Tenant's operations), estate, gift or inheritance tax
imposed on Landlord (the "PROPERTY TAX EXCLUSIONS").
-----------------------
D. Other Taxes. Tenant shall, as Additional Rent, pay or reimburse
-----------
Landlord for any tax based upon, allocable to, or measured by the area of the
Premises or the Buildings or the Parcel; or by the rent paid, payable or
received under this Lease; any tax upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy of the Premises or any portion thereof; any privilege tax, excise tax,
business and occupation tax, gross receipts tax, sales and/or use tax, water
tax, sewer tax, employee tax, occupational license tax imposed upon Landlord or
Tenant with respect to the Premises; any tax upon this transaction or any
document to which Tenant is a party creating or transferring any of Tenant's
interest or estate in the Premises; provided, however that nothing in this
Subparagraph shall require Tenant to pay any Property Tax Exclusions.
E. Tenant's Right to Contest. Tenant shall have the right, by
-------------------------
appropriate proceedings, to protest or contest any assessment, reassessment or
allocation of Property Taxes or any change therein. In the contest or
proceedings, Tenant may act in its own name and/or the name of Landlord and
Landlord will, at Tenant's request and expense, cooperate with Tenant in any way
Tenant may reasonably require in connection with such contest. Tenant must pay
all Property Taxes as and when required by Subparagraph 7.B., even those which
are the subject of such protest or contest, but Tenant may sue to recover
overpayments or Property Taxes as part of any such contest. With respect to any
contest of Property Taxes, Tenant shall indemnify and hold Landlord and the
Premises harmless from any liens or damage arising out of such protest or
contest and shall pay any judgment that may be rendered for which Tenant would
otherwise be
-9-
<PAGE>
liable under this Lease without such contest or protest. Any contest conducted
by Tenant under this paragraph shall be at Tenant's expense and if interest or
late charges become payable as a result of such contest or protest, Tenant shall
pay the same. Any tax assessments reimbursed to Landlord as a consequence of
such contest shall be reimbursed to Tenant, to the extent originally paid by
Tenant under the terms of this Lease.
8. Insurance.
---------
A. Indemnity. Tenant agrees to indemnify, protect and defend
---------
Landlord against and hold Landlord harmless from any and all claims, causes of
action, judgments, obligations or liabilities, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable attorneys'
fees), to the extent they arise out of, the operation, maintenance, use or
occupancy of the Premises by Tenant and/or its Agents (except to the extent they
arise from the negligence or willful misconduct of Landlord or its Agents). This
Lease is made on the express understanding that Landlord shall not be liable
for, or suffer loss by reason of, injury to person or property, from whatever
cause (except to the extent it arises from the negligence or willful misconduct
of Landlord or its Agents), which in any way may be connected with the
operation, maintenance, use or occupancy of the Premises by Tenant and/or its
Agents specifically including, without limitation, any liability for injury to
the person or property of Tenant or its Agents.
B. Liability Insurance. Tenant shall, at Tenant's expense, obtain
-------------------
and keep in force during the term of this Lease a policy of commercial general
liability insurance insuring Landlord and Tenant against claims and liabilities
arising out of the operation, maintenance, use, or occupancy of the Premises.
Such insurance shall provide combined single limit coverage of not less than
Five Million Dollars ($5,000,000.00) per occurrence. Landlord shall have the
right to require Tenant to increase the amount of coverage of such public
liability insurance to the extent reasonably necessary to bring such insurance
coverage into conformity with the level of coverage commonly carried by similar
businesses in California leasing comparable buildings in the vicinity of the
Premises, which right Landlord may exercise no more frequently than once every
two (2) years during the Lease Term. The insurance shall be provided by
companies (i) admitted to issue insurance in California and (ii) having a
general policyholders' rating of at least "A" and a financial rating of at least
"VIII" as set forth in the most current issue of Best's Insurance Guide. Tenant
shall deliver to Landlord, prior to possession, and at least thirty (30) days
prior to the expiration of any insurance policy required hereby, a certificate
of insurance evidencing the existence of such policy and the certificate shall
certify that the policy (1) names Landlord as an additional insured, (2) shall
not be canceled or altered without thirty (30) days prior written notice to
Landlord, (3) insures performance of the indemnity set forth in Subparagraph
8.A. above, (4) the coverage is primary and any coverage by Landlord is in
excess thereto and (5) contains a cross-liability endorsement.
Landlord may maintain a policy or policies of commercial general liability
insurance insuring Landlord (and such others as are designated by Landlord),
against liability for personal
-10-
<PAGE>
injury, bodily injury, death and damage to property occurring or resulting from
an occurrence in, on or about the Premises, with such limits of coverage as
Landlord may from time to time determine are reasonably necessary for its
protection. Tenant shall, as Additional Rent, reimburse Landlord for the cost of
any such insurance policy within ten (10) days after receipt of billing.
C. Property Insurance. Landlord shall, at Tenant's expense, obtain
------------------
and keep in force during the Lease Term a policy of insurance covering loss or
damage to the Improvements, in the amount of the full replacement value thereof
with an Agreed Amount Endorsement, providing protection against those perils
included within the classification of "special form" insurance, plus a policy of
----
rental income insurance in the amount of one hundred percent (100%) of twelve
(12) months' rent (including, without limitation, sums payable as Additional
Rent), together with such additional coverages (such as earthquake and/or flood
insurance) which Landlord may elect to maintain from time to time or which may
be required from time to time by Landlord's Lender or by Tenant. Tenant shall
have no interest in nor any right to the proceeds of any insurance procured by
Landlord on the Buildings and Tenant Improvements. Tenant shall pay to Landlord,
as Additional Rent, the cost of such insurance procured and maintained by
Landlord on an annual basis within ten (10) days after receipt of demand
therefore from Landlord. Tenant's liability for the cost of such insurance shall
be prorated as of the commencement and termination of the Lease Term. Tenant
acknowledges that such insurance procured by Landlord shall contain a deductible
which reduces Tenant's cost for such insurance and, in the event of loss or
damage, Tenant shall be required to pay to Landlord the amount of such
deductible; provided, Tenant's liability for such deductible shall not exceed
Twenty Five Thousand Dollars ($25,000), except Tenant's liability for the
deductible on Landlord's earthquake insurance shall not exceed ten percent (10%)
of the policy amount.
D. Tenant's Property Insurance. Tenant acknowledges that the
---------------------------
insurance to be maintained Landlord on the Premises pursuant to Paragraph 8.C.
above will not insure any of Tenant's Property. Accordingly, Tenant, at Tenant's
own expense, shall maintain in full force and effect on all of Tenant's Property
in the Premises, a policy of "special form" coverage insurance to the extent of
at least ninety percent (90%) of insurable value of such property.
E. Mutual Waiver of Subrogation. Notwithstanding anything to the
----------------------------
contrary contained in this Lease, Tenant and Landlord hereby mutually waive
their respective rights of recovery against each other of any loss of or damage
to the property of either party, to the extent such loss or damage is insured by
either party at the time of such loss or damage or required to be insured
pursuant to this Lease by the party having the right of recovery against the
other party for such loss or damage. Each party shall obtain any special
endorsements, if required by the insurer, whereby the insurer waives its right
of subrogation against the other party hereto. The provisions of this
Subparagraph 8.E. shall not apply in those instances in which the waiver of
subrogation would cause either party's insurance coverage to be voided or
otherwise made uncollectible; provided, such party has afforded the other party
at least thirty (30) days prior written notice of such fact and a period of at
least thirty (30) days has elapsed after delivery of
-11-
<PAGE>
such notice without identification of alternative, reasonably equivalent
insurance that can be obtained without a voiding provision based on this waiver
of subrogation.
9. Utilities. Tenant shall pay for all water, gas, light, heat, power,
---------
electricity, telephone, trash pick-up, sewer charges, and all other services
supplied to or consumed on the Premises, and all taxes and surcharges thereon.
10. Repairs and Maintenance.
-----------------------
A. Landlord's Repairs. Subject to the provisions of Paragraphs 14
------------------
and 15 and the Improvement Agreement, Landlord, at its expense, shall keep and
maintain the exterior walls and the structural elements of the Buildings in good
order and repair. Landlord shall not, however, be required to maintain, repair
or replace the interior surface of exterior walls, nor shall Landlord be
required to maintain, repair or replace windows, doors, skylights or plate
glass. Landlord shall not be in default because it fails to make repairs under
this Subparagraph 10.A. until a reasonable time after receipt of written notice
from Tenant of the need for such repairs. Notwithstanding the foregoing but
subject to Subparagraph 8.E., Tenant shall reimburse Landlord, as Additional
Rent, within fifteen (15) days after receipt of billing, for the cost of
maintenance and repairs of the exterior walls and structural elements of the
Buildings to the extent such maintenance or repair is required because of the
negligence or willful misconduct of Tenant or its Agents, except as otherwise
provided in Subparagraph 8.E. As used herein, the term "STRUCTURAL ELEMENTS OF
----------------------
THE BUILDINGS" shall mean and be limited to the foundations, footings, floor
- -------------
slab (but not flooring), roof structure (but not roofing or roof membrane), load
bearing walls and structural portion of any second floor. If (a) repairs are
required to be made by Landlord pursuant to this Subparagraph 10.A., (b) the
failure to immediately make such repairs poses a threat of imminent danger to
people or property, and (c) after Landlord's receipt of notice from Tenant for
the need to make such repairs, Landlord does not immediately make such repairs,
then Tenant shall be allowed to make such repairs and Landlord shall
- ----
reimburse Tenant for the reasonable third party costs incurred by Tenant upon
receipt of written invoices for such repairs, lien releases from the third party
making such repairs and inspection of the repairs made by Tenant.
-12-
<PAGE>
B. Tenant's Repairs.
------------------
(i) Except as expressly provided in Subparagraphs 8.E. and 10.A.
above, Paragraphs 14 and 15 below and the Improvement Agreement, Tenant shall,
at its sole cost, keep and maintain the entire Premises and every part thereof,
including without limitation, the windows, window frames, plate glass, glazing,
skylights, truck doors, doors and all door hardware, the interior walls and
partitions, interior surfaces of exterior walls, carpets, flooring, roofing,
roof membrane, gutters, down spouts, the electrical, plumbing, lighting,
heating, ventilating and air conditioning systems and equipment, and all areas
outside the Buildings (including all landscaping, irrigation systems, paving,
driveways, parking areas, sidewalks, fences, signs and exterior lighting) in
good order, condition and repair. The term "repair" shall include replacements,
restorations and/or renewals when necessary as well as painting. Except as
expressly provided in Subparagraphs 8.E. and 10.A. above, Paragraphs 14 and 15
below and the Improvement Agreement, Tenant's obligation shall extend to all
alterations, additions and improvements to the Premises, and all fixtures and
appurtenances therein and thereto. Tenant shall, at all times during the Lease
Term, have in effect a service contract for the maintenance of the heating,
ventilating and air conditioning ("HVAC") equipment with an HVAC repair and
----
maintenance contractor reasonably approved by Landlord. The HVAC service
contract shall provide for periodic inspection and servicing at least once every
three (3) months during the Lease Term, and Tenant shall provide Landlord with a
copy of such contract and all periodic service reports. Landlord shall assign to
Tenant for the Lease Term the benefit of all warranties available to Landlord
which would reduce the cost of performing the obligations of Tenant to make
repairs under this Subparagraph 10.B. Landlord shall cooperate with Tenant in
the enforcement of such warranties. Notwithstanding anything to the contrary in
this Lease, Tenant shall have no responsibility to perform or construct, any
repair, maintenance or improvement that Landlord is required to perform pursuant
to any other term of this Lease or the Improvement Agreement.
(ii) Should Tenant fail to commence to make repairs required of
Tenant hereunder within ten (10) days after written notice from Landlord or
should Tenant fail thereafter to diligently complete the repairs, Landlord, in
addition to all other remedies available hereunder or by Law and without waiving
any alternative remedies, may make the same, and in that event, Tenant shall
reimburse Landlord as Additional Rent for the cost of such maintenance or
repairs within ten (10) days of written demand by Landlord.
(iii) Notwithstanding anything to the contrary in this Lease, any
capital replacements to the Premises which are otherwise found to be the
obligation of Tenant under this Lease, whether or not required by law, which are
required by generally accepted accounting principles ("GAAP") to be capitalized
----
("CAPITAL REPLACEMENTS") shall be made by and paid for by the parties in
--------------------
accordance with the following:
(a) Tenant shall promptly undertake and diligently
complete,
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<PAGE>
and Tenant shall be solely responsible for the cost of, all Capital Replacements
that have a cost less than Three Hundred Thousand Dollars ($300,000).
(b) Upon Tenant's written notice to Landlord for the need
of any Capital Replacement which Landlord is required to make pursuant to this
Subparagraph 10.B.(iii)(b), Landlord shall promptly undertake and diligently
complete all Capital Replacements having a cost in excess of Three Hundred
Thousand Dollars ($300,000) ("LANDLORD'S CAPITAL REPLACEMENTS"). The cost of
-------------------------------
Landlord's Capital Replacements shall be borne by the parties as follows:
(1) Tenant shall reimburse Landlord for Tenant's
Share of the Cost of Landlord's Capital Replacement within ten (10) days
following delivery to Tenant of reasonable documentation of the amount owing by
Tenant for completed work, which payments may be demanded by Landlord of Tenant
on a monthly basis as the work progresses. The " TENANT'S SHARE OF THE COST OF
-----------------------------
LANDLORD'S CAPITAL REPLACEMENT," shall be equal to the total cost reasonably
- ------------------------------
incurred by Landlord to construct, permit and/or plan a Landlord's Capital
Replacement (the "CAPITAL COST") times a fraction, the numerator of which is
------------
equal to the number of unexpired months in the then existing Lease Term (without
any consideration of Extended Terms that have not commenced), and the
denominator of which is equal to the useful life (expressed in months) of such
Landlord's Capital Replacement. The remainder of such cost shall be borne by
Landlord, subject to Subparagraphs 10.B.(iii)(b)(2) and 10.B.(iii)(b)(3), below.
(2) If the Lease Term is extended by Tenant as herein
permitted, then as a condition to each such extension and within ten (10) days
following Landlord's written demand therefor, Tenant shall make an additional
reimbursement of the Capital Cost of Landlord's Capital Replacement in an amount
equal to the Capital Cost times a fraction, the numerator of which is equal to
the lesser of (A) the useful life (expressed in months) of such Landlord's
Capital Replacement not subject to reimbursement under Subparagraph
10.B.(iii)(b)(1) above and not subject to reimbursement under this Subparagraph
10.B.(iii)(b)(2) with respect to a prior extension of the Lease Term, or (B) the
number of months in the extension period, and the denominator of which is equal
to the total useful life (expressed in months) of such Landlord's Capital
Replacement.
(3) If Landlord terminates this Lease on account of
an Event of Default by Tenant, as permitted by Section 13.B.(ii) below, then in
addition to Landlord's other remedies, Tenant shall pay to Landlord upon demand
so much of the Capital Cost of Landlord's Capital Replacement, which has not
been theretofore reimbursed by Tenant to Landlord.
(iv) Landlord shall have no maintenance or repair obligations
whatsoever with respect to the Premises except as expressly provided in this
Lease and the Improvement Agreement. Tenant hereby expressly waives the
provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the
Civil Code of California and all rights to make
-14-
<PAGE>
repairs at the expense of Landlord as provided in Section 1942 of said Civil
Code; provided, Tenant shall have the right to cure Landlord's defaults pursuant
to the terms and conditions of Paragraph 38 hereof.
11. Alterations.
-----------
A. Limitations. Tenant shall not make, or suffer to be made, any
-----------
alterations, improvements or additions in, on, about or to the Premises or any
part thereof, without the prior written consent of Landlord (which consent shall
not be unreasonably withheld) and without a valid building permit issued by the
appropriate governmental authority; provided, however, Landlord's consent shall
not be required for interior non-structural alterations which (i) cost less than
Twenty Thousand Dollars ($20,000.00) per work of improvement and (ii) cost less
than Seventy Five Thousand Dollars ($75,000.00) for all alterations made in any
twelve (12) month period. As a condition to, and concurrently with, the giving
of such consent Landlord may require that Tenant agree to remove any such
alterations, improvements or additions at the termination of this Lease, and to
restore the Premises to their prior condition. Unless Landlord requires that
Tenant remove any such alteration, improvement or addition at the time that
Landlord provides its consent thereto, any alteration, addition or improvement
to the Premises, except movable furniture and trade fixtures not affixed to the
Premises, shall become the property of Landlord upon termination of the Lease
and shall remain upon and be surrendered with the Premises at the termination of
this Lease. Without limiting the generality of the foregoing, all heating,
lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts,
main and subpanels), air conditioning, partitioning, drapery, and carpet
installations made by Tenant regardless of how affixed to the Premises, together
with all other additions, alterations and improvements that have become an
integral part of any of the Buildings, shall be and become the property of the
Landlord upon termination of the Lease, and shall not be deemed trade fixtures,
and shall remain upon and be surrendered with the Premises at the termination of
this Lease.
B. Tenant's Rights. All trade fixtures, movable furniture and
---------------
personal property installed in the Premises at Tenant's expense (collectively,
"TENANT'S PROPERTY") shall at all times remain Tenant's property and Tenant
-----------------
shall be entitled to all depreciation, amortization and other tax benefits with
respect thereto, except for Tenant's Property which cannot be removed without
structural injury to the Premises. At any time during the Lease Term, Tenant may
remove Tenant's Property from the Premises, provided Tenant repairs all damage
caused by such removal. Landlord shall have no lien or other interest whatsoever
in any item of Tenant's Property or any portion thereof or interest therein,
located in the Premises or elsewhere, and Landlord hereby waives all such liens
and interests. Within ten (10) days following Tenant's written request, Landlord
shall execute documents in form reasonably acceptable to Tenant and Landlord to
evidence Landlord's waiver of any right, title, lien or interest in Tenant's
Property located in the Premises.
C. Alterations Required by Law. If, during the Lease Term, any
---------------------------
alteration,
-15-
<PAGE>
addition or change of any sort to all or any portion of the Premises is required
by Law, Tenant shall promptly make the same at its sole cost and expense;
provided, Tenant shall only be obligated to make alterations, additions or
changes required by Law to the "structural elements of the Buildings" (as
defined in Subparagraph 10.A. above), if such requirement is triggered by (i)
Tenant's particular use of the Premises, or (ii) Tenant's alterations,
improvements or additions in, on, about or to the Premises or any part thereof;
and if Landlord has performed its obligations under this Lease with respect to
the structural elements of the Buildings.
12. Acceptance of the Premises. By entry and taking possession of the
--------------------------
Premises pursuant to this Lease, Tenant accepts the Premises as being in good
and sanitary order, condition and repair and accepts the Premises in their
condition existing as of the date of such entry and Tenant further accepts the
Tenant Improvements to be constructed by Landlord, if any, as being completed in
accordance with the plans and specifications for such Tenant Improvements,
except for punch list items, and any express warranties by and obligations of
Landlord set forth in this Lease. Tenant acknowledges that neither the Landlord
nor Landlord's agents has made any representation or warranty as to the
suitability of the Premises to the conduct of Tenant's business. Any agreements,
warranties or representations not expressly contained herein shall in no way
bind either Landlord or Tenant, and Landlord and Tenant expressly waive all
claims for damages by reason of any statement, representation, warranty, promise
or agreement not contained in this Lease. This Lease constitutes the entire
understanding between the parties hereto and no addition to, or modification of,
any term or provision of this Lease shall be effective until set forth in a
writing signed by both Landlord and Tenant.
13. Default.
-------
A. Events of Default. A breach of this Lease by Tenant shall exist
-----------------
if any of the following events (hereinafter referred to as "EVENT OF DEFAULT")
----------------
shall occur:
(i) Default in the payment when due of any installment of rent
or other payment required to be made by Tenant hereunder, where such default
shall not have been cured within five (5) days after written notice of such
default is given to Tenant;
(ii) Tenant's failure to perform any other term, covenant or
condition contained in this Lease where such failure shall have continued for
twenty (20) days after written notice of such failure is given to Tenant;
provided, however, Tenant shall not be deemed in default if Tenant commences to
cure such failure within said twenty (20) day period and thereafter diligently
prosecutes such cure to completion;
(iii) Tenant vacates the Premises for sixty (60) consecutive days
and upon the expiration of such sixty (60) day period, Tenant has failed to
perform any term, covenant or condition contained in this Lease (under such
circumstances Tenant shall have no right to cure the default and Landlord shall
have no requirement to notify Tenant of the default
-16-
<PAGE>
except as required by law);
(iv) Tenant's assignment of its assets for the benefit of its
creditors;
(v) The sequestration of, attachment of, or execution on, any
substantial part of the property of Tenant or on any property essential to the
conduct of Tenant's business, shall have occurred and Tenant shall have failed
to obtain a return or release of such property within thirty (30) days
thereafter, or prior to sale pursuant to such sequestration, attachment or levy,
whichever is earlier;
(vi) Tenant or any guarantor of Tenant's obligations hereunder
shall commence any case, proceeding or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any Law relating to bankruptcy, insolvency, reorganization or relief
of debtors, or seek appointment of a receiver, trustee, custodian, or other
similar official for it or for all or any substantial part of its property; or
(vii) Any case, proceeding or other action against Tenant or any
guarantor of Tenant's obligations hereunder shall be commenced seeking to have
an order for relief entered against it as debtor, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any Law relating to bankruptcy, insolvency, reorganization or relief
of debtors, or seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its property, and
such case, proceeding or other action (i) results in the entry of an order for
relief against it which is not fully stayed within seven (7) business days after
the entry thereof or (ii) remains undismissed for a period of sixty (60) days.
Any notice given by Landlord in order to satisfy the requirements of this
Subparagraph 13.B. shall also satisfy the notice requirements of California Code
of Civil Procedure Section 1161 and all similar statutes regarding unlawful
detainer proceedings.
B. Remedies. Upon any Event of Default, Landlord shall have the
--------
following remedies, in addition to all other rights and remedies provided by
law, to which Landlord may resort cumulatively, or in the alternative:
(i) Recovery of Rent. Landlord shall be entitled to keep this
----------------
Lease in full force and effect (whether or not Tenant shall have abandoned the
Premises) and to enforce all of its rights and remedies under this Lease,
including the right to recover rent and other sums as they become due, plus
interest at the Permitted Rate (as defined in Paragraph 31 below) as therein
provided.
(ii) Termination. Landlord may terminate this Lease by giving
-----------
Tenant written notice of termination in accordance with applicable law. On the
giving of the notice all of Tenant's rights in the Premises shall terminate.
Upon the giving of the notice of termination,
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<PAGE>
Tenant shall surrender and vacate the Premises in the condition required by
Paragraph 32, and Landlord may re-enter and take possession of the Premises and
all the remaining improvements or property and eject Tenant or any of Tenant's
subtenants, assignees or other person or persons claiming any right under or
through Tenant or eject some and not others or eject none. This Lease may also
be terminated by a judgment specifically providing for termination. Any
termination under this paragraph shall not release Tenant from the payment of
any sum then due Landlord or from any claim for damages or rent previously
accrued or then accruing against Tenant. In no event shall any one or more of
the following actions by Landlord constitute a termination of this Lease:
(a) maintenance and preservation of the Premises;
(b) efforts to relet the Premises;
(c) appointment of a receiver in order to protect
Landlord's interest hereunder;
(d) consent to any subletting of the Premises or assignment
of this Lease by Tenant, whether pursuant to provisions hereof concerning
subletting and assignment or otherwise; or
(e) any other action by Landlord or Landlord's agents
intended to mitigate the adverse effects from any breach of this Lease by
Tenant.
(iii) Damages. In the event this Lease is terminated pursuant to
-------
Subparagraph 13.B.(ii) above, or otherwise, Landlord shall be entitled to
damages in the following sums:
(a) the worth at the time of award of the unpaid rent which
has been earned at the time of termination; plus
(b) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(c) the worth at the time of award of the amount by which
the unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; and
(d) any other amount necessary to compensate Landlord for
all detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which in the ordinary course of things would be
likely to result therefrom including, without limitation, the following: (i)
reasonable expenses for cleaning, repairing or restoring the
-18-
<PAGE>
Premises to surrender condition; (ii) real estate broker's fees, advertising
costs and other expenses of reletting the Premises which are reasonably incurred
by Landlord and applicable to the period after termination of this Lease; (iii)
reasonable costs of carrying the Premises such as taxes and insurance premiums
thereon, utilities and security precautions not otherwise included in Additional
Rent; (iv) expenses in retaking possession of the Premises; and (v) reasonable
attorneys' fees and court costs.
(e) The "worth at the time of award" of the amounts
referred to in Subparagraphs (a) and (b) of this Subparagraph 13.B.(iii), is
computed by allowing interest at the Permitted Rate. The "worth at the time of
award" of the amounts referred to in Subparagraph (c) of this Subparagraph
13.B.(iii) is computed by discounting such amount at the discount rate of the
Federal Reserve Board of San Francisco at the time of award plus one percent
(1%). The term "rent" as used in this Paragraph 13 shall include all sums
required to be paid by Tenant to Landlord pursuant to the terms of this Lease.
C. Waivers. Tenant hereby waives any right of redemption or relief
-------
from forfeiture under the laws of the State of California, or under any other
present or future law, including the provisions of Sections 1174 and 1179 of the
California Code of Civil Procedure.
14. Destruction.
-----------
A. Landlord's Duty to Restore. If the Improvements are damaged by
--------------------------
any peril after the Commencement Date of this Lease, Landlord shall restore the
Premises unless the Lease is terminated by Landlord pursuant to Subparagraph
14.B. or by Tenant pursuant to Subparagraph 14.C. All insurance proceeds
available from the property damage insurance carried by Landlord pursuant to
Subparagraph 8.C. shall be paid to and become the property of Landlord and shall
be used for the restoration of the Premises, unless this Lease is terminated
pursuant to Subparagraphs 14.B. or 14.C. or as otherwise required by Landlord's
Lender. If this Lease is terminated pursuant to either Subparagraphs 14.B. or
14.C., then all insurance proceeds available from the insurance required to be
carried by Tenant which covers loss to property that is Landlord's property or
would become Landlord's property on the termination of this Lease shall be paid
to and become the property of Landlord. If this Lease is not so terminated, then
Landlord shall be entitled to all such insurance proceeds and upon receipt of
such insurance proceeds (if the loss is covered by insurance) and the issuance
of all necessary governmental permits, Landlord shall commence and diligently
prosecute to completion the restoration of the Premises, to the extent then
allowed by Law, to substantially the same condition in which the Premises were
immediately prior to such damage. Landlord's obligation to restore shall be
limited to the Buildings and Tenant Improvements constructed by Landlord as they
existed as of the Commencement Date and to the extent Landlord receives
insurance proceeds, any Tenant Improvements as they existed as of the
Commencement Date which were paid for by Tenant, excluding any Tenant's Property
or Tenant Improvements paid for by Tenant to the extent Landlord does not
receive insurance proceeds for such Tenant Improvements.
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<PAGE>
B. Landlord's Right to Terminate. Landlord shall have the option to
-----------------------------
terminate this Lease in the event any of the following occurs, which option may
be exercised only by delivery to Tenant of a written notice of election to
terminate within thirty (30) days after the date of such damage:
(i) The Improvements are damaged by any peril either (i) covered
by the type of insurance Landlord is required to carry pursuant to Subparagraph
8.C. or (ii) covered by valid and collectible insurance actually carried by
Landlord and in force at the time of such damage or destruction, to such an
extent that the estimated restoration cost exceeds fifty percent (50%) of the
then actual replacement cost thereof.
(ii) The Improvements are damaged by any peril both (i) not
covered by the type of insurance Landlord is required to carry pursuant to
Subparagraph 8.C. and (ii) not covered by valid and collectible insurance
actually carried by Landlord and in force at the time of such damage or
destruction, to such an extent that the estimated restoration cost exceeds five
percent (5%) of the then actual replacement cost of the Improvements; provided,
however, that Landlord may not terminate this Lease pursuant to this
Subparagraph 14.B.(ii) if Tenant agrees in writing to pay the amount by which
the restoration cost exceed five percent (5%) of the replacement cost of the
Improvements and deposits with Landlord or provides other reasonable assurances
of payment (which assurances must be approved by Landlord's Lender) of an amount
equal to the estimated amount of such excess within thirty (30) days after
Landlord has notified Tenant with its election to terminate this Lease pursuant
to this Subparagraph 14.B.(ii).
(iii) The Improvements are damaged by any peril during the last
twelve (12) months of the Lease Term to such an extent that the estimated cost
to restore equals or exceeds an amount equal to six (6) times the Monthly
Installment of rent then due; provided, however, that Landlord may not terminate
this Lease pursuant to this Subparagraph 14.B.(iii) if Tenant, at the time of
such damage, has an express written option to further extend the term of this
Lease and Tenant exercises such option to so further extend the Lease Term
within fifteen (15) days following notice of Landlord's termination of this
Lease.
(iv) The Improvements are damaged by any peril and, because of
the Laws then in force, may not be restored at a cost less than or equal to the
available insurance proceeds and any amounts Tenant is required by this Lease to
pay or Tenant otherwise elects to pay, to substantially the same condition in
which it was prior to such damage.
C. Tenant's Right to Terminate. If the Improvements are damaged by
---------------------------
any peril and Landlord does not elect to terminate this Lease or is not entitled
to terminate this Lease pursuant to Subparagraph 14.B., then as soon as
reasonably practicable, Landlord shall furnish Tenant with the written opinion
of Landlord's architect or construction consultant as to when the restoration
work required of Tenant may be completed and the permits required for such work
can be obtained. Tenant shall have the option to terminate this Lease in whole
or in part as specified below in the event any of the following occurs, which
option may be exercised only by
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<PAGE>
delivery to Landlord of a written notice of election to terminate within fifteen
(15) days after Tenant receives from Landlord the estimate of the time needed to
complete such restoration:
(i) If any Building is damaged by any peril and, in the
reasonable opinion of Landlord's architect or construction consultant, the
restoration of such Building cannot be substantially completed within two
hundred seventy (270) days after the date of the damage, then Tenant may
terminate the Lease as to such damaged Building only.
(ii) If any Building is damaged by any peril and all permits
required for the commencement of restoration are not obtained within sixty (60)
days beyond the time estimated by Landlord's architect or construction
consultant, or if following receipt of such permits the restoration is not
completed within sixty (60) days beyond the time estimated by Landlord's
architect or construction consultant as the required restoration time (provided
such time periods shall be extended by force majeure delays), then Tenant may
terminate this Lease with respect only to such damaged Building for which
permits are not timely obtained or which are not timely restored.
(iii) If any Building is damaged by any peril within twelve (12)
months of the last day of the Lease Term, and, in the reasonable opinion of
Landlord's architect or construction consultant, the restoration of the Premises
cannot be substantially completed within ninety (90) days after the date of such
damage, then Tenant may term inate this Lease with respect only to such damaged
Building.
(iv) If two (2) of the three (3) Buildings are damaged by any
peril and, in the reasonable opinion of Landlord's architect or construction
consultant, the restoration of all Buildings cannot be substantially completed
within two hundred seventy (270) days after the date of the damage, Tenant may
terminate the entire Lease.
D. Abatement of Rent. In the event of damage to the Premises which
-----------------
does not result in the termination of this Lease, the Monthly Installment of
rent and Additional Rent shall be temporarily abated from the date of inception
of the loss until the damaged Building(s) are restored, in proportion to the
degree to which Tenant's use of the Premises is impaired by such damage. Tenant
shall not be entitled to any compensation from Landlord for loss of Tenant's
property or loss to Tenant's business caused by such damage or restoration.
Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section
1933, Subdivision 4, of the California Civil Code, and the provisions of any
similar law, hereinafter enacted.
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<PAGE>
15. Condemnation.
------------
A. Definition of Terms. For the purposes of this Lease, the term (1)
-------------------
"TAKING" means a taking of the Premises or damage to the Premises related to
------
the exercise of the power of eminent domain and includes a voluntary conveyance,
in lieu of court proceedings, to any agency, authority, public utility, person
or corporate entity empowered to condemn property; (2) "TOTAL TAKING" means the
------------
taking of the entire Premises or so much of the Premises as to prevent or
substantially impair the use thereof by Tenant for the uses herein specified;
(3) "PARTIAL TAKING" means a Taking which does not constitute a Total Taking;
--------------
(4) "DATE OF TAKING" means the date upon which the title to the Premises, or a
--------------
portion thereof, passes to and vests in the condemnor or the effective date of
any order for possession if issued prior to the date title vests in the
condemnor; and (5) "AWARD" means the amount of any award made, consideration
-----
paid, or damages ordered as a result of a Taking.
B. Rights. The parties agree that in the event of a Taking all
------
rights (as between them) in and to an Award shall be as set forth herein and
Tenant shall have no right to any Award except as set forth herein; provided,
however, that Tenant shall be entitled to any award for the taking of Tenant's
Property.
C. Total Taking. In the event of a Total Taking during the Lease
------------
Term (1) the rights of Tenant under the Lease and the leasehold estate of Tenant
in and to the Premises shall cease and terminate as of the Date of Taking; (2)
Landlord shall refund to Tenant any prepaid rent and any unapplied security
deposit; (3) Tenant shall pay Landlord any unpaid rent or charges due Landlord
under the Lease, each prorated as of the Date of Taking; (4) Tenant shall
receive from the Award those portions of the Award attributable to Tenant's
Property and for moving expenses of Tenant; and (5) the remainder of the Award
shall be paid to and be the property of Landlord.
D. Partial Taking. In the event of a Partial Taking during the Lease
--------------
Term (1) the rights of Tenant under the Lease and the leasehold estate of Tenant
in and to the portion of the Premises taken shall cease and terminate as of the
Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and any
unapplied security deposit relating to the portion of the Premises taken based
on a square footage basis; (3) Tenant shall pay Landlord any unpaid rent or
charges due Landlord under the Lease for the portion of the Premises taken, each
prorated as of the Date of Taking; (4) from and after the Date of Taking the
Monthly Installment of rent shall be an amount equal to the product obtained by
multiplying the Monthly Installment of rent immediately prior to the Taking by a
fraction, the numerator of which is the number of square feet contained in the
Building after the Taking and the denominator of which is the number of square
feet contained in the Building prior to the Taking; (5) Tenant shall receive
from the Award those portions of the Award attributable to Tenant's Property and
for moving expenses of Tenant; and (6) the remainder of the Award shall be paid
to and be the property of Landlord.
16. Mechanics' Lien. Tenant shall (A) pay for all labor and services
---------------
performed for,
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<PAGE>
materials used by or furnished to, Tenant or any contractor employed by Tenant
with respect to the Premises; (B) indemnify, defend, protect and hold Landlord
and the Premises harmless and free from any liens, claims, liabilities, demands,
encumbrances, or judgments created or suffered by reason of any labor or
services performed for, materials used by or furnished to, Tenant or any
contractor employed by Tenant with respect to the Premises; (C) give notice to
Landlord in writing five (5) days prior to employing any laborer or contractor
to perform services related to, or receiving materials for use upon the
Premises; and (D) permit Landlord to post a notice of nonresponsibility in
accordance with the statutory requirements of California Civil Code Section 3094
or any amendment thereof. In the event Tenant is required to post an
improvement bond with a public agency in connection with the above, Tenant
agrees to include Landlord as an additional obligee.
17. Inspection of the Premises. Tenant shall permit Landlord and its
--------------------------
agents to enter the Premises at any reasonable time for the purpose of
inspecting the same, performing Landlord's maintenance and repair
responsibilities (upon 24 hour prior notice except in an emergency), posting a
notice of non-responsibility for alterations, additions or repairs and at any
time within two hundred seventy (270) days prior to expiration of this Lease, to
place upon the Premises, ordinary "For Lease" or "For Sale" signs.
18. Compliance with Laws. Tenant shall, at its own cost, comply with all
--------------------
of the requirements of all municipal, county, state and federal authorities now
in force, or which may hereafter be in force, pertaining to Tenant's use and
occupancy of the Premises, and shall faithfully observe all municipal, county,
state and federal law, statutes or ordinances now in force or which may
hereafter be in force pertaining to Tenant's use and occupancy of the Premises.
The judgment of any court of competent jurisdiction or the admission of Tenant
in any action or proceeding against Tenant, whether Landlord be a party thereto
or not, that Tenant has violated any such ordinance or statute in the use and
occupancy of the Premises shall be conclusive of the fact that such violation by
Tenant has occurred. Tenant shall indemnify, protect, defend, and hold Landlord
harmless against any loss, expense, damage, attorneys' fees or liability to the
extent arising out of the failure of Tenant to comply with any applicable law,
except to the extent such failure of Tenant to comply with any applicable law is
caused by the negligence or willful misconduct of Landlord or its Agents.
19. Subordination. The following provisions shall govern the relationship
-------------
of this Lease to any underlying lease, mortgage or deed of trust which now or
hereafter affects the Premises or Landlord's interest or estate therein and any
renewal, modification, consolidation, replacement, or extension thereof (a
"SECURITY INSTRUMENT").
-------------------
A. Priority. This Lease is subject and subordinate to all Security
--------
Instruments existing as of the Commencement Date. However, if any Lender so
requires, this Lease shall become prior and superior to any such Security
Instrument. Landlord, as a condition to Tenant's obligations under this Lease,
shall obtain a recognition and non-disturbance agreement from all existing
lienholders in form reasonably acceptable to Tenant and Landlord's Lender.
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<PAGE>
B. Subsequent Security Instruments. At Landlord's election, this
-------------------------------
Lease shall become subject and subordinate to any Security Instrument created
after the Commencement Date, provided that the Lender holding such Security
Agreement agrees that in the event of foreclosure of the Security Instrument in
question, such Lender shall recognize the tenancy of Tenant on the terms and
conditions contained in this Lease so long as no Event of Default (as defined in
Paragraph 13.A. hereof) exists on the date such person acquires the Premises.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed so long as no Event of Default exists on the
date such person acquires the Premises, unless this Lease is otherwise
terminated pursuant to its terms.
C. Documents. Tenant shall execute any reasonable document or
---------
instrument required by Landlord or any Lender to make this Lease either prior or
subordinate to a Security Instrument, which may include such other matters as
the Lender customarily and reasonably requires in connection with such
agreements, including provisions that the Lender not be liable for (1) the
return of the Security Deposit unless the Lender receives it from Landlord, and
(2) any defaults on the part of Landlord occurring prior to the time that the
Lender takes possession of the Premises in connection with the enforcement of
its Security Instrument. Tenant's failure to execute any such document or
instrument within ten (10) days after written demand therefor shall constitute a
default by Tenant. Tenant's obligation to execute and deliver any subordination
agreement to any future Lender shall be conditioned upon such Lender agreeing
that in the event of foreclosure of the mortgage or termination of the ground
lease in question, such Lender shall recognize the tenancy of Tenant on the
terms and conditions contained in this Lease as long as no Event of Default
exists on the date such person acquires the Premises.
D. Tenant's Attornment. Subject to the recognition obligations under
-------------------
Subparagraphs 19.B. and 19.C. above, Tenant shall attorn (1) to any purchaser of
the Premises at any foreclosure sale or private sale conducted pursuant to any
Security Instrument encumbering the Premises; (2) to any grantee or transferee
designated in any deed given in lieu of foreclosure; or (3) to the lessor under
any underlying ground lease should such ground lease be terminated.
20. Holding Over. This Lease shall terminate without further notice at
------------
the expiration of the Lease Term. Any holding over by Tenant after expiration
shall not constitute a renewal or extension or give Tenant any rights in or to
the Premises except as expressly provided in this Lease. Any holding over after
the expiration without the consent of Landlord shall be construed to be a
tenancy from month to month, at one hundred fifty percent (150%) of the monthly
rent for the last month of the Lease Term, and shall otherwise be on the terms
and conditions herein specified insofar as applicable.
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21. Notices. Any notice required or desired to be given under this Lease
-------
shall be in writing with copies directed as indicated below and shall be
personally served or given by facsimile (with receipt confirmed by telephone),
personal delivery, mail or by prepaid next-business day courier. Personal
delivery, mail and facsimile transmittal shall be effective when received or
delivery is refused by the party. Any notice given by courier shall be deemed to
have been given on the next business day after the time such notice was sent,
addressed to the party to be served with a copy as indicated herein at the last
address given by that party to the other party under the provisions of this
paragraph. At the date of execution of this Lease, the address of Landlord is:
South Bay Development Company, Inc.
511 Division Street
Campbell, California 95008
Attn: Mr. Scott Trobbe
With a copy to:
South Bay/San Tomas Associates
c/o AEW Real Estate Advisors, Inc.
399 Boylston Street
Boston, Massachusetts 02116
Attn: Mr. Christopher Kazantis
and the address of Tenant is:
Auspex Systems, Inc.
5200 Great America Parkway
Santa Clara, California 95054
Attn: General Counsel
After the Commencement Date, the address of Tenant will be at the Premises.
22. Attorneys' Fees. In the event either party shall bring any action or
---------------
legal proceeding for damages for any alleged breach of any provision of this
Lease, to recover rent or possession of the Premises, to terminate this Lease,
or to enforce, protect or establish any term or covenant of this Lease or right
or remedy of either party, the prevailing party shall be entitled to recover as
a part of such action or proceeding, reasonable attorneys' fees and court costs,
including attorneys' fees and costs for appeal, as may be fixed by the court or
jury. The term "prevailing party" shall mean the party who received
substantially the relief requested, whether by settlement, dismissal, summary
judgment, judgment, or otherwise.
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<PAGE>
23. Subleasing and Assignment.
-------------------------
A. Landlord's Consent Required. Tenant's interest in this Lease is
---------------------------
not assignable, by operation of Law or otherwise, nor shall Tenant have the
right to sublet the Premises, transfer any interest of Tenant therein or permit
any use of the Premises by another party, without the prior written consent of
Landlord to each such assignment, subletting, transfer or use, which consent
Landlord agrees not to withhold unreasonably subject to the provisions of
Subparagraph 23.C. below. A consent to one assignment, subletting, occupancy or
use by another party shall not be deemed to be a consent to any subsequent
assignment, subletting, occupancy or use by another party. Any assignment or
subletting without such consent shall be void and shall, at the option of
Landlord, terminate this Lease. Landlord's waiver or consent to any assignment
or subletting hereunder shall not relieve Tenant from any obligation under this
Lease unless the consent shall so provide.
B. Transferee Information Required. If Tenant desires to assign its
-------------------------------
interest in this Lease or sublet the Premises, or transfer any interest of
Tenant therein, or permit the use of the Premises by another party (hereinafter
collectively referred to as a "TRANSFER"), Tenant shall give Landlord at least
--------
twenty (20) business days prior written notice of the proposed Transfer and of
the terms of such proposed Transfer, including, but not limited to, the name and
legal composition of the proposed transferee, a financial statement of the
proposed transferee, the nature of the proposed transferee's business to be
carried on in the Premises (including a list of the type and quantities of all
Hazardous Materials to be used by the transferee on the Premises), the payment
to be made or other consideration to be given to Tenant on account of the
Transfer, and such other pertinent information as may be reasonably requested by
Landlord, all in sufficient detail to enable Landlord to evaluate the proposed
Transfer and the prospective transferee.
C. Landlord's Rights. It is the intent of the parties hereto that
-----------------
this Lease shall confer upon Tenant only the right to use and occupy the
Premises, and to exercise such other rights as are conferred upon Tenant by this
Lease. The parties agree that this Lease is not intended to have a bonus value
nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this
Lease or the right to use or occupy the Premises as a result of any favorable
terms contained herein, or future changes in the market for leased space. It is
the intent of the parties that any such bonus value that may attach to this
Lease shall be and remain the exclusive property of Landlord, except as provided
in Subparagraph 23.C.(ii) below. In the event Tenant seeks to Transfer its
interest in this Lease or the Premises, Landlord shall have the following
options, which shall be exercised by Landlord, within twenty (20) business days
of Landlord receiving all of the information regarding the Transfer that is
required under Subparagraph 23.B., at Landlord's sole choice without limiting
Landlord in the exercise of any other right or remedy which Landlord may have by
reason of such proposed Transfer:
(i) In the event of a Transfer constituting either an assignment
of the entire Lease or a sublease of substantially all of the Premises for all
or substantially all of the
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balance of the Lease Term, Landlord may elect to terminate this Lease effective
as of the proposed effective date of the proposed Transfer and release Tenant
from any further liability hereunder accruing after such termination date by
giving Tenant written notice of such termination within fifteen (15) days after
receipt by Landlord of Tenant's notice of intent to Transfer as provided above.
If Landlord makes such election to terminate this Lease, Tenant shall surrender
the Premises, in accordance with Paragraph 32, on or before the effective
termination date; or
(ii) Landlord may consent to the proposed Transfer on the
condition that Tenant agrees to pay to Landlord, as additional rent, fifty
percent (50%) of any and all rents or other consideration (including key money)
received by Tenant from the transferee by reason of such Transfer in excess of
the rent payable by Tenant to Landlord under this Lease (after reimbursement to
Tenant of any brokerage commissions, attorneys' fees and advertising expenses
incurred by Tenant in connection with the Transfer, and any tenant improvement
costs related to such Transfer that are incurred by Tenant). Tenant expressly
agrees that the foregoing is a reasonable condition for obtaining Landlord's
consent to any Transfer;
(iii) Landlord may consent to the proposed Transfer on the
condition that if such Transfer is an assignment that Landlord in its sole and
absolute discretion shall determine whether such Transfer shall include the
right to exercise the Options to extend the Lease Term;
(iv) Landlord may withhold its consent in its sole and absolute
discretion to the proposed Transfer if the Transfer is a sublease and the term
of the such sublease extends beyond the then existing Lease Term (the "then
existing Lease Term" shall not include any unexercised options to extend the
Lease Term); or
(v) Landlord may reasonably withhold its consent to the proposed
Transfer.
If Landlord agrees to consent to the proposed Transfer pursuant to Subparagraphs
23.C.(ii) or 23.C.(iii), Landlord shall provide such consent on Landlord's form
within ten (10) business days of Landlord electing such option and receiving the
final version of the document evidencing the Transfer.
D. Permitted Transfers. Notwithstanding the foregoing, Tenant may,
-------------------
without Landlord's prior written consent and without providing to Landlord the
option described in Subparagraph 23.C.(i) above, assign its interest in the
Lease or sublet the Premises or a portion thereof to (i) a subsidiary,
affiliate, division or corporation controlled by or under common control with
Tenant; (ii) a successor corporation related to Tenant by merger, consolidation,
non-bankruptcy reorganization or government action; or (iii) a purchaser of
substantially all of the Tenant's assets; provided that, in each instance
described above, (a) each assignee assumes the obligations of Tenant under this
Lease and each sublessee agrees to abide by this Lease in a
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<PAGE>
written instrument delivered to Landlord; (b) Tenant as transferor remains
liable as a primary obligor for the obligations of the tenant under this Lease;
and (c) the financial strength of the transferee tenant is no less than Tenant's
financial strength as of the Commencement Date or the date of such Transfer,
whichever is greater. Additionally, Tenant may, without Landlord's prior written
consent, sublease one (1) of the Buildings prior to taking occupancy thereof,
provided that (x) the sublessee agrees to abide by the obligations of Tenant
under this Lease in a written instrument delivered to Landlord; (y) Tenant as
transferor remains liable as a primary obligor for the obligations of the tenant
under this Lease; and (z) the term of the sublease does not exceed thirty-six
(36) months from the Commencement Date.
24. Successors. The covenants and agreements contained in this Lease
----------
shall be binding on and inure to the benefit of the parties hereto and on their
respective heirs, successors and assigns (to the extent the Lease is
assignable).
25. Mortgagee Protection. In the event of any default on the part of
--------------------
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage encumbering the
Premises, whose address shall have been previously furnished to Tenant in
writing by Landlord. Such beneficiary or mortgagee shall have the right to cure
Landlord's default and so long as such beneficiary or mortgagee is making
reasonable efforts to cure Landlord's default, including, but not limited to,
obtaining possession of the Premises by power of sale or judicial foreclosure,
if such should prove necessary to effect a cure, Tenant shall not have the right
to terminate this Lease.
26. Estoppel Certificate. Tenant and Landlord agree within ten (10) days
--------------------
following request by the other party to (A) execute and deliver to other party
any documents, including estoppel certificates presented to a party by the other
party, (1) certifying that this Lease is unmodified, or if modified, indicating
the modifications, and in full force and effect and the date to which the rent
and other charges are paid in advance, if any, and (2) acknowledging that there
are not, to such party's knowledge, any uncured defaults on the part of other
party hereunder, or specifying the defaults, if any, and (3) evidencing the
status of the Lease as may be reasonably required either by a lender making a
loan to Landlord or to Tenant to be secured by a deed of trust or mortgage
covering the Premises or a purchaser of the Premises from Landlord, and (B)
Tenant agrees to deliver to Landlord the financial statement of Tenant with an
opinion of a certified public accountant, including a balance sheet and profit
and loss statement, for the last completed fiscal year all prepared in
accordance with generally accepted accounting principles consistently applied.
Tenant's failure to deliver an estoppel certificate within ten (10) days
following a request by Landlord shall be an Event of Default under this Lease.
Landlord's failure to deliver an estoppel certificate within ten (10) days
following a request by Tenant shall be an event of default under this Lease.
27. Surrender of Lease Not Merger. The voluntary or other surrender of
-----------------------------
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger
and shall, at the option of Landlord, terminate all or any existing subleases or
subtenants, or operate as an assignment to
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<PAGE>
Landlord of any or all such subleases or subtenants.
28. Waiver. The waiver by Landlord or Tenant of any breach of any term,
------
covenant or condition herein contained shall not be deemed to be a waiver of
such term, covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained. Any waiver shall be in
writing and signed by both Landlord and Tenant.
29. General.
-------
A. Captions. The captions and paragraph headings used in this Lease
--------
are for the purposes of convenience only. They shall not be construed to limit
or extend the meaning of any part of this Lease, or be used to interpret
specific sections. The word(s) enclosed in quotation marks shall be construed as
defined terms for purposes of this Lease. As used in this Lease, the masculine,
feminine and neuter and the singular or plural number shall each be deemed to
include the other whenever the context so requires.
B. Definition of Landlord. The term Landlord as used in this Lease,
----------------------
so far as the covenants or obligations on the part of Landlord are concerned,
shall be limited to mean and include only the owner at the time in question of
the fee title of the Premises, and in the event of any transfer or transfers of
the title of such fee, the Landlord herein named (and in case of any subsequent
transfers or conveyances, the then grantor) shall be automatically freed and
relieved of all liability with respect to performance of any covenants or
obligations on the part of Landlord contained in this Lease to be performed
after the date of such transfer or conveyance which are assumed in writing by
the transferee; provided that any funds in the hands of Landlord or the then
grantor at the time of such transfer, in which Tenant has an interest, shall be
turned over to the grantee. It is intended that the covenants and obligations
contained in this Lease on the part of Landlord shall, subject as aforesaid, be
binding upon each Landlord, its heirs, personal representatives, successors and
assigns only with respect to the obligations of Landlord arising during its
respective period of ownership.
C. Time of Essence. Time is of the essence for the performance of
---------------
each term, covenant and condition of this Lease.
D. Severability. In case any one or more of the provisions contained
------------
herein, except for the payment of rent, shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Lease, but this
Lease shall be construed as if such invalid, illegal or unenforceable provision
had not been contained herein. This Lease shall be construed and enforced in
accordance with the laws of the State of California.
E. Quiet Enjoyment. Upon Tenant paying the rent for the Premises and
---------------
observing and performing all of the covenants, conditions and provisions on
Tenant's part to be observed and performed hereunder, Tenant shall have quiet
possession of the Premises for the
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<PAGE>
entire term hereof subject to all of the provisions of this Lease.
F. Law. As used in this Lease, the term "LAW" or "LAWS" shall mean
--- --- ----
any judicial decision, statute, constitution, ordinance, resolution, regulation,
rule, administrative order, or other requirement of any government agency or
authority having jurisdiction over the parties to this Lease or the Premises or
both, in effect at the Commencement Date of this Lease or any time during the
Lease Term, including, without limitation, any regulation, order, or policy of
any quasi-official entity or body (e.g., board of fire examiners, public utility
----
or special district).
G. Agent. As used in this Lease, the term "AGENT" shall mean, with
----- -----
respect to either Landlord or Tenant, its respective agents, employees,
contractors (and their subcontractors), and invitees (and in the case of Tenant,
its subtenants).
H. Lender. As used in this Lease, the term "LENDER" shall mean any
------ ------
beneficiary, mortgagee, secured party or other holder of any deed of trust,
mortgage or other written security device or agreement affecting Landlord's
interest in the Premises.
I. Force Majeure. Any prevention, delay or stoppage due to strikes,
-------------
lock-outs, inclement weather, labor disputes, inability to obtain labor,
materials, fuels or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other acts
of God, and other causes beyond the reasonable control of the party obligated to
perform (except financial inability) shall excuse the performance, for a period
equal to the period of any said prevention, delay or stoppage, or any obligation
hereunder except the obligation of Tenant to pay rent or any other sums due
hereunder.
30. Sign. Tenant shall not place or permit to be placed any sign or
----
decoration on the Parcel or the exterior of any of the Buildings without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld or delayed. Tenant, upon written notice by Landlord, shall immediately
remove any sign or decoration that Tenant has placed or permitted to be placed
on the Parcel or the exterior of any of the Buildings without the prior written
consent of Landlord, and if Tenant fails to so remove such sign or decoration
within five (5) days after Landlord's written notice, Landlord may enter upon
the Premises and remove said sign or decoration and Tenant agrees to pay
Landlord, as additional rent upon demand, the cost of such removal. At the
termination of this Lease, Tenant shall remove any sign which it has placed on
the Parcel or any of the Buildings and shall repair any damage caused by the
installation or removal of such sign.
31. Interest on Past Due Obligations. Any Monthly Installment of rent due
--------------------------------
from Tenant, or any other sum due under this Lease from Tenant, which is
received by Landlord after the date ten (10) days following the date written
notice is given by Landlord to Tenant that such sum has not been paid when due,
shall bear interest from said due date until paid, at an annual rate equal to
the lower of (the "PERMITTED RATE"): (1) twelve percent (12%); or (2) five
--------------
percent
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<PAGE>
(5%) plus the rate established by the Federal Reserve Bank of San Francisco,
as of the twenty-fifth (25th) day of the month immediately preceding the due
date, on advances to member banks under Sections 13 and 13(a) of the Federal
Reserve Act, as now in effect or hereafter from time to time amended. Payment
of such interest shall not excuse or cure any default by Tenant. In addition,
Tenant shall pay all costs and attorneys' fees reasonably incurred by Landlord
in collection of such amounts.
32. Surrender of the Premises. On the last day of the term hereof, or on
-------------------------
the sooner termination of this Lease, Tenant shall surrender the Premises to
Landlord in their condition existing as of the Commencement Date of this Lease,
except for (A) ordinary wear and tear; (B) acts of God; (C) condemnation; (D)
Hazardous Materials which Tenant is not responsible for pursuant to this Lease;
and (E) all alterations, improvements or additions which Tenant is not required
to remove pursuant to this Lease. Tenant shall surrender the Premises with all
originally painted interior walls washed, and other interior walls cleaned, and
repaired or replaced, the air conditioning and heating equipment serviced and
repaired by a reputable and licensed service firm as required by Paragraph 10.B.
hereof, all floors cleaned and waxed, all to the reasonable satisfaction of
Landlord. Tenant shall remove all of Tenant's Property from the Premises, and
all property not so removed shall be deemed abandoned by Tenant. Tenant, at its
sole cost, shall repair any damage to the Premises caused by the removal of
Tenant's Property, which repair shall include, without limitation, the patching
and filling of holes and repair of structural damage. If the Premises are not so
surrendered at the termination of this Lease, Tenant shall indemnify, defend,
protect and hold Landlord harmless from and against loss or liability resulting
from delay by Tenant in so surrendering the Premises including without
limitation, any claims made by any succeeding tenant or losses to Landlord due
to lost opportunities to lease to succeeding tenants.
33. Authority. The undersigned parties hereby warrant that they have
---------
proper authority and are empowered to execute this Lease on behalf of Landlord
and Tenant, respectively.
34. CC&Rs. This Lease is made subject to all matters of public record
-----
affecting title to the property of which the Premises are a part as described in
the Preliminary Title Report dated October 2, 1996, prepared by Santa Clara Land
Title Company, Order No. 00121233, a copy of which is attached hereto as Exhibit
-------
"G" (the "TITLE REPORT"). Tenant shall abide by and comply with all private
- --- ------------
conditions, covenants and restrictions of public record now or hereafter
affecting the Premises as described on Exhibit "H" with reference to the Title
-----------
Report ("CC&RS"), except as may be otherwise provided in Exhibit "H". Landlord
----- -----------
represents and warrants that to its actual knowledge no violation of the CC&Rs
exists as of the date of this Lease. During the Lease Term, Landlord shall
promptly notify Tenant of any modification to the CC&Rs.
35. Brokers. The parties represent and warrant to each other that they
------
have not dealt with any broker respecting this transaction other than
Cooper/Brady Corporate Real Estate Services (the "BROKER") and hereby agree to
------
indemnify and hold each other harmless from and
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<PAGE>
against any brokerage commission or fee, obligation, claim or damage (including
attorneys' fees) paid or incurred respecting any broker claiming through the
other party or with which/whom the other party has dealt. Landlord shall pay
commission owing to the Broker pursuant to a separate agreement between Landlord
and the Broker.
36. Limitation on Landlord's Liability. Tenant, for itself and its
----------------------------------
successors and assigns (to the extent this Lease is assignable), hereby agrees
that in the event of any actual, or alleged, breach or default by Landlord under
this Lease that:
A. Tenant's sole and exclusive remedy and recourse against
Landlord shall be as against Landlord's interest in the Premises and this Lease;
B. No partner of Landlord shall be sued or named as a party in a
suit or action (except as may be necessary to secure jurisdiction of the
partnership) for the breach of any obligation of Landlord or the act or omission
of Landlord or its Agents;
C. No service of process shall be made against any partner of
Landlord with respect to any claim arising under or out of this Lease (except as
may be necessary to secure jurisdiction of the partnership);
D. No partner of Landlord shall be required to answer or otherwise
plead to any service of process with respect to any claim arising under or out
of this Lease (except as may be necessary to secure jurisdiction of the
partnership);
E. No judgment will be taken against any partner of Landlord for
the breach of any obligation of Landlord or the act or omission of Landlord or
its Agents; F. Any such judgment taken against any partner of Landlord may be
vacated and set aside at any time nunc pro tunc;
G. No writ of execution will ever be levied against the assets of
any partner of Landlord for a judgment based on any breach of a Landlord's
obligations under this Lease or any act or omission of Landlord; and
H. The covenants and agreements of Tenant set forth in this
Paragraph 36 shall be enforceable by Landlord and any partner of Landlord.
37. Hazardous Material.
------------------
A. Definitions. As used herein, the term "HAZARDOUS MATERIAL"
----------- ------------------
shall mean any substance: (i) the presence of which requires investigation or
remediation under any federal, state or local statute, regulation, ordinance,
order, action, policy or common law; (ii) which is or becomes defined as a
"hazardous waste," "hazardous substance," pollutant or contaminant under
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<PAGE>
any federal, state or local statute, regulation, rule or ordinance or amendments
thereto including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and/or the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii)
which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by
any governmental authority, agency, department, commission, board, agency or
instrumentality of the United States, the State of California or any political
subdivision thereof; (iv) the presence of which on the Premises causes or
threatens to cause a nuisance upon the Premises or to adjacent properties or
poses or threatens to pose a hazard to the health or safety of persons on or
about the Premises; (v) the presence of which on adjacent properties could
constitute a trespass by Landlord or Tenant; (vi) without limitation which
contains gasoline, diesel fuel or other petroleum hydrocarbons; (vii) without
limitation which contains polychlorinated biphenyls (PCBs), asbestos or urea
formaldehyde foam insulation; or (viii) without limitation radon gas.
B. Landlord's Obligation. Except for the Existing Environmental
---------------------
Condition (as defined in Subparagraph 37.L. hereof), Landlord has no actual
knowledge, without any duty to make investigation, of any Hazardous Materials
present in the soil or groundwater of the Parcel. Landlord, at its sole cost,
shall comply with all Laws which impose liability or responsibility upon either
Landlord or Tenant to investigate, remediate or otherwise take any action with
respect to the Existing Environmental Condition; provided, however, that this
covenant shall not require Landlord to perform any obligation Tenant has under
this Paragraph 37. Subject to Subparagraph 8.E., Landlord shall indemnify,
defend, protect and hold Tenant harmless from and against all liabilities,
claims, penalties, fines, response costs and other expenses (including
reasonable attorneys' fees) which result from Landlord's failure to timely
perform the obligation stated in the immediate preceding sentence.
C. Permitted Use. Subject to the compliance by Tenant with the
-------------
provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be
permitted to use and store on the Premises those Hazardous Materials listed in
Exhibit "E" attached hereto, in the quantities set forth in Exhibit "E" and
- ----------- -----------
such other Hazardous Materials approved by Landlord in writing.
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<PAGE>
D. Hazardous Materials Management Plan.
-----------------------------------
(i) Prior to Tenant or its subtenant using, handling,
transporting or storing any Hazardous Material at or about the Premises
(including, without limitation, those listed in Exhibit "E" other than customary
-----------
quantities of janitorial and office supplies), Tenant shall submit to Landlord a
Hazardous Materials Management Plan ("HMMP") for Landlord's review and
----
approval, which approval shall not be unreasonably withheld. The HMMP shall
describe: (aa) the quantities of each material to be used, (bb) the purpose for
which each material is to be used, (cc) the method of storage of each material,
(dd) the method of transporting each material to and from the Premises and
within the Premises, (ee) the methods Tenant will employ to monitor the use of
the material and to detect any leaks or potential hazards, and (ff) any other
information any department of any governmental entity (city, state or federal)
requires prior to the issuance of any required permit for the Premises or during
Tenant's occupancy of the Premises. Landlord may, but shall have no obligation
to review and approve the foregoing information and HMMP, and such review and
approval or failure to review and approve shall not act as an estoppel or
otherwise waive Landlord's rights under this Lease or relieve Tenant of its
obligations under this Lease; provided that a failure to review and approve
within a reasonable time shall not be deemed a disapproval. If Landlord
determines in good faith by inspection of the Premises or review of the HMMP
that the methods in use or described by Tenant are not adequate in Landlord's
good faith judgment to prevent or eliminate the existence of environmental
hazards, then Tenant shall not use, handle, transport, or store such Hazardous
Materials at or about the Premises unless and until such methods are approved by
Landlord in good faith and added to an approved HMMP. Once approved by Landlord,
Tenant shall strictly comply with the HMMP and shall not change its use,
operations or procedures with respect to Hazardous Materials without submitting
an amended HMMP for Landlord's review and approval as provided above.
(ii) Tenant shall pay to Landlord when Tenant submits an HMMP
(or amended HMMP) the amount reasonably determined by Landlord to cover all
Landlord's costs and expenses reasonably incurred in connection with Landlord's
review of the HMMP which costs and expenses shall include, among other things,
all reasonable out-of-pocket fees of attorneys, architects, or other consultants
incurred by Landlord in connection with Landlord's review of the HMMP. Landlord
shall have no obligation to consider a request for consent to a proposed HMMP
unless and until Tenant has paid to Landlord its reasonable estimate of all such
costs and expenses to Landlord, and Tenant shall pay all such costs and expenses
to Landlord irrespective of whether Landlord consents to such proposed HMMP.
Tenant shall pay to Landlord on demand the excess, if any, of such costs and
expenses actually incurred by Landlord over the amount of such costs and
expenses actually paid by Tenant, and Landlord shall promptly refund to Tenant
the excess, if any, of such costs and expenses actually paid by Tenant over the
amount of such costs and expenses actually incurred by Landlord.
E. Use Restriction. Except as specifically allowed in
---------------
Subparagraph C above, Tenant shall not cause or permit any Hazardous Material to
be used, stored, generated,
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<PAGE>
discharged, transported to or from, or disposed of in or about the Premises, or
any other land or improvements in the vicinity of the Premises. Without limiting
the generality of the foregoing, Tenant, at its sole cost, shall comply with all
Laws relating to the storage, use, generation, transport, discharge and disposal
by Tenant or its Agents of any Hazardous Material. If the presence of any
Hazardous Material on the Premises (other than an Existing Environmental
Condition) caused or permitted by Tenant or its Agents results in contamination
of the Premises or any soil, air, ground or surface waters under, through, over,
on, in or about the Premises, Tenant, at its expense, shall promptly take all
actions necessary to return the Premises and/or the surrounding real property to
the condition existing prior to the appearance of such Hazardous Material to the
extent feasible and in all events, to a condition which complies with applicable
Environmental Law. In the event there is a release, discharge or disposal of or
contamination of the Premises by a Hazardous Material which is of the type that
has been stored, handled, transported or otherwise used or permitted by Tenant
or its Agents on or about the Premises (other than an Existing Environmental
Condition), Tenant shall have the burden of proving that such release,
discharge, disposal or contamination is not the result of the acts or omissions
of Tenant or its Agents.
F. Tenant Indemnity. Tenant shall defend, protect, hold harmless
----------------
and indemnify Landlord and its Agents and Lenders with respect to all actions,
claims, losses (including, diminution in value of the Premises), fines,
penalties, fees (including, but not limited to, attorneys' and consultants'
fees) costs, damages, liabilities, remediation costs, investigation costs,
response costs and other expenses arising out of, resulting from, or caused by
(i) any Hazardous Material used, generated, discharged, transported to or from,
stored, or disposed of by Tenant or its Agents in, on, under, over, through or
about the Premises and/or the surrounding real property or (ii) any disposal or
release of any Hazardous Material on the surface of the Premises occurring after
the Commencement Date and prior to the termination of this Lease that is not the
result of the negligent acts or willful misconduct of Landlord or its Agents;
provided that in no event shall the foregoing create any liability in Tenant for
an Existing Environmental Condition. Tenant shall not suffer any lien to be
recorded against the Premises as a consequence of the disposal of any Hazardous
Material on the Premises by Tenant or its Agents, including any so called state,
federal or local "super fund" lien related to the "clean up" of any such
Hazardous Material in, over, on, under, through, or about the Premises.
G. Compliance. Tenant shall immediately notify Landlord, and
----------
Landlord shall notify Tenant, of any inquiry, test, investigation, enforcement
proceeding by or against Tenant or the Premises concerning contamination of the
Premises caused by any Hazardous Material. Any remediation plan prepared by or
on behalf of Tenant must be submitted to Landlord prior to conducting any work
pursuant to such plan and prior to submittal to any applicable government
authority and shall be subject to Landlord's consent which consent shall not be
unreasonably withheld or delayed. Tenant acknowledges that Landlord, as the
owner of the Property, at its election, shall have the sole right to negotiate,
defend, approve and appeal any action taken or order issued with regard to any
Hazardous Material by any applicable governmental authority.
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<PAGE>
H. Assignment and Subletting. It shall not be unreasonable for
-------------------------
Landlord to withhold its consent to any proposed assignment or subletting if (i)
the proposed assignee's or subtenant's anticipated use of the Premises involves
the storage, generation, discharge, transport, use or disposal of any Hazardous
Material (other than reasonable quantities of office supplies, warehouse
supplies and janitorial supplies that may contain Hazardous Materials) in a
manner which represents a risk to the health and safety of persons on or about
the Premises, and in Landlord's opinion, that risk is a material risk; (ii) if
the proposed assignee or subtenant has been required by any prior landlord,
lender or governmental authority to "clean up" or remediate any Hazardous
Material resulting from the negligence or affirmative actions of the proposed
assignee or subtenant within the last five (5) years; (iii) if the proposed
assignee or subtenant is subject to investigation or enforcement order or
proceeding by any governmental authority in connection with the use, generation,
discharge, transport, disposal or storage of any Hazardous Material resulting
from the negligence or affirmative actions of the proposed assignee or subtenant
within the last five (5) years.
I. Surrender. Upon the expiration or earlier termination of the
---------
Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the
Premises that Tenant or its Agents introduced to the Premises. If Tenant fails
to so surrender the Premises, Tenant shall indemnify, protect, defend and hold
Landlord harmless from and against all damages to the extent resulting from
Tenant's failure to surrender the Premises as required by this Paragraph,
including, without limitation, any actions, claims, losses, liabilities, fees
(including, but not limited to, attorneys' and consultants' fees), fines, costs,
penalties, or damages in connection with the condition of the Premises
including, without limitation, damages occasioned by the inability to relet the
Premises or a reduction in the fair market and/or rental value of the Premises
by reason of the existence of any Hazardous Material that Tenant or its Agents
introduced in, on, over, under, through or around the Premises.
J. Right to Appoint Consultant. If Tenant or its Agents have used
---------------------------
Hazardous Materials (other than customary quantities of janitorial or office
supplies), Landlord shall have the right to appoint a consultant, at Tenant's
expense, to conduct an investigation to determine whether any Hazardous Material
is being used, generated, discharged, transported to or from, stored or disposed
of in, on, over, through, or about the Premises, in an inappropriate or unlawful
manner. If Tenant has violated any Law or covenant in this Lease regarding the
use, storage or disposal of Hazardous Materials on or about the Premises, Tenant
shall reimburse Landlord for the cost of such investigation. Tenant, at its
expense, shall comply with all reasonable recommendations of the consultant or
take other steps approved by Landlord required to conform Tenant's use, storage
or disposal of Hazardous Materials to the requirements of applicable Law or to
fulfill the obligations of Tenant hereunder.
K. Holding Over. If during the Lease Term, Tenant or any of its
------------
Agents is required to take any action of any kind required or requested to be
taken by any governmental authority to clean-up, remove, remediate or monitor
any Hazardous Material (the presence of
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<PAGE>
which is the result of the acts or omissions of Tenant or its Agents and other
than an Existing Environmental Condition) and such action is not completed prior
to the expiration or earlier termination of the Lease, Tenant shall be deemed to
have impermissibly held over until such time as such required action is
completed, and Landlord shall be entitled to all damages directly or indirectly
incurred in connection with such holding over, including without limitation,
damages occasioned by the inability to re-let the Premises or a reduction of the
fair market and/or rental value of the Premises.
L. Existing Environmental Reports. Tenant hereby acknowledges
------------------------------
that it has received, read and reviewed the reports and test results described
in Exhibit "F" attached hereto and made a part hereof (the "EXISTING
----------- --------
ENVIRONMENTAL REPORTS"). The Hazardous Materials currently present in, on or
- ---------------------
under the Premises or the soil, groundwater, surface water or air thereof, or
in, on, or under any property in the vicinity of the Premises, or the soil,
groundwater, surface water or air thereof, as described in the Existing
Environmental Reports are referred to herein as the "EXISTING ENVIRONMENTAL
----------------------
CONDITION". Tenant shall keep the Existing Environmental Reports
- ----------
and all information contained therein confidential, except Tenant shall be
allowed to disclose such information to Tenant's consultants and attorneys
provided such parties agree to keep the information confidential.
M. Provisions Survive Termination. The provisions of this
------------------------------
Paragraph 37 shall survive the expiration or termination of this Lease.
N. Controlling Provisions. The provisions of this Paragraph 37
----------------------
are intended to govern the rights and liabilities of the Landlord and Tenant
under this Lease respecting Hazardous Materials to the exclusion of any other
provisions in this Lease that might otherwise be deemed applicable. The
provisions of this Paragraph 37 shall be controlling with respect to any
provisions in this Lease that are inconsistent with this Paragraph 37.
38. Landlord's Default.
------------------
A. If Tenant believes Landlord has failed to perform or provide
any service or pay any sum which Tenant in good faith believes Landlord is
obligated to provide, perform or pay under this Lease, Tenant shall provide
Landlord with written notice thereof. If Landlord does not perform or provide
the required service or make such required payment within thirty (30) days after
receipt of Tenant's notice (or if such failure cannot be cured within such
thirty (30) day period, if Landlord does not promptly commence to provide or
cure the same and diligently pursue the same to completion), Tenant shall have
the right to provide, perform or pay the same. If Tenant, after such notice,
provides and performs such service or makes such payment and sends to Landlord a
written statement reflecting the reasonable costs for providing the same or the
amount paid and Landlord fails to pay the same within twenty (20) days after
receipt of such notice, Tenant shall have the right to seek and obtain damages
from Landlord.
B. In the event of any default by Landlord, Tenant's exclusive
remedies shall
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<PAGE>
be an action for specific performance or an action for damages. Tenant hereby
waives the benefit of any laws granting it the right to terminate this Lease or
withhold rent on account of any Landlord default. Tenant waives the provisions
of Sections 1932(l), 1941 and 1942 of the California Civil Code and any similar
or successor law regarding Tenant's right to terminate this Lease or to make
repairs and deduct the expenses of such repairs from the rent due under this
Lease.
39. Condition to Effectiveness. The effectiveness of this Lease is
--------------------------
conditioned upon Landlord obtaining architectural approval by April 1, 1997 from
the City of Santa Clara for the construction of the ninety eight thousand four
hundred thirty (98,430) square foot building described in the Lease Agreement
between Landlord and Tenant dated concurrently with this Lease. This condition
is for the benefit of Tenant and Tenant may waive this condition by written
notice to Landlord on or before April 1, 1997. If on or before April 1, 1997
this condition is neither fulfilled nor waived by Tenant, then this Lease shall
automatically terminate, Landlord shall return the Security Deposit to Tenant
and the parties shall have no further rights or obligations hereunder. If this
condition is fulfilled or waived by Tenant on or before April 1, 1997, then this
Lease shall continue in full force and effect. Landlord shall use good faith and
all reasonable efforts to obtain the architectural approval by April 1, 1997.
-38-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
set forth below.
LANDLORD TENANT
South Bay/San Tomas Associates, Auspex Systems, Inc.,
a California general partnership a Delaware corporation
By: CIIF Associates II Limited By: _____________________
partnership, a Delaware limited
partnership, its general partner Its: VP & CFO
By: AEW Advisors, Inc.,
a Massachusetts corporation,
its managing general partner
By: /s/ Christopher Kazantis
Its: Vice President
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<PAGE>
EXHIBIT "A"
Legal Description of Parcel
---------------------------
All that certain real property situate in the City of Santa Clara, County of
Santa Clara, State of California, described as follows:
PARCEL ONE:
Parcel 1, as shown on that certain Parcel Map filed for record in the Office of
the Recorder of the County of Santa Clara State of California on May 13, 1993 in
Book 646 of Maps, Pages 46 thru 49.
RESERVING THEREFROM an easement for ingress and egress and for Emergency Vehicle
Ingress and Egress for the benefit of Parcel 2, as shown and designated P.I.E.E.
and E.V.I.E.E. established herein to benefit Parcel 2 on the map hereinabove
referred to.
Reserving therefrom an easement for Landscape purposes for the benefit of Parcel
2, as shown and designated as P.L.E. established herein to benefit Parcel 2 on
the map herein above referred to.
PARCEL TWO
An easement for ingress and egress over Parcel 1, of Parcel Map filed for record
on September 19, 1990 in Book 618 of Maps, Pages 36, 37 and 38, shown as
Ingress-Egress over Parcel 1 for the benefit of Parcel 2, as reserved in the
Deed recorded October 156, 1990 in Book L 508, Page 283, Official Records.
PARCEL THREE
An easement for storm drain over all those portions of Parcel 2, designated "10'
S.D.E. Established hereon To Benefit Parcel 1", as shown on the Parcel Map filed
for record in the Office of the Recorder of the County of Santa Clara, State of
California on May 13, 1993 in Book 646 of Maps, Pages 46 thru 49, pursuant to
that certain Declaration of Covenants, Conditions, Restrictions and Easements
recorded May 13, 1993 in Book M 775, Page 1281, Official Records
PARCEL FOUR
An easement for sanitary sewer over that portion of Parcel 4, designated "15' x
438.12' P.S.S.E. Established Hereon To Benefit Parcels 1 and 2", as shown on the
Parcel Map filed for record in the Office of the Recorder of the County of Santa
Clara, State of California on May 13, 1993 in
-40-
<PAGE>
Book 646 of Maps, Pages 46 thru 49, pursuant to that certain Declaration of
Covenants, Conditions, Restrictions and Easements recorded May 13, 1993 in Book
M 775, Page 1281, Official Records
PARCEL FIVE
An easement for sanitary sewer over all those portions of Parcel 2, designated
P.S.S.E. Established Hereon to Benefit Parcel 1", as shown on the Parcel Map
filed for record in the Office of the Recorder of the County of Santa Clara,
State of California on May 13, 1993 in Book 646 of Maps, Pages 46 thru 49,
pursuant to that certain Declaration of Covenants, Conditions, Restrictions and
Easements recorded May 13, 1993 in Book M 775, Page 1281, Official Records.
ARB No: 224-10-100
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<PAGE>
EXHIBIT "B"
Site Plan
---------
[Diagram showing an area of approximately one hundred seventy one thousand
three hundred eighty two (171,382) square feet consisting of three (3) two (2)
story buildings located on the Central Expressway in the city of Santa Clara,
State of California, together with related driveways, parking areas, and nearby
buildings.]
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<PAGE>
EXHIBIT "C"
Improvement Agreement
---------------------
THIS IMPROVEMENT AGREEMENT by and between SOUTH BAY/SAN TOMAS ASSOCIATES
("Landlord") and AUSPEX SYSTEMS, INC. ("Tenant"), dated January, 1997, is made
part of that Lease (the "Lease"), between Landlord and Tenant, dated
concurrently herewith. Landlord and Tenant agree that the following terms are
part of the lease:
1. Definitions: Except as defined below, capitalized terms in this
-----------
Improvement Agreement shall have the meanings given those terms in the Lease.
(a) Architect shall collectively mean all architects, structural
---------
engineers, mechanical engineers, and other design professionals retained by
Landlord and needed to design the Tenant Improvements.
(b) Applicable Laws and Restrictions shall mean all laws
--------------------------------
(including without limitation the Americans With Disabilities Act), building
codes, ordinances, regulations, title covenants, conditions and restrictions.
(c) Approved Plans shall mean the Final Tenant Improvement Plans,
--------------
as the same may be modified by a Change Order issued in accordance with this
Improvement Agreement.
(d) Building shall mean each Building Shell and the Tenant
--------
Improvements therein.
(e) Buildings shall mean all of the Building Shells and all of the
---------
Tenant Improvements.
(f) Building Shell shall mean each (concrete or two story tilt-up
--------------
R&D building), having the general specifications described on attached Exhibit
-------
1, which shall be constructed by Landlord for Tenant generally in the
- -
location and configuration shown on Exhibit B to the Lease.
(g) Construction Documents shall mean the Final Tenant Improvement
----------------------
Plans, and any and all bid packages, contracts with Contractors and agreement
with the Architect.
(h) Contractor(s) shall mean South Bay Construction and
-------------
Development Company and all other contractors, design-build contractors,
subcontractors, and material supplies who provide labor and material for
construction of the Tenant Improvements. To the extent required by Applicable
Laws and Restrictions, each Contractor shall be duly licensed by the State of
California.
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<PAGE>
(i) Construction Schedule shall mean the schedule for the
---------------------
commencement, prosecution and Substantial Completion of the Tenant Improvements,
which shall be in substantially the form of attached Exhibit 2, and which shall
---------
be approved by the parties pursuant to this Improvement Agreement and, when
agreed upon attached hereto in replacement of Exhibit 2 and incorporated
---------
herein by this reference.
(j) Final Tenant Improvement Plans shall mean those plans,
------------------------------
specifications and working drawings for the Tenant Improvements, which shall be
prepared, approved and identified in Exhibit 3 when approved in writing by
---------
Landlord and Tenant, and thereafter incorporated herein by this reference.
(k) Force Majeure shall mean any prevention, delay or stoppage due
-------------
to strikes, lock-outs, inclement weather, labor disputes, inability to obtain
labor, materials, fuels or reasonable substitutes therefor, governmental
restrictions, regulations, controls, action or inaction, civil commotion, fire
or other acts of God, and other causes beyond the reasonable control of the
party obligated to perform (except financial inability) shall excuse the
performance, for a period equal to the period of any said prevention, delay or
stoppage, or any obligation hereunder except the obligation of Tenant to pay any
sums due hereunder.
(l) Landlord's Representative shall mean Scott Trobbe, whose
-------------------------
telephone number is (408) 379-0400, whose facsimile number is (408) 379-3229,
and whose address for delivered notice is South Bay Development Company, Inc.,
511 Division Street, Campbell, California 95008, or such other person as
Landlord shall designate in writing to Tenant as its authorized representative
for the proposes of administering this Improvement Agreement. Landlord's
Representative may change its numbers and address by deliver of three (3)
business days notice to Tenant's Representative.
(m) Planning Schedule shall mean the schedule for the preparation,
-----------------
approval and permitting of the Approved Plans for the Tenant Improvements
attached hereto as Exhibit 4, and incorporated herein by this reference.
---------
(n) Permits shall mean all of the permits, inspections, approvals
-------
and consents of governmental authorities.
(o) Substantial Completion shall mean that (i) the Tenant
----------------------
Improvements have been completed in accordance with the provisions of this
Improvement Agreement and the Final Tenant Improvement Plans therefor (except
for minor punchlist items which do not substantially interfere with Tenant's use
of the Premises), (ii) all utilities are connected and available for Tenant's
use, and (iii) all necessary governmental approvals for occupancy of the
Buildings have been obtained (including, if applicable, a certificate of
occupancy); provided, however that, to the extent that Substantial Completion of
the Buildings is delayed because of a Tenant Delay, the Substantial Completion
Date shall be deemed to be the date the Buildings would have otherwise
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<PAGE>
been Substantially Completed, absent the Tenant Delay.
(p) Tenant Delay shall mean any delay in the Substantial
------------
Completion of the Tenant Improvements as a consequence of (i) Tenant's failure
to promptly review and approve or properly disapprove plans for the Tenant
Improvements in accordance with this Improvement Agreement and within the time
permitted by the Planning Schedule; (ii) Tenant's request for special materials,
finishes, or installations which are not readily available, provided the length
of Tenant Delay due to such unavailability shall not exceed the amount of delay
approved by Tenant when such materials, components, finish, or improvements were
requested by Tenant; (iii) Change Orders requested by Tenant and approved by
Landlord, provided that the amount of Tenant Delay as a consequence of any
Change Order may not exceed the amount of delay specified in the Change Order;
(iv) Tenant's failure to complete any of its own improvement work identified in
the Construction Schedule as being necessary for the Substantial Completion of
the Tenant Improvements by the date specified in the Construction Schedule for
completion of such work; (v) interference with Landlord's work caused by Tenant
or Tenant's contractors or subcontractors.
(q) Tenant Improvements shall mean those improvements that
-------------------
Landlord is obligated to construct in the Premises pursuant to Final Tenant
Improvement Plans.
(r) TI Allowance shall mean an amount equal to Four Million Two
------------
Hundred Eighty Four Thousand Five Hundred Fifty Dollars ($4,284,550), which
allowance is already reflected in the Monthly Installment amount set forth in
Subparagraph 4.B. of the Lease.
(s) TI Costs shall mean all sums (i) paid to Contractors for labor
--------
and materials furnished in connection with construction of the Tenant
Improvements; (ii) all costs, expenses, payments, fees, and charges whatsoever
paid or incurred by Landlord to or at the direction of any city, county, or
other governmental authority or agency which are required to be paid by Landlord
in order to obtain all necessary governmental permits, licenses, inspections and
approvals relating to the construction of the Tenant Improvements and the use
and occupancy of the Premises, including without limitation all in lieu fees and
utility fees; (iii) engineering and architectural fees for services required in
connection with the design and construction of the Tenant Improvements; and (iv)
premiums, if any, for course of construction insurance and for payment and
completion bonds relating only to construction of the Tenant Improvements. In no
event shall TI Costs include any of the following, all of which shall be the
sole obligation of Landlord: (a) any cost attributable to the Building Shell,
including without limitation the cost to design, permit, or construct the
Building Shell improvements described on Exhibit 1 to this Exhibit "C", (b)
--------- -----------
charges and expenses for changes to the Construction Documents which have not
been approved in writing by Tenant, except for those changes to the Construction
Documents required by governmental authority, (c) wages, labor and overhead for
overtime and premium time, unless approved in writing by Tenant; (d) additional
costs and expenses incurred by Landlord on account of any Contractors' or
Architects' default or construction defects in the Improvements; (e) interest
and fees for construction financing; (f) labor and overhead costs for
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<PAGE>
Landlord's employees and office; and (g) bond premiums.
(t) TI Cost Estimate shall mean the total estimated cost of
----------------
constructing the Tenant Improvements prepared and approved by Landlord and
Tenant in accordance with this Improvement Agreement, as modified by change
orders issued in accordance with this Improvement Agreement.
2. Designation of Representative. Landlord and Tenant hereby
-----------------------------
respectively appoint Landlord's Representative and Tenant's Representative as
its sole representative for the purposes of this Improvement Agreement. Until
replaced by written notice, Landlord's Representative and Tenant's
Representative shall have the full authority and responsibility to act on behalf
of Landlord and Tenant, respectively, as required in this Improvement Agreement.
3. Preparation and Approval of Plans.
---------------------------------
(a) Retention of Architect(s). Tenant shall retain the
-------------------------
Architect(s) to prepare the plans and specifications for the Tenant
Improvements, subject to Landlord's reasonable approval.
(b) Tenant Improvement Plans.
------------------------
(i) To facilitate timely commencement and Substantial
Completion of the Tenant Improvements, within the time specified in the Planning
Schedule, Tenant shall prepare and submit to Landlord for Landlord's approval
the Tenant's design requirements for the Tenant Improvements. At such time as
Landlord has approved the Tenant's design requirements and within the time
provided in the Planning Schedule, Landlord shall cause the Architect to proceed
with the preparation of preliminary plans and specifications, and a preliminary
cost estimate for the Tenant Improvements and shall notify Tenant of any
revisions that may need to be made to the previously approved construction
schedule. Tenant shall review and approve or disapprove of such items and any
changes in the Construction Schedule within the time permitted by the Planning
Schedule. If Tenant does not approve any preliminary plan or specification, the
preliminary cost estimate, or a construction schedule change, Tenant and
Landlord shall work with the Architect and negotiate in good faith to reach
agreement on all such items within the time permitted by the Planning Schedule.
(ii) When the preliminary space plans, elevations, preliminary
cost estimate and any Construction Schedule changes have been approved by
Tenant, Landlord shall cause the Architect to prepare and deliver to Tenant by
the date specified in the Planning Schedule (i) proposed final plans,
specifications and working drawings for the Tenant Improvements, (ii) a proposed
final TI Cost Estimate, and (iii) a proposed final Construction Schedule for the
Improvements substantially in the form of attached Exhibit 2, all of which
---------
shall be consistent with, and logical evolutions of the preliminary plans and
elevations approved by Tenant pursuant to the foregoing, the terms of this
Improvement Agreement and the Construction
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<PAGE>
Schedule and the changes thereto previously approved by the parties. Tenant
shall review and approve the proposed final plans, specifications, and working
drawings for the Tenant Improvements, the proposed TI Cost Estimate, or the
proposed final Construction Schedule within the time permitted by the Planning
Schedule. If Tenant reasonably disapproves of the plans, specifications or
working drawings for the Tenant Improvements (which disapproval can only be
based upon whether such plans, specification or working drawings are consistent
with the preliminary plans), the proposed TI Cost Estimate, and/or the proposed
final Construction Schedule, then Landlord and Tenant shall negotiate in good
faith, using all reasonable efforts to reach agreement on such items within the
time specified in the Planning Schedule; provided, however, that Landlord shall
not unreasonably withhold its approval of such change requested by Tenant to the
Tenant Improvements which does not materially delay the Scheduled Completion
Date for the Tenant Improvements nor materially increase the cost that will be
incurred by Landlord in constructing the Tenant Improvements. If Tenant
believes that the cost estimate is incorrect, it may require that all or any
portion of the work be submitted for competitive bids, in which case the amount
for the rebid work included in the TI Cost Estimate shall not exceed the lowest
responsible bid(s) from responsible Contractor(s) and Supplier(s) for such work.
The plans, specifications, and working drawings for the Tenant Improvements, the
final TI Cost Estimate, and the Construction Schedule approved by Tenant and
Landlord pursuant to this Section, shall be the "Final Tenant Improvement
Plans," "TI Cost Estimate" and "Construction Schedule" for the purposes of this
Improvement Agreement.
(c) Disapprovals and Failures to Respond. Any disapproval by
------------------------------------
Tenant of a preliminary plan, space plan, elevation final plan, specification,
cost estimate, or construction schedule item submitted for its approval shall be
communicated only by a writing, which is delivered to Landlord within the time
permitted by the Planning Schedule and which specifies the disapproved item(s),
the reason(s) for the disapproval, and the changes required to make the item
acceptable to Tenant. If Tenant's disapproval of any item requiring its approval
under this Construction Agreement is not delivered in accordance with the
procedures and time limits specified in this Improvement Agreement, then Tenant
shall be deemed to have given its approval to such item.
(d) Changes to Plans, Cost Estimate and Construction Schedule.
---------------------------------------------------------
When the Final Tenant Improvement Plans, the TI Cost Estimate and Construction
Schedule have been approved by Landlord and Tenant as provided above, the
description of said plans and the Construction Schedule shall be initialed by
the parties and attached to this Agreement as Exhibits 2 and 3, respectively.
---------- -
Once the Final Tenant Improvement Plans, the TI Cost Estimate, and the
Construction Schedule (including, without limitation, the Scheduled Completion
Date specified therein) are approved by Landlord and Tenant as provided above,
neither party shall thereafter have the right to order extra work or change
orders, nor will the Construction Schedule or the TI Cost Estimate be modified,
except by a written "Change Order" approved by Landlord and Tenant, which
approval shall not be unreasonably withheld, except as expressly stated to the
contrary below. The Change Order shall clearly describe (i) the change, (ii) the
party required to perform the change, (iii) any modification of the Approved
Plans, (iv) the amount of delay or the
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<PAGE>
time saved resulting therefrom and any revision of the Construction Schedule and
Scheduled Completion Date occasioned by the change, (v) any added or reduced TI
Cost resulting from the Change, (vi) any other cost, and the manner of payment
of such costs which Tenant may be required to pay with respect to a Change
requested by Tenant, or Landlord may be required to reimburse to Tenant as a
consequence of a change requested by Landlord.
(e) Application for Permits. As soon as the Final Tenant
-----------------------
Improvement Plans are approved by Landlord and Tenant, Landlord shall submit
said plans to all appropriate governmental agencies and private parties from
whom Permits are required for the construction and use of the Tenant
Improvements. Landlord shall notify Tenant of any changes required by any
governmental agencies, and Tenant shall have seven (7) days thereafter to
indicate its approval thereof. All such changes required by governmental
agencies shall be deemed acceptable to Tenant unless Tenant's use of the
Premises is materially impaired thereby. The final plans, specifications and
working drawings as approved, and all change orders specifically permitted
pursuant to Subparagraph (c) below, shall be referred to herein as the "Approved
Plans."
4. Construction.
------------
(a) General Contractor. South Bay Development and Construction
------------------
Company shall serve as the general Contractor. Contractor's fee as general
Contractor for the Tenant Improvements shall be calculated as follows and shall
be included in the TI Cost Estimate: five percent (5%) of the TI Costs not
including such Contractor's fee.
(b) Subcontracts and Materials. Prior to issuance of any
--------------------------
subcontract relating to Tenant Improvements, Landlord shall submit for Tenant's
approval (which approval shall not be unreasonably withheld) a list of the
Contractors and Suppliers for the Tenant Improvement work. At Tenant's request,
all labor and materials for the Tenant Improvements shall be competitively bid
by at least two (2) Contractors or Suppliers. Landlord may also bid on such
work. If Tenant so desires, Tenant may also select a Contractor or Supplier,
reasonably acceptable to Landlord, to bid the work. All bids shall be opened
simultaneously. Landlord shall have the right to select the Contractor or
Supplier to perform the work. Notwithstanding Tenant's right to approve the
Contractors and Suppliers, the Contractors and Suppliers are a contractor only
for Landlord, and Tenant shall have no liability to any Contractor or Supplier
under any Construction Document or otherwise with respect to the Tenant
Improvements; provided, Tenant shall be required to reimburse Landlord for its
portion of the TI Costs pursuant to this Improvement Agreement.
(c) Commencement and Completion of Improvements. As soon as (i)
-------------------------------------------
the Approved Plans have been developed as provided above, and (ii) all necessary
Permits for commencement of construction of the Tenant Improvements have been
obtained, Landlord shall cause its Contractor(s) to commence and to thereafter
diligently prosecute to completion the construction of the Tenant Improvements
in accordance with the Approved Plans by the
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<PAGE>
Scheduled Completion Dates therefor contained in the Construction Schedule;
provided, however, Landlord shall not be liable for delay in the Substantial
Completion Date for any Building to the extent reasonably attributable to a
Force Majeure Delay, except as specifically provided in this Lease.
(d) Standard of Construction. Landlord shall cause all work to be
------------------------
constructed in a good and workmanlike manner, free from material design and
workmanship defects in accordance with the Approved Plans, the other
Construction Documents, the Permits, and Applicable Law and Restrictions.
Notwithstanding anything to the contrary in the Lease or this Improvement
Agreement, Tenant's acceptance of the Landlord's Work shall not waive the
foregoing warranty and Landlord shall promptly remedy all violations of the
warranty at its sole cost and expense which occur during the first twelve (12)
months of the Lease Term. Such warranty shall expire and be of no further force
or effect on the date which is twelve (12) months after the Commencement Date.
Tenant shall promptly notify Landlord in writing during the warranty period of
any defect in construction or in the operation of equipment discovered during
such period, and promptly thereafter Landlord shall commence the cure of such
defect and complete such cure with diligence at Landlord's sole cost. After said
twelve (12) month period, Tenant shall conclusively be deemed to have approved
the construction of the Tenant Improvements and accepted them "as is", subject
only to defects claimed as provided above. With respect to defects discovered
after the expiration of said one (1) year period, the parties hereto acknowledge
that it is their intention that Tenant have the benefit of any construction or
equipment warranties existing in favor of Landlord that would assist Tenant in
correcting such construction defects and in discharging its obligations
regarding the repair and maintenance of the Premises. Upon request by Tenant
following the expiration of such twelve (12) month period, Landlord shall inform
Tenant of all written construction and equipment warranties existing in favor of
Landlord which affect the Tenant Improvements. Landlord shall assign such
warranties to Tenant upon request in order that Tenant may enforce the same.
(e) Tenant Fixturing. Landlord shall use all reasonable efforts
----------------
to complete construction of Tenant Improvements of each Building to a point
permitting Tenant's entry for installation of its fixtures and equipment on or
before the date specified in the Construction Schedule. When the construction of
each Building has proceeded to the point where Tenant's installation of its
fixtures and equipment in the Building can be commenced in accordance with good
construction practice, the Landlord shall notify Tenant to that effect and shall
permit Tenant and its authorized representatives and contractors to have access
to the Building for a period of not less than thirty (30) days for the purpose
of installing Tenant's trade fixtures, equipment and other Tenant's Property in
the Building. Landlord and Tenant shall cooperate in good faith to schedule and
coordinate Tenant's fixturing with the Landlord's construction in a manner which
will assure Substantial Completion of the Improvements by the Scheduled
Completion Dates, will reduce each party's cost, and ensure labor harmony. While
performing fixturing, Tenant shall comply, and shall cause its employees,
contractors and suppliers to comply, with the reasonable work rules observed by
Landlord's Contractors and Suppliers.
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<PAGE>
(f) Inspection & Punchlist. Tenant's Representative and Tenant's
----------------------
architect, designers and consultants shall have the right to enter on the
Premises at all reasonable times and upon notice to Landlord's Representative
for the purpose of inspecting the progress of the work. Tenant's Representative,
Landlord's Representative and the Architect(s), and such advisers as they shall
desire, shall inspect each Building upon its Substantial Completion using their
best efforts to discover all uncompleted or defective construction. After such
inspection has been completed, a list of "punchlist" items shall be prepared by
Landlord which the parties agree are to be corrected by Landlord. Landlord shall
use its best efforts to complete and/or repair such "punchlist" items within
thirty (30) days. Tenant's taking possession of the Premises shall be deemed to
be an acceptance by Tenant of the Premises as complete and in accordance with
the terms of this Lease, subject to completion of the punchlist items within
said period.
5. Payment of Construction Costs. Landlord and Tenant shall each bear
-----------------------------
their own cost for performance of their respective obligations under this
Improvement Agreement, except that Tenant shall reimburse Landlord for the
amount, if any, by which the TI Cost exceeds the TI Allowance in the following
manner: Landlord shall submit receipted bills and/or lien releases evidencing
Landlord's payment of TI Costs in such amounts and at such times as bills are
submitted to Landlord for the TI Costs by Contractors and Suppliers for Tenant
Improvement work in place prior to the date of the bill (a "TI Progress Cost").
On or before the twenty-fifth (25th) day following receipt of the request,
Tenant shall pay to Landlord a sum equal to (i) the TI Progress Cost times a
fraction, the numerator of which shall be equal to the TI Cost Estimate minus
the TI Allowance and the denominator of which shall be equal to the TI Cost
Estimate, minus (ii) the sums previously reimbursed by Tenant to Landlord;
provided, however that in no event shall Tenant be required to reimburse
Landlord (1) for more than 90% of the difference between the TI Cost Estimate
and the TI Allowance prior to the Substantial Completion Date, (2) so long as
Landlord has failed to use the reimbursements previously paid by Tenant to
discharge the obligation of the Landlord to the Contractors and Suppliers, or
(3) so long as Landlord is in default of its obligations under this Improvement
Agreement in any material respect.
6. Delay In Completion Caused By Tenant. The parties hereto
------------------------------------
acknowledge that the date on which Tenant's obligation to pay the Monthly
Installment would otherwise commence could be delayed because of Tenant Delays.
It is the intent of the parties hereto that Tenant's obligation to pay the
Monthly Installments of rent not be delayed by any of such causes or by any
other act of Tenant, and in the event it is so delayed, then Tenant's obligation
to pay the Monthly Installments shall commence as of the date it would otherwise
have commenced absent said Tenant Delay. Tenant Delays in excess of thirty (30)
days for any of the above-mentioned reasons may affect Landlord's financing of
construction of the Premises, and Tenant agrees to pay any reasonable additional
financing costs, including loan fees, incurred by Landlord as a result thereof.
7. Notices. The notices to be delivered to the parties pursuant to
-------
this Improvement Agreement shall be given by personal delivery or by facsimile
(with receipt confirmed) to the
-50-
<PAGE>
Tenant's Representative and the Landlord's Representative at the following
address and facsimile number.
Tenant's Representative: [FOLLOWING EXECUTION OF THIS LEASE, TENANT SHALL
PROMPTLY PROVIDE LANDLORD WITH THE NAME, ADDRESS AND FACSIMILE NUMBER FOR
TENANT'S REPRESENTATIVE.]
Address: Auspex Systems, Inc.
5200 Great America Pkwy.
Santa Clara, CA 95054
Attn: Elizabeth Piceno
Facsimile: (408) 986-2525
Landlord's Representative:
Address: South Bay Development Company, Inc.
511 Division Street
Campbell, California 95008
Attn: Mr. Scott Trobbe
Facsimile: (408) 379-3229
8. Miscellaneous. Except as otherwise expressly provided in this
-------------
Improvement Agreement, whenever either party's consent, approval, designation,
or advice is required by the other party, such consent, approval, designation,
or advice shall not be unreasonably withheld or delayed. This Improvement
Agreement and the Lease contain the entire agreement between the parties with
respect to the construction of the Tenant Improvements and, in the event of any
conflict between the terms of this Improvement Agreement and the Lease, this
Improvement Agreement shall prevail. This Improvement Agreement may be amended
and the provisions hereof may be waived only by a writing signed by Landlord and
Tenant and the provisions hereof shall be binding upon the successors and
assigns of the parties to the Lease. If any legal action, arbitration or other
proceeding is commenced to interpret or enforce this Improvement Agreement, the
prevailing party in such action, arbitration or proceeding shall be entitled to
recover its reasonable attorneys' fees and costs.
-51-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
set forth below.
LANDLORD TENANT
South Bay/San Tomas Associates, Auspex Systems, Inc.,
a California general partnership a Delaware corporation
By: CIIF Associates II Limited By:
partnership, a Delaware limited ----------------------------
partnership, its general partner Its: VP & CFO
By: AEW Advisors, Inc.,
a Massachusetts corporation,
its managing general partner
By: /s/ Christopher Kazantis
Its: Vice President
-52-
<PAGE>
EXHIBIT 1 TO EXHIBIT C
DEFINITION OF BUILDING SHELLS
The components and systems below shall be included in the design of the new
buildings. All code requirements should be considered minimum beginning
requirements and not the highest level of design. Landlord's cost shall include
all "hard and soft" costs related to the construction of the site and shell,
including architectural and engineering services, permits, utility fees for
connections and meters, etc.
1. BUILDINGS STRUCTURE
(a) All foundations to include footings, piers, caissons, pilings, grade
beams, foundation walls or other building foundation components
required to support the entire building structure.
(b) Columns shall be steel box or pipe columns.
(c) All columns, beams, joists, purlins, headers, or other framing members
to support the roof and roofing membrane.
(d) Five inch (5") thick concrete slab on grade with welded wire mesh and
any other reinforcing or structural connections that may be necessary
or required.
(e) Exterior walls that enclose the perimeter of the building with steel
reinforcing and structural connections that may be necessary or
required.
(f) All exterior glass and glazing with anodized aluminum frames. Glass to
be tinted as appropriate to the aesthetic design of the building. All
exterior doors, door closer and locking devices necessary for proper
functioning.
(g) Wood panel roof system to support roofing membrane.
(h) Three (3) ply built up roofing with cap sheet and all flashings by
Owens-Corning, John Manville, or equal.
(i) Exterior painting of all concrete with Tex-Coat or Kel-Tex textural
paint. All caulking of exterior concrete joints in preparation for
painting.
-53-
<PAGE>
(j) The multi-story buildings are to be designed for a minimum of one
elevator per building, the elevator shafts to be a part of Landlord's
shell costs.
(k) The foundation and structural framing should be designed to support a
minimum live load of 100 psf in all areas.
(l) The floor-to-floor height of the buildings shall allow a minimum of
10'-0" interior drop ceiling height.
2. PLUMBING
(a) Underground sanitary sewer laterals connected to the city sewer main in
the street and piped into each building and under the concrete slab on
grade for the length of the buildings. Main waste lines under the slabs
will be in as close proximity as possible to the building rest room
locations.
(b) Domestic water mains connected to the city water main in the street and
stubbed to the buildings. Water mains to each building shall not be
less than 2.5" in size.
(c) Roof drain leaders piped and connected to the site storm drainage
systems.
(d) Gas lines connected to the city public utility mains and gas meters
adjacent to, and in close proximity to each building. Meters supplied
by utility company.
3. ELECTRICAL
(a) All primary electrical service to each building that is complete
including underground conduit and wire feeders from transformer pads
into the building's main switchgear electrical room. The electrical
characteristics of the secondary side of transformers shall be 277/480
Volt. 3 Phase and the rated capacity of the transformers shall be 2,000
amps for each building. All electrical panels and breakers will have
isolated grounds and surge protectors.
(b) Underground pull section, meter, and panel(s), for site lighting and
landscaping.
(c) Underground conduit from the street to the building for telephone
-54-
<PAGE>
trunk line service by Pacific Telephone. Conduit to each building
shall not be less than 4".
(d) An electrically operated landscape irrigation controller that is a
complete and functioning system.
(e) Underground conduit from the building to the main fire protection
system, shut off valve (PIV) for installation of security alarm
wiring.
(f) All parking lot and landscaping lighting to include fixtures,
underground conduit, wire, distribution panel and controller. All
exterior lighting shall be a complete and functioning system.
4. FIRE PROTECTION (SPRINKLERS)
(a) A complete and fully functional overhead system distributed throughout
the building. The systems shall be classified ordinary hazard group II
and be distributed throughout the building.
(b) System shall include all sprinkler heads that may be required by
building codes above the ceiling, when ceilings are installed.
(c) Site sprinkler main to be sized adequately to support Tenant's uses
within each building.
5. SITEWORK
(a) All work outside the building perimeter walls shall be considered site
work for the building shell and shall include grading, asphalt
concrete, paving, landscaping (hard and soft), landscape irrigation,
storm drainage, utility service laterals, including conduit for voice
and data connecting the buildings, curbs, gutters, sidewalks, specialty
paving (if required), retaining walls, fencing and gates, trash
enclosures, planters, sign monuments, parking lot and landscape
lighting and other exterior lighting per code.
(b) Paving sections for automobile and truck access shall be according to
the Geological Soils Report.
(c) All parking lot striping to include handicap signage and spaces
(parking ratio: no less than 1 space per 295 gross square feet).
-55-
<PAGE>
(d) Underground site storm drainage system shall be connected to the city
storm system main.
-56-
<PAGE>
EXHIBIT 2 TO EXHIBIT C
CONSTRUCTION SCHEDULE
[TO BE DETERMINED]
-57-
<PAGE>
EXHIBIT 3 TO EXHIBIT C
FINAL TENANT IMPROVEMENT PLANS
[TO BE DETERMINED]
-58-
<PAGE>
EXHIBIT 4 TO EXHIBIT C
PLANNING SCHEDULE
[TO BE DETERMINED]
<TABLE>
<CAPTION>
Required Action Last Date for Completion
- ---------------------------------------------------------------------------------------------------------------
Tenant Improvements Plans and Specifications
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
1. Tenant delivers its design requirements to _________________, 199__
__________.
- ---------------------------------------------------------------------------------------------------------------
2. Landlord causes the Architect to deliver ______ Days after Task 1 is satisfied
preliminary plans, and a preliminary cost
estimate for the Tenant Improvements and a list
of any expected construction schedule changes
to Tenant for its review.
- ---------------------------------------------------------------------------------------------------------------
3. Tenant approves or disapproves the items ______ Days after Task 2 is completed
delivered pursuant to Task 8.
- ---------------------------------------------------------------------------------------------------------------
4. Landlord and Tenant agree upon preliminary _________________, 199__
plans, a cost estimate and any construction
schedule changes for Tenant Improvements.
- ---------------------------------------------------------------------------------------------------------------
5. Landlord delivers proposed plans, ______ Days after Task 4 is completed
specifications and working drawings, a proposed
final TI Cost Estimate for the Tenant
Improvements, and a final Construction Schedule
to Tenant for its review.
- ---------------------------------------------------------------------------------------------------------------
6. Tenant approves or disapproves the items ______ Days after Task 5 is completed
delivered pursuant to Task 1.
- ---------------------------------------------------------------------------------------------------------------
7. Landlord and Tenant agree upon Final Tenant __________________, 199__
Improvement Plans, a final TI Cost Estimate,
and a final Construction Schedule.
- ---------------------------------------------------------------------------------------------------------------
Permitting & Governmental Approvals
- ---------------------------------------------------------------------------------------------------------------
8. Landlord submits the Final Tenant ______ days after Task 7 is completed
Improvement Plans to all applicable
governmental authorities for Permits.
- ---------------------------------------------------------------------------------------------------------------
9. All governmental permits and approvals ___________________, 199__
necessary for the construction of the
Improvements for the Permitted Uses are
obtained.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
-59-
<PAGE>
EXHIBIT "D"
Commencement Date Memorandum
----------------------------
With respect to that certain Lease Agreement ("Lease"), dated January ____,
1997, by and between South Bay/San Tomas Associates, a California general
partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware corporation
--------
("TENANT"), whereby Landlord leased to Tenant and Tenant leased from Landlord
- --------
the Premises (as defined in the Lease). All terms not defined herein shall have
the same meaning as set forth for such terms in the Lease. Tenant hereby
acknowledges and certifies to Landlord as follows:
(1) The Lease commenced on ___________________, 19___ ("Commencement
Date");
(2) The Initial Term of the Lease shall expire on ____________________,
______ (the "Expiration Date");
(3) The initial Monthly Installment of Rent for the Premises is
_______________________________ Dollars ($_________________); and
(4) Tenant has accepted [and is currently in possession of] the Premises.
IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this
______ day of __________________, 199____.
"Tenant"
Auspex Systems, Inc., a
Delaware corporation
By: __________________________
Its: _________________________
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<PAGE>
EXHIBIT "E"
List of Hazardous Materials
---------------------------
Tenant Will Use on The Premises
-------------------------------
Janitorial Supplies (including handsoaps, detergents, furniture polish, glass
and bowl cleaners, disinfectant cleaners, etc.)
Copier Supplies (including: toners, developers, etc.)
Painting Supplies (wall and trim paints)
-61-
<PAGE>
EXHIBIT "F"
Description of Existing Environmental Reports
---------------------------------------------
Environmental Reports & Correspondence
The Former Unisys Site
1. Environmental Baseline Report - Revised October 1989
A. Including the following tables, figures and appendices (359 pages)
Tables
------
1. Tanks and Chemical Storage
2. Previous Tank Storage Summary
3. Groundwater Monitoring Data 10/88
Figures
-------
1. Map
2. Site Map
3. Tank Locations
4. Previous Tank Storage Sites
5. Monitoring Well Locations
Appendices
----------
PCB Information
Asbestos Information
Tank Pull 1/84
Well Destruction Investigation
Hydrogeological Investigation 10/87
Unisys for SFRWQCB; Environmental Baseline Investigation
(Appx 60 pages)
Hydrogeological Investigation 11/88
Soil Gas Survey 5/89
-62-
<PAGE>
Semi-Annual Sampling 5/89
Clarifier Removal 10/89
2. Tank Removal - Completed 2/6/90 - Santa Clara Fire Department Permit
3. Internal Memo 3/2/90 Regional Water Quality Control Board/2 pages
4. Letter: 3/5/90 to Unisys from Pacific Environmental Group, Inc./4 pages
5. Table 1: Summary of Current Groundwater Laboratory Results/4 pages.
6. Letter: 6/11/90 to E2C, Inc. from Chips Environmental Consultants/16 pages
7. Letter: 6/28/90 to South Bay Construction and Development Company from E2C,
Inc./3 pages
8. Report: 6/29/90 Level II Environmental Site Assessment prepared by E2C,
Inc., previously forwarded to ASK 3/17/92
9. Television inspection location sheet dated 7/16/90-VCR tape available/2
pages
10. Letter: 7/19/90 to City of Santa Clara from E2C, Inc./1 page
11. Progress report sanitary sewer line video and groundwater analysis dated
8/7/90 prepared by E2C, Inc./44 pages
12. Letter: 8/31/90 to South Bay Construction and Development Company from E2C,
Inc./3 pages
13. Television inspection location sheet dated 8/31/90-VCR tape available/2
pages
14. Letter: 10/19/90 to Prevention Bureau, Santa Clara Fire Department from
Pacific Environmental Group, Inc./22 pages
15. Letter; 10/23/90 to South Bay Construction and Development Company from
Unisys/9 pages
16. Letter: 11/1/90 to South Bay Construction and Development Company from
Unisys/9 pages
17. Letter: 11/1/90 to Prevention Bureau, Santa Clara Fire Department from
Pacific Environmental Group, Inc./8 pages
18. Letter: 11/21/90 to South Bay Construction and Development Company from
E2C, Inc./6 pages
19. Letter: 1/3/91 to South Bay/San Thomas Associates from Unisys/2 pages
20. Memo: 1/29 91 to Unisys Corporation from Pacific Environmental group,
Inc./41
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<PAGE>
pages
21. Fax: 2/11/91 to Unisys from E2C, Inc./7 pages
22. Final submittals-Unisys Corporation-Asbestos/25 pages
23. Letter: 3/15/91 to Pacific Environmental Group from Clayton Environmental
Consultants/26 pages
24. Letter: 3/19/91 to E2C, Inc., from Pacific Environmental Group, Inc./16
pages
25. Letter: 3/21/91 to South Bay/San Tomas Associates from Unisys/16 pages
26. Letter: 3/21/91 to Unisys from Pacific Environmental Group, Inc./12 pages
27. Letter: 3/22/91 to South Bay Development Company from Unisys/2 pages
28. Fax: 4/4/91 to Pacific Environmental Group/1 page
29. Fax: 4/4/91 to Pacific Environmental Group/1 page
30. Fax: 4/8/91 from Pacific Environmental Group-Organic Analysis Data Sheets/8
pages
31. Fax: 4/10/91 from Pacific Environmental Group-Permits Santa Clara Fire
Department/5 pages
32. Letter: 4/12/91 to San Francisco Regional Water Quality Control Board from
Unisys/81 pages
33. Letter: 4/23/91 to South Bay Development Company from Unisys/1 page
34. Letter: 5/21/91 to South Bay Development Company from Unisys/7 pages
35. Uniform Hazardous Waste Manifests 5/22/91/44 pages
36. Letter: 6/5/91 to Unisys from California Regional Water Quality Control
Board/2 pages
37. Report of Abatement Observation and Air Monitoring June 6, 1991 prepared by
Law Associates/66 pages
38. Letter. 6/20/91 to Unisys from Pacific Environmental Group, Inc./18 pages
39. Soil & Groundwater Assessment dated July 11, 1991, prepared by E2C, Inc.
40. Fax: 8/28/91 to SBC&D Co., from E2C, Inc./7 pages
41. Letter: 1/14/92 to California Regional Water Quality Control Board from
Unisys/8 pages
42. Letter: 1/14/92 to Unisys from Pacific Environmental Group, Inc./4 pages
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<PAGE>
43. Report: 1/20/92 Second and Third Quarter Split Sampling prepared by E2C,
Inc./121 pages
44. Letter: 2/3/92 from Unisys from California Regional Water Quality Control
Board/2 pages
45. Letter: 3/24/92 to South Bay Construction and Development from E2C, Inc./8
pages
46. Letter: 3/25/92 to Regional Water Quality Control Board from Unisys/12
pages
47. Report: 4/2/92 Installation of B-Zone Well prepared by E2C, Inc./53 pages
48. Report: 8/25/92 Phase I Environmental Assessments Building 14 prepared for
the ASK Companies by Environ Corporation
49. Letter: 11/10/92 to South Bay Development Company from Unisys/9 pages;
Justification for Removal
50. Letter: 12/11/92 to South Bay Construction and Development company from
E2C, Inc./3 pages
51. Letter 12/11/92 to South Bay Construction and Development Company from E2C,
Inc./4 pages
52. Letter: 12/11/92 to Regional Water Quality Control Board from Unisys/8
pages; Table-Unisys Monitoring Well Removal Notification
53. Letter: 12/14/92 to Regional Water Quality Control Board from E2C, Inc./4
pages
54. Letter: 12/21/92 to E2C, Inc. from California Regional Water Quality
Control Board/1 page
55. Letter: 12/28/92 to The ASK Companies from South Bay Construction and
Development Company/1 page
56. Letter: 1/22/93 to Regional Water Quality Control Board from Unisys/1 page
57. Fax: 3/29/93 to South Bay Construction and Development Company from E2C,
Inc./2 pages
58. Letter: 4/1/93 to South Bay/San Tomas from E2C, Inc./1 page
59. Letter: 4/8/93 to South Bay Construction and Development Company from E2C,
Inc./8 pages; Well Destruction Report
60. Letter: 6/15/93 to Regional Water Quality Control Board from Unisys/15
pages; Well Abandonment Report
61. Site Investigation Summary by Unisys Corporate Environmental Affairs dated
March 6, 1995
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<PAGE>
containing Report, Figures, Tables and Appendices A through D
62. Letter: 6/22/95 to Regional Water Quality Control Board from Unisys/21
pages
63. Letter: 9/11/95 to Regional Water Quality Control Board from Unisys/8 pages
64. Letter: 12/19/95 to South Bay Construction and Development Company from
Unisys/14 pages
65. Letter: 1/26/96 to California Regional Water Quality Control Board from
Unisys/21 pages
66. Fax: 4/10/96 to Larry Patterson from Asbestos Control Center/13 pages
67. Report: 7/19/96 System Installation and Additional Investigation prepared
by Unisys Corporate Environmental Affairs
-66-
<PAGE>
EXHIBIT "G"
Preliminary Title Report
------------------------
Santa Clara Land Title Company ESCROW BRANCH:
-------------
PRELIMINARY REPORT 701 MILLER STREET
ORDER NO. 00121233 SAN JOSE, CA 95110
(408) 288-7800 FAX (408) 275-0824
ESCROW OFFICER: LIZ ZANKICH
-----------------------------
TITLE & ADMINISTRATIVE SERVICES:
701 MILLER STREET, SAN JOSE, CA 95110
(408) 288-7800 FAX (408) 993-1070
TITLE OFFICER: LIZ ZANKICH/MAL
REF. NO:
SOUTH BAY DEVELOPMENT
511 DIVISION STREET PROPERTY ADDRESS:
CAMPBELL, CALIF. 95008
ATTN: SCOTT TROBBE
In response to the above referenced application for a policy of title insurance,
this Company reports that it is prepared to issue, or cause to be issued, as of
the date hereof, a Policy or Policies of Title Insurance describing the land and
the estate or interest therein hereinafter set forth, insuring against loss
which may be sustained by reason of any defect, lien or lien or encumbrance not
shown or referred to as an Exception herein or not excluded from coverage
pursuant to the printed Schedules, Conditions and Stipulations of said Policy
forms. The printed Exceptions and Exclusions from the coverage of said Policy
or Policies are set forth in Exhibit A attached.
Please read the exceptions shown or referred to below and the Exceptions and
Exclusions set forth in Exhibit A of this report carefully. The exceptions and
exclusions are meant to provide you with notice of matters which are not covered
under the terms of the title insurance policy and should be carefully
considered.
It is important to note that this preliminary report is not a written
representation as to the condition of title and may not list all liens, defects,
and encumbrances affecting title to the land. This report (and any supplements
hereto) is issued solely for the purpose of facilitating the issuance of a
policy of title insurance and no liability is assumed hereby. If it is desired
that liability be assumed prior to the issuance of a policy of title insurance,
a Binder or Commitment should be requested.
The form of policy of title insurance contemplated by this report is:
Dated as of October 2nd, 1996 at 7:30 a.m.
The estate or interest in the land hereinafter described or referred to covered
by this Report is:
A FEE as to Parcel Number(s) One
EASEMENT as to Parcel Number(s) Two, Three, Four and Five
-67-
<PAGE>
Title to said estate or interest at the date hereof is vested in:
South Bay/San Tomas Associates, a California general partnership
At the date hereof exceptions to coverage in addition to the printed Exceptions
and Exclusions in said policy wold be those as shown on the following page.
-68-
<PAGE>
1. TAXES for the fiscal year 1996-97, a lien, shown as follows:
1st Installment................... $31,135.14 Open
2nd Installment................... $31,135.14 Open
Assessor's Parcel No. 224-45-022.. Code Area 07-059
Land $5,837,028.00............... IMP NONE PP NONE Exempt NONE
2. The lien of supplemental taxes, if any, assessed pursuant to the provisions
of Chapter 3.5, (commencing with Section 75) to the Revenue and Taxation
Code of the State of California.
3. The fact that the ownership of said land does not include any right of
ingress or egress to or from the highway contiguous thereto, said right
having been relinquished by deed,
From: Memorex Corporation
To: City of Santa Clara, California a municipal corporation
Recorded: January 20, 1970 in Book 8804, Page 535, Official Records
Except: described as follows:
Beginning at point "D" as therein described and running thence from a
tangent bearing S. 73 19' 17" W. on a curve to the right with a radius of
112.81 feet through an angle of 30 50' 40" for a distance of 60.73 feet to
a point.
(Affects a portion of the premises' Central Expressway frontage)
4. An Agreement, affecting said land, for the purposes stated herein and
subject to the terms, covenants, conditions, restrictions, and easements,
if any, contained therein
For: Agreement Regarding Separation of Certain Utilities
Dated: September 11, 1990
Executed by: City of Santa Clara, a California municipal corporation and
Unisys Corporation, a Delaware corporation
Recorded: September 19, 1990 in Book L 483, Page 0989, Official Records.
5. Covenants, conditions and restrictions in the deed,
Recorded: October 15, 1990 in Book L 508, Page 283, Official Records
Restrictions, if any, based upon race, color, religion, sex, handicap,
familial status, or national origin are deleted.
Said covenants, conditions and restrictions do not provide for reversion of
title in the event of a breach thereof.
Which provides that a violation thereof shall not defeat or render invalid
the lien of any mortgage or deed of trust made in good faith and for value.
-69-
<PAGE>
Reference to the records is hereby made for further particulars.
6. An easement affecting the portion of said land and for the purpose stated
herein and incidental purposes,
In Favor Of: Unisys Corporation, a Delaware corporation
For: ingress and egress
Recorded: October 15, 1990 in Book L 508, Page 0283, Official Records
Affects: Over Parcel 2, for the benefit of Parcel 1, as shown on the
Parcel Map filed for record on September 19, 1990 in Book
618 of Maps, Pages 36, 37 and 38.
7. Matters in an instrument which among other things, provided for the
reciprocal exchange of rights and easements, limitations, covenants,
conditions and restrictions,
Executed by: Southbay/San Tomas Associates, a California general
partnership and Unisys Corporation, a Delaware corporation
Recorded: October 15, 1990 in Book L 508, Page 301, Official Records.
Among other things said instrument, in part, provides for an easement or
easements affecting the portion of said land and for the purpose stated
herein and incidental purposes,
In favor of: Unisys Corporation, a Delaware corporation
(A) For: ingress and egress
Affects: That portion designated Ingress and Egress Easement over
Parcel 2 of the benefit of Parcel 1, as shown upon the
Parcel Map filed for record September 19, 1990 in Book 618
of Maps, pages 36 thru 38.
(B) For: Surface water drainage rights
Affects: All of Parcel 2, as shown upon Parcel map filed for record
September 19, 1990 in Book 618 Maps, pages 36 thru 38,
Santa Clara County Records
(Affects Parcel One)
8. An easement affecting the portion of said land and for the purpose stated
herein and incidental purposes, shown or dedicated by the map herein
referred to:
(A) For: Private Ingress and Egress Easement
Affects: as shown upon said Map
(B) For: Private landscape Easement
Affects: as shown upon said Map
(C) For: Light and Air (designated as Building setback line)
Affects: as shown upon said Map
-70-
<PAGE>
(D) For: Emergency Vehicle Ingress and Egress Easement
Affects: as shown upon said Map
9. Matters in an instrument which among other things, provides for the
reciprocal exchange of rights and easements, limitations, covenants,
conditions and restrictions,
Executed by: South Bay/San Tomas Associates, a California general
partnership
For: Development of the Plan
Recorded: May 13, 1993 in Book M 775, Page 1281, Official Records
10. Rights of parties in possession of said land by reason of unrecorded
leases, or rental agreements, if any.
11. Any facts, rights, interests or claims which a correct survey would show.
12. The requirement that this company be provided with evidence that CIIF
Associates II, Limited Partnership, a Delaware Limited Partnership remains
in existence and is in compliance with the Revised Limited Partnership Act
of the State of California. Whether said partnership has or has not elected
to be governed by said act, a Certificate of Limited Partnership must be
filed in the Office of the Secretary of State as required by said act and
this company requires that a certified copy thereof be recorded in the
Office of the Recorder of the County of Santa Clara.
NOTES:
a. Date last insured: 10/15/1990
b. This report does not reflect requests for notice of default, requests for
notice of delinquency, subsequent transfers of easements, and similar
matters not germane to the issuance of the policy of title insurance
anticipated hereunder.
c. If this company is requested to disburse funds in connection with this
transaction, Chapter 598 of 1989 Mandates of the California Insurance Code
requires hold periods for checks deposited to escrow or sub-escrow
accounts. Such periods vary depending upon the type of check and
anticipated methods of deposit should be discussed with the escrow officer.
d. No endorsement issued in connection with the policy and relating to
covenants, conditions or restrictions provides coverage for environmental
protection.
-71-
<PAGE>
e. Title of the vestee herein was acquired by Deed--
Grantor: Unisys Corporation, a Delaware corporation
Grantee: South Bay/San Tomas Associates, a California general
partnership
Recorded: October 15, 1990 in Book L 508, Page 0283, Official
Records
f. The Records of Santa Clara County Recorder's Office disclose that a
Statement of General Partnership has been recorded as follows--
Name: South Bay/San Tomas Association
Recorded: June 7, 1996 in Book P 365, Page 2094, Official Records
General Partners: CIIF Associates II Limited Partnership, a Delaware
limited partnership and CIIF II Holding Corp., a
Massachusetts corporation
-72-
<PAGE>
SCHEDULE C
LEGAL DESCRIPTION
All that certain real property situated in the City of Santa Clara, County of
Santa Clara, State of California, described as follows:
PARCEL ONE:
Parcel 1, as shown on that certain Parcel Map filed for record in the Office of
the Recorder of the County of Santa Clara State of California on May 13, 1993 in
Book 646 of Maps, Pages 46 thru 49.
RESERVING THEREFROM an easement for ingress and egress and for Emergency Vehicle
Ingress and Egress for the benefit of Parcel 2, as shown and designated P.I.E.E.
and E.V.I.E.E. established herein to benefit Parcel 2 on the map hereinabove
referred to.
Reserving therefrom an easement for Landscape purposes for the benefit of Parcel
2, as shown and designated as P.L.E. established herein to benefit Parcel 2 on
the map herein above referred to.
PARCEL TWO:
An easement for ingress and egress over Parcel 1, of Parcel Map filed for record
on September 19, 1990 in Book 618 of Maps, Pages 36, 37 and 38, shown as
Ingress-Egress over Parcel 1 for the benefit of Parcel 2, as reserved in the
Deed recorded October 15, 1990 in Book L 508, Page 283, Official Records.
PARCEL THREE:
An easement for storm drain over all those portions of Parcel 2, designated "10'
S.D.E. Established Hereon To Benefit Parcel 1", as shown on the Parcel Map filed
for record in the Office of the Recorder of the County of Santa Clara, State of
California on May 13, 1993 in Book 646 of Maps, Pages 46 thru 49, pursuant to
that certain Declaration of Covenants, Conditions, Restrictions and Easements
recorded May 13, 1993 in Book M 775, Page 1281, Official Records.
PARCEL FOUR:
An easement for sanitary sewer over that portion of Parcel 4, designated "15' x
438.12' P.S.S.E. Established Hereon To Benefit Parcels 1 and 2", as shown on the
Parcel Map filed for record in the Office of the Recorder of the County of Santa
Clara, State of California on May 13, 1993 in Book 646 of Maps, Pages 46 thru
49, pursuant to that certain Declaration of Covenants,
-73-
<PAGE>
Conditions, Restrictions and Easements recorded May 13, 1993 in Book M 775, Page
1281, Official Records.
PARCEL FIVE:
An easement for sanitary sewer over all those portions of Parcel 2, designated
P.S.S.E. Established Hereon To Benefit Parcel 1", as shown on the Parcel Map
filed for record in the Office of the Recorder of the County of Santa Clara,
State of California on May 13, 1993 in book 646 of Maps, Pages 46 thru 49,
pursuant to that certain Declaration of Covenants, Conditions, Restrictions and
Easements recorded May 13, 1993 in Book M 775, Page 1281, Official Records.
ARB No: 224-10-100
-74-
<PAGE>
PARCEL MAP
----------
Consisting of Four Sheets
Being all of Parcel 2, Book 618, Pages 36 38
Santa Clara County Records and a Portion of
The Northwest Quarter of Section 34
Township 6 South, Range 1 West
Mount Doable Base & Meridian
(and Graphical Depiction of Same)
-75-
<PAGE>
EXHIBIT "A"
LIST OF PRINTED EXCEPTIONS AND EXCLUSIONS
- --------------------------------------------------------------------------------
NOTE: This Exhibit reflects the matters which are excluded and excepted from
coverage in the 1990 CLTA Standard Coverage Policy and the 1992 ALTA
Extended Coverage Loan Policy with ALTA endorsement Form 1 Coverage. If
the issuance of any other type of policy is anticipated, the escrow
officer should be contacted to determine the applicable exclusions and
exceptions.
- --------------------------------------------------------------------------------
1992 AMERICAN LAND TITLE ASSOCIATION EXTENDED COVERAGE LOAN POLICY
WITH ALTA ENDORSEMENT FORM 1 COVERAGE
EXCLUSIONS FROM COVERAGE
1. (a) Any law, ordinance or governmental regulation (including but not
limited to building and zoning laws, ordinances, or regulations)
restricting, regulating, prohibiting or relating to (i) the occupancy,
use, or enjoyment of the land; (ii) the character, dimensions or
locations of any improvement now or hereafter erected on the land;
(iii) a separation in ownership or a change in the dimensions or area
of the land or any parcel of which the land is or was a part; or (iv)
environmental protection, or the effect of any violation of these
laws, ordinances or governmental regulations, except to the extent
that a notice of the enforcement thereof or a notice of a defect, lien
or encumbrance resulting from a violation or alleged violation
affecting the land had been recorded in the public records at Date of
policy.
(b) Any governmental police power not excluded by (a) above, except to the
extent that a notice of the exercise thereof or a notice of a defect,
lien or encumbrance resulting from a violation or alleged violation
affecting the land has been recorded in the public records at date of
policy.
2. Rights of eminent domain unless notice of the exercise thereof has
been recorded in the public records at date of policy, but not
excluding from coverage any taking which has occurred prior to Date of
policy which would be binding on the rights of a purchaser for value
without knowledge.
3. Defects, liens, encumbrances, adverse claims or other matters:
(a) created, suffered, assumed or agreed to by the insured claimant;
(b) not known to the Company, not recorded in the public records at date
of policy, but known to the insured claimant and not disclosed in
writing to the Company by the insured claimant prior to the date the
insured claimant became an insured under this policy;
(c) resulting in no loss or damage to the insured claimant;
(d) attaching or created subsequent to date of policy (except to the
extent that this policy insures the priority of the lien of the
insured mortgage over any statutory liens for services, labor or
materials, or to the extent insurance is afforded herein as to
assessments for street improvements under construction or completed at
date of policy); or
(e) resulting in loss or damage which would not have been sustained if the
insured claimant had paid value for the insured mortgage.
4. Unenforceability of the lien of the insured mortgage because of the
inability or failure of the insured at date of policy, or the
inability or failure of any subsequent owner of the indebtedness, to
comply with applicable doing business laws of the state in which the
land is situated.
5. Invalidity or unenforceability of the lien of the insured mortgage, or
claim thereof, which arises out of the transaction evidenced by the
insured mortgage and is based upon usury or any consumer credit
protection or truth-in-lending law.
6. Any statutory lien for services, labor or materials (or the claim or
priority of any statutory lien for services, labor or materials over
the lien of the insured mortgage) arising from the improvement or work
related to the land which is contracted for and commenced subsequent
to date of policy and is not financed in whole or in part by proceeds
of the indebtedness secured by the insured mortgage which at date of
policy the insured has advanced or is obligated to advance.
7. Any claim, which arises out of the transaction creating the interest
of the mortgagee insured by this policy, by reason of the operation of
federal bankruptcy, state insolvency or similar creditors' rights laws
that is based on
(i) the transaction creating the interest of the insured mortgagee being
deemed a fraudulent conveyance or fraudulent transfer; or
(ii) subordination of the interest of the insured mortgagee as the result
of the application of the doctrine of equitable subordination; or
(iii) the transaction creating the interest of the insured mortgagee being
deemed a preferential transfer accept where the preferential transfer
results from the failure;
(a) to timely record the instrument of transfer; or
(b) of such recordation to impart notice to purchaser for value or a
judgment or lien creditor.
-76-
<PAGE>
EXHIBIT "A" CONTINUED
CALIFORNIA LAND TITLE ASSOCIATION STANDARD COVERAGE POLICY 1990
EXCLUSIONS FROM COVERAGE
1. (a) Any law, ordinance or governmental regulation (including but not
limited to building and zoning laws, ordinances, or regulations)
restricting regulating, prohibiting or relating to (i) the occupancy,
use, or enjoyment of the land; (ii) the character, dimensions or
locations of any improvement now or hereafter erected on the land;
(iii) a separation in ownership or a change in the dimensions or area
of the land or any parcel of which the land is or was a part; or (iv)
environmental protection, or the effect of any violation of these
laws, ordinances or governmental regulations, except to the extent
that a notice of the enforcement thereof or a notice of a defect, lien
or encumbrance resulting from a violation or alleged violation
affecting the land had been recorded in the public records at date of
policy.
(b) Any governmental police power not excluded by (a) above, except to the
extent that a notice of the exercise thereof or a notice of a defect,
lien or encumbrance resulting from a violation or alleged violation
affecting the land has been recorded in the public records at date of
policy.
2. Rights of eminent domain unless notice of the exercise thereof has
been recorded in the public records at date of policy, but not
excluding from coverage any taking which has occurred prior to date of
policy which would be binding on the rights of a purchaser for value
without knowledge.
3. Defects, liens, encumbrances, adverse claims or other matters:
(a) whether or not recorded in the public records at date of policy, but
created, suffered, assumed or agreed to by the insured claimant;
(b) not known to the Company, not recorded in the public records at date
of policy, but known to the insured claimant and not disclosed in
writing to the Company by the insured claimant prior to the date the
insured claimant became an insured under this policy;
(c) resulting in no loss or damage to the insured claimant;
(d) attaching or created subsequent to date of policy; or
(e) resulting in loss or damage which would not have been sustained if the
insured claimant had paid value for the insured mortgage or the estate
of interest insured by this policy.
4. Unenforceability of the lien of the insured mortgage because of the
inability or failure of the insured at date of policy, or the
inability or failure of any subsequent owner of the indebtedness, to
comply with applicable doing business laws of the state in which the
land is situated.
5. Invalidity or unenforceability of the lien of the insured mortgage, or
claim thereof, which arises out of the transaction evidenced by the
insured mortgage and is based upon usury or any consumer credit
protection or truth-in-lending law.
6. Any claim, which arises out of the transaction vesting in the insured
the estate or interest insured by this policy or the transaction
creating the interest of the insured lender, by reason of the
operation of federal bankruptcy, state insolvency or similar
creditors' rights laws.
- --------------------------------------------------------------------------------
EXCEPTIONS FROM COVERAGE
1. Taxes or assessments which are not shown as existing liens by the
records of any taxing authority that levies taxes or assessments on
real property or by the public records. Proceedings by a public agency
which may result in taxes or assessments, or notices of such
proceedings, whether or not shown by the records of such agency or by
the public records.
2. Any facts, rights, interests or claims which are not shown by the
public records but which could be ascertained by an inspection of the
land or which may be asserted by persons in possession thereof.
3. Easements, liens or encumbrances, or claims thereof, which are not
shown by the public records.
4. Discrepancies, conflicts in boundary lines, shortage in area,
encroachments, or any other facts which a correct survey would
disclose, and which are not shown by the public records.
5. (a) Unpatented mining claims;
(b) reservations or exceptions in patents or in Acts authorizing the
issuance thereof;
(c) water rights, claims or title to water, whether or not the maters
excepted under (a), (b) or (c) are shown by the public records.
-77-
<PAGE>
EXHIBIT "H"
CC&R's and Excluded Obligations
Under CC&R's Described in the Title Report
------------------------------------------
The documents referred to in the following specially enumerated exceptions
in the Title Report attached as Exhibit "G" to this Lease constitute the
-----------
"CC&R's" referred to in Paragraph 34 of the Lease. Pursuant to Paragraph 34 of
the Lease, except as otherwise stated below as being obligations of Landlord,
Tenant shall abide by and comply during the Lease Term with the obligations
stated below with respect to the documents listed below to the extent the
obligations arise from the ownership or occupancy of the Premises (and to the
extent they arise from Landlord's ownership of the Premises together with
Landlord's ownership of other property, then to the extent such obligations are
reasonably allocable to the Premises).
Exception No. 4 pertains to an Agreement Regarding Separation of Certain
Utilities between the City of Santa Clara and Unisys Corporation. Tenant shall
not be responsible for any obligations thereunder, with any obligations
affecting the Premises to be borne by Landlord.
Exception No. 5 pertains to a Grant Deed with Grant and Reservation of
Easements from Unisys Corporation to Landlord. Tenant shall be responsible for
the obligations embodied therein as relate to the use by Tenant of the easements
which are reflected therein as appurtenances to the Premises.
Exception No. 7 pertains to a Declaration of Covenants, Conditions,
Restrictions and Easements between Landlord and Unisys Corporation. Tenant
shall be responsible for the obligations thereunder pertaining to maintaining
ingress and egress easement areas located within the boundaries of the Premises
in the manner required by that Declaration and for the obligations not to
unreasonably interfere with the surface water drainage easement in favor of
Unisys over the Premises.
Exception No. 5 pertains to a Grant Deed with Reservation of Easement from
Unisys Corporation to Landlord, which grants Unisys Corporation certain rights
of access over the Premises associated with the operation of groundwater
monitoring wells on the Property. Paragraph 2(b) of this document indicates
that the rights and obligations of the parties thereunder are set forth in and
are subject to certain terms and conditions in the Agreement of Purchase and
Sale and Escrow Instructions between Landlord and Unisys Corporation. Tenant's
only obligation with regard to the easements reserved in this Grant Deed is not
to unreasonably interfere with the access of Unisys to any monitoring wells that
may be hereafter placed upon the Property. Landlord shall be responsible under
this Lease to ensure that if any monitoring wells are to be installed on the
Premises by Unisys, that they shall be installed in a manner which will not
unreasonably interfere with Tenant's use of the Premises and that Unisys
exercises its rights under this Grant Deed in manner not to unreasonably
interfere with Tenant's use of the Premises.
Exception No. 9 pertains to a Declaration of Covenants, Conditions,
Restrictions and Easements executed by Landlord. Tenant shall have the
obligations for maintenance of such easements and utilities as are located
within the boundaries of the Premises as referred to in this Declaration, and
the obligation to contribute the share of expenses (as provided therein) which
is allocable to the Premises associated with the costs of maintenance of the
easement areas on other parcels for the benefit of the Premises. As relates to
easements over, under or across the Premises for the benefit of other parcels,
Tenant shall have the right to obtain reimbursement from the owners of other
parcels for the cost of maintenance of the easements in accordance with the
terms of this Declaration, including recovery from Landlord to the extent it is
at such time the owner of any other parcel which is obligated to share in such
costs under this Declaration. Landlord shall cooperate with Tenant in any
collection efforts from other owners.
-78-
<PAGE>
CAFETERIA USE AGREEMENT
THIS CAFETERIA USE AGREEMENT ("Agreement") is made effective as of July
15, 1998, by and between AUSPEX SYSTEMS, INC., a Delaware corporation
("Licensor"), and COVAD COMMUNICATIONS GROUP, INC., a Delaware corporation
("Licensee"), in the context of the following facts and circumstances:
A. Licensor, as tenant, is leasing from South Bay/San Tomas Associates, a
California general partnership, approximately 171,382 feet of leasable area
consisting of three (3) two (2) story buildings located on the Central
Expressway in the City of Santa Clara, State California, together with related
driveways, parking areas and related fixtures and improvements (collectively,
the "Complex").
B. Licensor, as sublessor, and Licensee, as sublessee, have entered into a
Sublease Agreement of even date herewith (the "Sublease") for one (1) of the
three (3) buildings located within the Complex containing approximately 62,504
square feet of leasable area and commonly known as 2330 Central Expressway,
Santa Clara, California (the "Sublease Premises").
C. Pursuant to the terms and conditions set forth below, Licensor has agreed
to allow Licensee to use the cafeteria located within the Complex.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. LICENSE AREA AND LOCATION. Licensor hereby grants to Licensee a non-
assignable, non-transferable right and revocable license to use of that certain
cafeteria (the "Cafeteria"), located on the first floor of the building commonly
referred to as Building A located at 2300 Central Expressway, Santa Clara,
California, and shown on the floor plan attached hereto as EXHIBIT A. Licensor
reserves, in its sole and absolute discretion, the right from time to time to
make changes in the shape, size, location, structure, nature and extent of the
Cafeteria and services provided therein and suspend operations from time to time
2. TERM; RIGHT TO TERMINATE. The term of this Agreement (the "License Term")
will commence as of the date Licensee first occupies the Sublease Premises
pursuant to the Sublease (the "Commencement Date"), and will terminate on the
date which the Sublease terminates, unless sooner terminated (the "Termination
Date") pursuant to any of the following provisions:
(a) Licensor may terminate this Agreement by giving three (3) business
days written notice to Licensee if Licensee fails to observe or perform any
term, covenant, or condition of this Agreement or the Sublease.
(b) Licensor may terminate this Agreement by giving three (3) business
days written notice to Licensee if the Cafeteria is damaged or destroyed by
a fire or other casualty that makes it impracticable for Licensor to
continue to allow Licensee to use the Cafeteria.
(c) Licensor may terminate this Agreement by giving thirty (30) days
written notice to Licensee if Licensor, in Licensor's sole discretion,
discontinues operating the Cafeteria.
3. LICENSE FEE. Licensee shall not be required to pay a monthly fee for use
of the Cafeteria. Notwithstanding the foregoing, if at any time during the term
of this Agreement Licensor elects to subsidize the cost of food sold at the
Cafeteria for the benefit of Licensor's employees, such benefit shall not be
provided to Licensee or Licensee's employees who shall be required to pay the
full (unsubsidized) cost for food purchased at the Cafeteria.
4. USE. Licensee shall use the Cafeteria during the License Term only as a
cafeteria, as contemplated by this Agreement, and for no other purpose without
Licensor's prior written approval which may be withheld in Licensor's sole and
absolute discretion. Subject to Licensor's reasonable approval, Licensee may
use the Cafeteria for company meetings on a prescheduled and available basis.
Licensee's use of the Cafeteria shall be subject to rules and regulations
promulgated by Licensor from time to time.
Page 1 of 4
<PAGE>
5. RULES OF CONDUCT. Licensee and its employees shall at all times use the
Cafeteria in compliance with the following provisions, which rules Licensor may
change from time to time in Licensor's sole discretion:
(a) Licensee shall at all times conduct its activities in or about the
Building in a professional and proper manner in accordance with Licensor's
rules and regulations.
(b) Licensee shall abide by Licensor's policies and procedures
regarding building access and security, which policies and procedures
Licensor may change from time to time in Licensor's sole discretion.
(c) Licensee shall access the Cafeteria during business hours only,
which shall be established by Licensor in its sole discretion.
6. INDEMNIFICATION OF LICENSOR. Licensee shall, at its sole cost and
expense, indemnify, protect, defend (with counsel acceptable to Licensor) and
hold harmless Licensor, its partners, shareholders, officers, directors,
attorneys, agents, beneficiaries, employees, affiliates, contractors, and
related entities (collectively, "Licensor's Related Parties") from and against
all liabilities, obligations, damages, penalties, claims, costs, charges and
expenses, including reasonable attorneys' fees, which may arise in any manner
out of or in connection with (i) Licensee's use of the Cafeteria; (ii) any act
or omission of Licensee or Licensee's partners, shareholders, officers,
directors, attorneys, agents, beneficiaries, employees, affiliates, contractors,
and related entities (collectively, "Licensee's Related Parties"); and/or (iii)
any breach by Licensee under this Agreement; provided, however, Licensee shall
have no obligation to defend or indemnify Licensor from claims which are caused
by the sole negligence or willful acts of Licensor or Licensor's Related
Parties.
7. WAIVER OF RESPONSIBILITY. Licensor and Licensor's Related Parties shall
not be liable for, and Licensee waives, all claims for loss or damage or injury
to person or property sustained by Licensee or any person claiming by, through,
or under Licensee, resulting from any accident or occurrence in, on or about the
Cafeteria, including, without limitation, claims for loss, theft or damage
resulting from: (i) any furnishings or other equipment or appurtenances being
in disrepair; (ii) any defect in or failure to operate, for whatever reason, any
equipment or facilities in Cafeteria; (iii) any act, omission or negligence of
other licensees, any other users or occupants of the Complex, any of Licensor's
employees, or the public; or (iv) any other cause of any nature. To the maximum
extent permitted by law, Licensee agrees to use the Cafeteria at Licensee's own
risk.
8. WAIVER OF RIGHT OF RECOVERY. Licensee (for itself and its insureds)
hereby releases and waives all right of recovery which it might otherwise have
(including rights of subrogation) against Licensor and Licensor's Related
Parties by reason of any loss or damage resulting from any recovery, claim,
action or cause for damages or injury or other occurrence no matter how caused,
to the extent that the same is covered by Licensee's insurance.
9. DEFAULT. Each party may exercise any remedy available to it at law or in
equity upon the other party's breach or default of this Agreement, and the
rights, remedies, and benefits provided by this Agreement and by law are
cumulative and nonexclusive. In the event of any action or other proceeding to
interpret or enforce this Agreement, the prevailing party shall be entitled to
recover its reasonable attorney's fees from the other party.
10. MISCELLANEOUS PROVISIONS. This Agreement may be modified only in writing
by Licensor and Licensee. This Agreement shall be governed by the laws of the
State of California. This Agreement shall not be strictly construed against the
party preparing it, but shall be construed as if all parties prepared this
Agreement jointly upon the advice of their respective legal counsel. If any
provision in this Agreement is held by any court to be invalid, void or
unenforceable, the remaining provisions shall nevertheless continue in full
force and effect. Waiver by Licensor of any breach of any term, covenant or
condition herein contained shall not be deemed a waiver of any subsequent breach
of the same or any other term, covenant or condition herein contained. Time is
of the essence of this Agreement and of every term, covenant and condition
hereof.
11. DELIVERY BY COUNTERPARTS AND FACSIMILES. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original and which
together shall constitute
Page 2 of 4
<PAGE>
one and the same instrument. Each party may execute and deliver this instrument
by facsimile, and facsimiles of signatures shall be deemed original signatures
for all purposes, but each party executing and delivering this instrument by
facsimile shall also send the other party an original of this instrument
containing such party's ink signature.
IN WITNESS WHEREOF, the parties have executed this Agreement on the respective
dates set forth below.
"Licensor"
AUSPEX SYSTEMS, INC.,
a Delaware corporation
By: /s/ R. Marshall Case
-------------------------------------
Title: VP & CFO
----------------------------------
Date Signed: 6 July 98
----------------------------
"Licensee"
COVAD COMMUNICATIONS GROUP, INC.,
a Delaware corporation
By: /s/ Timothy Laehy
-------------------------------------
Title: CFO
----------------------------------
Date Signed: 7/6/98
----------------------------
Page 3 of 4
<PAGE>
CAFETERIA USE AGREEMENT
Exhibit A
[Diagram showing the floor plan of the first floor of Building A located at 2300
Central Expressway, Santa Clara, California and the cafeteria located thereon.]
Page 4 of 4
<PAGE>
EXHIBIT 10.10
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>
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>
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 21.1
------------
SUBSIDIARIES OF THE REGISTRANT
Covad Communications Company, a California corporation
DIECA Communications, Inc., a Virginia corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, 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, except for the fourth and seventh
paragraphs of Note 7 as to which the date is August 6, 1998, in the Registration
Statement (Form S-1) and related Prospectus of Covad Communications Group, Inc.
for the registration of its common stock.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
September 18, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF WILSON SONSINI GOODRICH & ROSATI
We consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati, P.C.
September 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 JUN-30-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 4,378 121,885
<SECURITIES> 0 0
<RECEIVABLES> 25 568
<ALLOWANCES> 0 0
<INVENTORY> 43 208
<CURRENT-ASSETS> 4,819 123,288
<PP&E> 3,084 15,485
<DEPRECIATION> 70 680
<TOTAL-ASSETS> 8,074 146,541
<CURRENT-LIABILITIES> 1,022 5,559
<BONDS> 0 132,467
0 0
18 18
<COMMON> 11 11
<OTHER-SE> 6,469 8,036
<TOTAL-LIABILITY-AND-EQUITY> 8,074 146,541
<SALES> 26 995
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<CGS> 54 961
<TOTAL-COSTS> 2,793 8,979
<OTHER-EXPENSES> 0 0
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<INTEREST-EXPENSE> 12 5,867
<INCOME-PRETAX> (2,612) (11,704)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,612) (11,704)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> (2,612) (11,704)
<EPS-PRIMARY> (.80) (2.31)
<EPS-DILUTED> (.80) (2.31)
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