<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1998
REGISTRATION NO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
NOTE EXCHANGE OFFER
ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
COVAD COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 1731 77-0461529
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S.
OF INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION EMPLOYER IDENTIFICATION
CODE NUMBER) NUMBER)
</TABLE>
3560 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(408) 490-4500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CHARLES MCMINN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COVAD COMMUNICATIONS GROUP, INC.
3560 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054
(408) 490-4500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
BARRY E. TAYLOR, ESQ.
MEREDITH S. JACKSON, ESQ.
CECILIA M. DE LEON, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
13 1/2% Senior Discount
Notes
due 2008, Series B.... $260,000,000 100% $260,000,000 $76,700
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED APRIL 27, 1998
PROSPECTUS
COVAD COMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE ITS
13 1/2% SENIOR DISCOUNT NOTES DUE MARCH 15, 2008, SERIES B
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SENIOR DISCOUNT NOTES DUE MARCH 15, 2008, SERIES A
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME ON , 1998, UNLESS EXTENDED.
-----------
Covad Communications Group, Inc. (the "Company") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (as the same
may be amended or supplemented from time to time, the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal" and together
with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal
amount at maturity of its 13 1/2% Senior Discount Notes due March 15, 2008,
Series B (the "New Notes") which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement (as defined) of which this Prospectus is a part, for each $1,000
principal amount at maturity of its outstanding 13 1/2% Senior Discount Notes
due March 15, 2008, Series A (the "Old Notes"), of which $260,000,000 principal
amount at maturity is outstanding as of the date hereof.
The Company will accept for exchange any and all validly tendered Old Notes
prior to 5:00 P.M., New York City time, on , 1998, unless extended (the
"Expiration Date"). Old Notes may be tendered only in integral multiples of
$1,000 principal amount at maturity. Tenders of Old Notes may be withdrawn at
any time prior to 5:00 P.M., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum amount of Old Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions. In the event the Company terminates the Exchange Offer
and does not accept for exchange any Old Notes, the Company will promptly
return the Old Notes to the Holders (as defined) thereof. The Company will not
receive any proceeds from the Exchange Offer. See "The Exchange Offer."
The terms of the New Notes will be identical in all material respects to
those of the Old Notes, except that the New Notes (i) will have been registered
under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes and (ii) will not be
entitled to certain registration or other rights under the Registration Rights
Agreement (as defined), including the provision in the Registration Rights
Agreement for additional interest on the Old Notes of up to 2.0% per annum upon
failure by the Company to consummate the Exchange Offer. See "Description of
the Old Notes--Registration Rights; Additional Interest." The New Notes will be
entitled to the benefits of the Indenture (as defined) governing the Old Notes.
See "Description of the Old Notes" and "The Exchange Offer."
(Continued on following page)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS
ON , 1998.
SEE "RISK FACTORS" ON PAGE 14 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS OFFERING.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1998
<PAGE>
(Continuation of cover page)
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement dated as of
March 11, 1998 (the "Registration Rights Agreement") by and among the Company
and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated (the "Initial
Purchasers"), a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Exchange Offer is intended
to satisfy the Company's obligations under the Registration Rights Agreement
to register the Old Notes under the Securities Act. Once the Exchange Offer is
consummated, the Company will have no further obligations to register any of
the Old Notes not tendered by the holders of the Old Notes (together with the
holders of the New Notes, the "Holders") for exchange. See "Risk Factors--
Consequences to Non-Tendering Holders of Old Notes."
The Old Notes were initially represented (i) in the case of Old Notes
initially purchased by "qualified institutional buyers" (as such term is
defined in Rule 144A under the Securities Act), by two global Old Notes in
fully registered form, all registered in the name of a nominee of The
Depository Trust Company ("DTC"), and (ii) in the case of Old Notes initially
purchased by persons other than U.S. persons in reliance upon Regulation S
under the Securities Act, by one global Regulation S Old Note in fully
registered form, all registered in the name of a nominee of DTC for the
accounts of Euroclear System ("Euroclear") and Cedel Bank, societe anonyme
("Cedel Bank"). The New Notes exchanged for the Old Notes represented by the
global Old Notes and global Regulation S Old Note will be represented (a) in
the case of "qualified institutional buyers", by two global New Notes in fully
registered form, registered in the name of the nominee of DTC, and (ii) one
global Regulation S New Note in fully registered form registered in the name
of the nominee of DTC for the accounts of Euroclear and Cedel Bank. The global
New Notes and global Regulation S New Note will be exchangeable for definitive
New Notes in registered form, in denominations of $1,000 principal amount at
maturity and integral multiples thereof. The New Notes in global form will
trade in The Depository Trust Company's Same-Day Funds Settlement System, and
secondary market trading activity in such New Notes will therefore settle in
immediately available funds. See "The Exchange Offer--Book-Entry Transfer;
Delivery and Form."
The New Notes will accrete in principal amount at the rate of 13.5% per
annum from the date of issuance thereof until March 15, 2003. Thereafter, the
New Notes will bear interest at a rate equal to 13.5% per annum, payable semi-
annually in arrears on March 15 and September 15 of each year, commencing
September 15, 2003. The Old Notes will continue to accrete in principal amount
at the rate of 13.5% per annum to, but not including, the date of issuance of
the New Notes. Such accretion will become a part of the Accreted Value (as
defined) of the New Notes. Any Old Notes not tendered or accepted for exchange
will continue to accrete in principal amount at the rate of 13.5%per annum in
accordance with its terms.
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after March 15, 2003, at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the date
of redemption. On or prior to March 15, 2003, up to 35% of the aggregate
principal amount at maturity of the New Notes will be redeemable at the option
of the Company with the net cash proceeds of one or more Public Equity
Offerings (as defined) or the sale of at least $35.0 million of Capital Stock
(as defined) to one or more Strategic Equity Investors (as defined); provided,
however, that New Notes representing $87.8 million of initial aggregate
Accreted Value of the Old Notes originally issued remain outstanding
immediately after such redemption. Upon the occurrence of a Change of Control
(as defined), each Holder of the New Notes may require the Company to
repurchase all or a portion of such Holder's New Notes at 101% of the
aggregate Accreted Value thereof (if prior to March 15, 2003) or the principal
amount thereof (if on or after March 15, 2003), together with accrued and
unpaid interest if any, to the date of repurchase. See "Description of the Old
Notes" and "Description of the New Notes."
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Division of Corporation Finance of the Securities Exchange
Commission (the "SEC" or "Commission") as set forth in the Staff's Exxon
Capital Holdings Corp. SEC No-Action Letter (available April 13, 1989), Morgan
Stanley & Co.,
<PAGE>
(Continuation of cover page)
Inc. SEC No-Action Letter (available June 5, 1991), Shearman & Sterling SEC
No-Action Letter (available July 7, 1993), and other interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter and there can be no assurance that the
Staff of the Division of Corporation Finance of the SEC would make a similar
determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff of the Division of Corporation Finance, and subject to the two
immediately following sentences, the Company believes that New Notes issued
pursuant to this Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a Holder thereof (other than a
Holder who is a broker-dealer) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
Holder's business and that such Holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such New Notes. However, any
Holder of Old Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing New Notes,
or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule144A under the Securities Act ("Rule144A") or any other
available exemption under the Securities Act, (a) will not be able to rely on
the interpretations of the Staff of the Division of Corporation Finance of the
SEC set forth in the above-mentioned interpretive letters, (b) will not be
permitted or entitled to tender such Old Notes in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption from such requirements. See
"Risk Factors--Consequences to Non-Tendering Holders of Old Notes. In
addition, as described below, if any broker-dealer holds Old Notes acquired
for its own account as a result of market-making or other trading activities
(a "Participating Broker-Dealer") and exchanges such Old Notes for New Notes,
then such Participating Broker-Dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes.
Each Holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such Holder is
not a broker-dealer, such Holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such
New Notes. Each Participating Broker-Dealer that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it acquired
the Old Notes for its own account as a result of market-making activities or
other trading activities and must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of such New Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a Participating Broker-Dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the Staff of the Division of
Corporation Finance of the SEC in the interpretive letters referred to above,
the Company believes that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the New Notes received upon
exchange of such Old Notes (other than Old Notes which represent an unsold
allotment from the original sale of the Old Notes) with a prospectus meeting
the requirements of the Securities Act, which may be the prospectus prepared
for an exchange offer so long as it contains a description of the plan of
distribution with respect to the resale of such New Notes. Accordingly, this
Prospectus may be used by a Participating Broker-Dealer during the period
referred to below in connection with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired by such Participating Broker-
Dealer for its own account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the Registration Rights
Agreement, the Company has agreed that this Prospectus may be used by a
Participating Broker-Dealer in connection with resales of such New Notes for a
period ending 150 days after the effective date of the Registration Statement
(subject to extension under certain limited circumstances described below) or,
if earlier, when such Participating Broker-Dealer is no longer required to
deliver a prospectus in connection with market-making or other trading
activities. See "Plan of Distribution."
<PAGE>
(Continuation of cover page)
Any Participating Broker-Dealer who is an "affiliate" of the Company may not
rely on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any
material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made,
not misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend
the sale of New Notes pursuant to this Prospectus until the Company has
amended or supplemented this Prospectus to correct such misstatement or
omission and has furnished copies of the amended or supplemented Prospectus to
such Participating Broker-Dealer or the Company has given notice that the sale
of the New Notes may be resumed, as the case may be. If the Company gives such
notice to suspend the sale of the New Notes, it shall extend the 150-day
period referred to above during which Participating Broker-Dealers are
entitled to use this Prospectus in connection with the resale of New Notes by
the number of days during the period from and including the date of the giving
of such notice to and including the date when Participating Broker-Dealers
shall have received copies of the amended or supplemented Prospectus necessary
to permit resales of the New Notes or to and including the date on which the
Company has given notice that the sale of New Notes may be resumed, as the
case may be.
The New Notes will be senior obligations of the Company, will rank pari
passu in right of payment with all existing and future senior Debt (as
defined) of the Company and will rank senior in right of payment to all future
subordinated Debt of the Company. As of March 31, 1998, the Company had
approximately $ million of long-term obligations (including current portion
but net of the debt discount (the "Debt Discount") associated with the
warrants issued with the issuance of the Old Notes (the "Old Note Issuance").
However, the Company is a holding company and the New Notes will be
effectively subordinated to future Debt and other liabilities (including any
subordinated indebtedness and trade payables) of the Company's Subsidiaries
(as defined). See "Risk Factors--Substantial Leverage; Ability to Service
Indebtedness" and "--Holding Company Structure; Restrictions on Access to
Subsidiary Cash Flow." The Indenture permits the Company and its Subsidiaries
to incur substantial additional Debt, including secured Debt, subject to
certain limitations. The Company conducts its operations primarily through its
Subsidiaries. These Subsidiaries do not guarantee the Old Notes and will not
be required to guarantee the New Notes, and the Company is permitted to make
substantial investments in these Subsidiaries.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture and the
Registration Rights Agreement (except for those rights which terminate upon
consummation of the Exchange Offer). Following consummation of the Exchange
Offer, the Holders of Old Notes will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to such Holders (other than to the Initial Purchasers under certain
limited circumstances) to provide for registration under the Securities Act of
the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered Old
Notes could be adversely affected. See "Summary-- Certain Consequences of a
Failure to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
<PAGE>
(Continuation of cover page)
Prior to this Exchange Offer, there has been no public market for the Old
Notes or New Notes. The Company does not intend to list the New Notes on a
national securities exchange or to seek approval for quotation through the
Nasdaq National Market. As the Old Notes were issued and the New Notes are
being issued to a limited number of institutions who typically hold similar
securities for investments, the Company does not expect that an active public
market for the New Notes will develop. In addition, resales by certain Holders
of any outstanding Old Notes and the New Notes of a substantial percentage of
the aggregate principal amount at maturity of such New Notes could constrain
the ability of any market maker to develop or maintain a market for the New
Notes. To the extent that a market for the New Notes should develop, the
market value of the New Notes will depend on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition, performance and prospects of the Company. Such factors might cause
the New Notes to trade at a discount from face value. See "Risk Factors--
Absence of Public Market for the New Notes; Restrictions on Transfer." The
Company has agreed to pay the expenses of the Exchange Offer.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with the
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES LAWS. ALL STATEMENTS REGARDING THE COMPANY'S AND ITS
SUBSIDIARIES' EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY AND ITS SUBSIDIARIES BELIEVE
THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO
HAVE BEEN CORRECT. ACTUAL RESULTS WILL DIFFER AND SUCH DIFFERENCES MAY BE
MATERIAL. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN
THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK
FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR PERSONS ACTING ON THEIR
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company has agreed that, whether or not it is
required to do so by the rules and regulations of the SEC, for so long as any
of the Old Notes and New Notes remain outstanding, it will furnish to the
Holders of the Old Notes and New Notes and file with the SEC (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the SEC on Forms 10-Q and 10-K if the Company were required to
file such forms, including a "Management's Discussion and Analysis of Results
of Operations and Financial Condition" and, with respect to the annual
information only, a report thereon by the Company's independent auditors and
(ii) all reports that would be required to be filed with the SEC on Form 8-K
if the Company were required to file such reports, in each case, within the
time periods set forth in the rules and regulations of the SEC. In addition,
for so long as any of the Old Notes and New Notes remain outstanding, the
Company has agreed to make available to the Holders of the Old Notes and New
Notes, securities analysts, prospective purchasers of the Old Notes and New
Notes or beneficial owners of the Old Notes and New Notes in connection with
any sale thereof, the information required by Rule 144A(d)(4) under the
Securities Act.
<PAGE>
(Continuation of cover page)
Market data and certain industry forecasts used throughout this Prospectus
were obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. Similarly, internal surveys, industry forecasts and market
research, while believed to be reliable, have not been independently verified,
and the Company does not make any representation as to the accuracy of such
information.
Covad Communications Company, Inc. was incorporated in California on October
7, 1996 under the name Covad Communications Company, Inc. In July 1997, Covad
Communications Company became a wholly-owned subsidiary of Covad
Communications Group, Inc., a Delaware corporation. Unless the context
otherwise requires, "Covad" and the "Company" refer to Covad Communications
Group, Inc. and its subsidiaries (the "Subsidiaries"), including Covad
Communications Company.
The "Covad(TM)", "TeleSpeed SM", "The Speed to Work SM"and the Covad
crescent logo names and marks are among the trademarks of the Company. This
Prospectus contains other product names, trade names and trademarks of the
Company and of other organizations.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments thereto, the "Registration Statement") filed by
the Company with the SEC under the Securities Act. This Prospectus, which
forms a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain parts of which
have been omitted in accordance with the rules and regulations of the SEC.
Reference is hereby made to the Registration Statement and related exhibits
and schedules filed therewith for further information with respect to the
Company and the New Notes offered hereby. Statements contained herein
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed by the Company with
the SEC and each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits and schedules thereto
may be inspected and copied at the public reference facilities maintained by
the SEC: New York Regional Office, Seven World Trade Center, New York, New
York 10048, and Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661. The SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. Copies of the Registration Statement may be
obtained from the SEC's Internet address at http://www.sec.gov.
<PAGE>
PROSPECTUS SUMMARY
Unless the context requires otherwise, references to "Covad" or the "Company"
herein refer to Covad Communications Group, Inc. and its Subsidiaries. The
following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and financial statements appearing
elsewhere in this Prospectus. This Prospectus includes "forward-looking"
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Although the Company believes that its plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such plans, intentions or
expectations will be achieved. Actual results will differ from such plans,
intentions and expectations, and such differences may be material. Important
factors that could cause actual results to differ materially from the Company's
forward-looking statements are set forth in "Risk Factors" and elsewhere in
this Prospectus. The Company disclaims any obligation to update forward-looking
statements contained herein. All forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth herein. The New Notes offered
hereby involve a high degree of risk. See "Risk Factors."
THE COMPANY
The Company is a packet-based Competitive Local Exchange Carrier ("CLEC")
which provides high-speed data communication services using Digital Subscriber
Line ("DSL") technology. The Company's services enhance remote access from
homes to Local Area Networks ("LANs") of large corporations, government
entities and educational institutions (collectively, "enterprises") and enable
Internet Service Providers ("ISPs") to offer high-speed Internet access to
their end-users. The Company's services are provided over standard copper
telephone lines at speeds of up to 1.5 Megabits per second ("Mbps"),
approximately 50 times the speed available through a standard 28.8 Kilobits per
second ("Kbps") modem. The Company markets its services directly to enterprises
that are increasingly emphasizing remote LAN ("RLAN") access to improve
employee productivity and reduce operating costs. The Company also markets its
services indirectly through ISPs that wish to sell high-speed Internet access
initially to small- and medium-sized businesses, and subsequently to consumers,
using the Company's DSL lines.
The Company was founded in October 1996 and launched its services in its
first market, the San Francisco Bay Area, in December 1997. Covad has entered
into arrangements for pilot implementation with a number of enterprise
customers including, among others, Cisco Systems, Inc. ("Cisco"), Intel
Corporation ("Intel"), Oracle Corporation and Stanford University. The Company
has also entered into marketing arrangements with 12 ISP customers, including
Concentric Network Corporation and Verio Inc. Covad's services are currently
available for subscription to over one million homes and businesses in the San
Francisco Bay Area. The Company is aggressively expanding its geographical
coverage in the San Francisco Bay Area. The Company plans to launch its
services in other regions, initially including Boston, Los Angeles, New York,
Seattle and Washington, D.C.
The demand for high-speed data services is growing rapidly. Over the past ten
years, high-speed LANs have become increasingly important to enterprises in
order for employees to share information, send e-mail, search databases and
conduct business. The Company believes that a large majority of personal
computers used in enterprises are connected to LANs. Enterprises are now
seeking to extend this same high-speed connectivity to employees accessing the
LAN from home to improve employee productivity and reduce operating costs.
High-speed connectivity has also become important to small- and medium-sized
businesses due to the dramatic increase in Internet usage. High-speed Internet
connections are required for small- and medium-sized businesses to host Web
sites and access critical business information outside the company. The Company
expects the market size for both RLAN access and small- and medium-sized
business Internet access to continue to grow rapidly as businesses increase
their use of the Internet, intranets and privately managed networks. Industry
analysts estimate
1
<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%.
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.
THE COVAD SOLUTION
Covad was formed to capitalize on the substantial market opportunity created
by the growing demand for high-speed data communications, the commercial
availability of low-cost DSL technology and the passage of the
Telecommunications Act of 1996 (the "1996 Act"). Key aspects of the Company's
high-speed data communication services solution include: (i) an attractive
value proposition that provides high-speed connections at similar or lower
prices than currently available to customers; (ii) a widely available, always-
connected, secure network that facilitates deployment of Internet and intranet
applications; and (iii) a management team experienced in the data
communications, telecommunications and personal computer industries.
Attractive Value Proposition. The Company offers higher bandwidth data
connections than alternative services at similar or lower prices that do not
vary with usage. For the RLAN market, the Company's mid-range services are
three to six times the speed of ISDN and up to ten times the speed of analog
modems at monthly rates similar to or lower than those for heavily used ISDN
lines. For business Internet users, the Company's high-end services offer
comparable bandwidth to T1 and Frame Relay circuits at approximately 25% of the
cost. The Company believes that many of its enterprise customers can justify
deploying lines to their employees if productivity improves by only a few hours
per month based on increases in the number of hours worked and decreases in
commute time and time spent waiting for information.
Widely Available, Always-Connected, Secure Network. The Company's strategy of
providing blanket coverage is designed to ensure that the Company's services
are available to the vast majority of its customers' end-users in any region it
enters. The Company's network provides 24-hour, always-on connectivity, unlike
ISDN lines and analog modems which require customers to connect to their LAN or
the Internet for each use. Also, because the Company uses dedicated connections
from each end-user to the enterprise network or ISP, its customers can obtain
increased security which reduces the risk of unauthorized access.
Experienced Management Team. The Company's management team includes
individuals with extensive experience in designing, marketing and financing
personal computer and networking equipment and services, including founders
Charles McMinn, President and Chief Executive Officer, Charles Haas, Vice
President of Sales and Marketing and Dhruv Khanna, Vice President, General
Counsel and Secretary (all of whom worked at Intel), Rex Cardinale, Vice
President of Engineering (former General Manager of the cc:Mail division of
Lotus Development Corporation), John Rugo, Vice President of Operations (former
Vice President of BBN Planet Corporation), and Timothy Laehy, Vice President of
Finance and Chief Financial Officer (former Vice President of Corporate Finance
and Treasurer of Leasing Solutions, Inc.).
BUSINESS STRATEGY
The Company's objective is to be the leading provider of high-speed data
communication services using DSL technology in each region that it enters. In
order to achieve this goal, the Company is implementing a business strategy
with the following key elements:
Secure CLEC Status and Sign Interconnection Agreements in the Top U.S.
Markets. To provide its services, the Company obtains CLEC status in each state
that it enters and signs interconnection agreements with the relevant Incumbent
Local Exchange Carriers ("ILECs"). To date, the Company has obtained CLEC
2
<PAGE>
regulatory approval in the states of California, Illinois, Massachusetts, New
York, Oregon and Washington and intends to obtain such approval in other states
necessary to cover the Company's initial target regions. In the aggregate, the
Company's initial target regions represent over 20% of the U.S. population.
Roll Out Service Rapidly in These Markets. The Company seeks to be the first
company to roll out service in each region that it enters in order to: (i)
secure ILEC central office ("CO") collocation space prior to competitors; (ii)
secure and retain customers before significant competition arises; (iii)
maintain advantages over competitors through superior coverage and high
customer satisfaction; and (iv) build the largest volume and market share in
order to allow the Company to reduce the costs and prices of its services and,
where it is first to market, maintain its leadership position.
Provide Pervasive Coverage. The Company is pursuing a blanket coverage
strategy of providing service in almost every CO in each region that it enters,
since the typical enterprise desires to offer RLAN access to all employees
regardless of where they reside in the region. Blanket coverage is also
important to the Company's ISP customers which desire to market their Internet
access services on a region-wide basis.
Focus on Packet Data Services. Although the Company is authorized to provide
both data and voice services, it is presently focusing exclusively on packet
data services and does not currently plan to offer analog voice services. The
Company believes that it can provide a superior data service while avoiding the
significant investment that would be required to compete in the already crowded
analog voice market.
Sell Directly to Enterprises and ISPs that Can Provide a Large Number of End-
Users. The Company's direct sales personnel specifically target large
enterprises that the Company estimates have over 100 existing ISDN or analog
modem-based RLAN users. The Company offers these customers higher performance
and always-on services at similar or lower prices than those of alternative
technologies. Additionally, the Company targets ISPs which can offer their end-
users similar cost and performance advantages for Internet access using the
Company's services.
Employ a "Success-Based" Investment Strategy. Because it uses DSL technology,
a significant portion of the Company's capital expenditures are "success-
based." The Company estimates that over 50% of capital expenditures over the
next several years will be for DSL equipment that is directly related to the
Company's end-user subscription rate.
Cooperate with ISPs and Other Industry Participants. The Company does not
provide Internet access directly to any of its customers. Instead, the Company
provides connections to ISPs which offer high-speed Internet access using the
Company's lines. In this way, the Company: (i) carries the traffic of multiple
ISPs in any region, increasing its volume and reducing its costs; (ii)
leverages its selling efforts through the sales and support staff of these
ISPs; (iii) offers ISPs a non-competitive transport alternative, since the ILEC
typically provides its own Internet access services in competition with ISPs;
and (iv) provides ISPs a high-speed service offering to compete with cable-
based Internet access.
Provide a Superior Product and Service Solution. The Company believes that it
can build a significant competitive position by providing a comprehensive
product and service solution to its customers. The Company undertakes to
provide all of the necessary product and service elements required to establish
and maintain data services in its target markets including: (i) managing the
ILEC's installation and testing of copper lines used for its service; (ii)
installing any in-building wiring required to initiate service; (iii) selling,
configuring and installing the DSL modem required at each end-user site; (iv)
providing 24-hour, seven-day 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.
3
<PAGE>
NEW EQUITY INVESTMENTS
The Company's investors include Intel, Warburg, Pincus Ventures, L.P.
("Warburg" or "WPV") and Crosspoint Venture Partners 1996 ("Crosspoint" and
together with Intel and Warburg, the "Investors"). On February 20, 1998, the
Company entered into a subscription agreement with the Investors, pursuant to
which Warburg and Crosspoint unconditionally agreed to invest $16.0 million of
additional equity capital in the Company at a date to be determined by the
Company but no later than March 11, 1999 (the "Equity Commitment"). The Company
agreed to either call the Equity Commitment or to complete an alternate equity
financing of at least $16.0 million by the end of March11, 1999. Also, pursuant
to this subscription agreement, Intel invested $1.0 million of additional
equity capital (the "Stock Purchase") concurrently with the closing of the Old
Note Issuance. See "Certain Relationships and Related Transactions."
FINANCING STRATEGY
The Company intends to use its current capital resources to expand its
operations to five additional regions in the next 18 months and to complete
additional deployment in the San Francisco Bay Area. The Company believes such
resources will be sufficient to fund the Company's aggregate capital
expenditures and working capital requirements, including operating losses,
associated with the rollout of its initial regions. While the Company believes
that such resources will be sufficient to finance its expansion into the
initial regions, it may need to secure additional financing to enter additional
regions or to meet higher-than-expected subscription rates for its services. If
demand for the Company's services is less than expected, the Company may
require additional financing at an earlier date, although the Company believes
it would be able to reduce certain costs that are, to a large extent, demand-
driven, or delay its entry into various of its targeted regions. There can be
no assurance that the Company will be able to implement its rollout strategy in
a timely fashion, if at all. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Liquidity and Capital
Resources."
4
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer............
$1,000 principal amount at maturity of the New
Notes in exchange for each $1,000 principal
amount at maturity of the Old Notes. As of
April 27, 1998, $260,000,000 in aggregate
principal amount at maturity of Old Notes were
outstanding. The Company will issue the New
Notes to Holders on or promptly after the
Expiration Date.
Based on an interpretation by the Staff of the
SEC set forth in the Staff's Exxon Capital
Holdings Corp. SEC No-Action Letter (available
April 13, 1989), Morgan Stanley & Co., Inc. SEC
No-Action Letter (available June 5, 1991),
Shearman & Sterling SEC No-Action Letter
(available July 7, 1993), and other no-action
letters issued to third parties, the Company
believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by Holders thereof without
compliance with the registration and prospectus
delivery provisions of the Securities Act.
However, any Holder who is an "affiliate" of
the Company or who intends to participate in
the Exchange Offer for the purpose of
distributing the New Notes, or any broker-
dealer who purchased Old Notes from the Company
to resell pursuant to Rule 144A or any other
available exemption under the Securities Act
(i) cannot rely on the interpretation by the
Staff of the SEC set forth in the above
referenced no-action letters, (ii) cannot
tender its Old Notes in the Exchange Offer and
(iii) must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any sale or
transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from
such requirements. See "Risk Factors--
Consequences to Non-Tendering Holder of Old
Notes."
Each Participating Broker-Dealer that receives
New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act. This Prospectus may be used
by a Participating Broker-Dealer in connection
with resales of New Notes received in exchange
for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as
a result of market-making activities or other
trading activities and not acquired directly
from the Company. The Company has agreed that
for a period of 150 days after the effective
date of the Registration Statement, it will
make this Prospectus available to any
Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution."
5
<PAGE>
Expiration Date............... , 1998, unless the Exchange Offer is
extended, in which case the term "Expiration
Date" means the latest date and time to which
the Exchange Offer is extended.
Accretion of the New Notes
and the Old Notes............. No cash interest will accrue or be payable in
respect of the New Notes prior to March 15,
2003. Thereafter, interest will accrue at the
rate of 13.5% per annum, payable semiannually
in arrears on each March 15 and September 15,
commencing September 15, 2003. The Old Notes
accepted for exchange will continue to accrete
in principal amount at the rate of 13.5% per
annum to, but excluding, the issuance date of
the New Notes and will cease to accrete in
principal amount upon cancellation of the Old
Notes and issuance of the New Notes. Any Old
Notes not tendered or accepted for exchange
will continue to accrete in principal amount at
the rate of 13.5% per annum in accordance with
its terms. The Accreted Value of the New Notes
upon issuance will equal the Accreted Value of
the Old Notes accepted for exchange immediately
prior to issuance of the New Notes.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer......................... customary conditions. The conditions are
limited and relate in general to proceedings
which have been instituted or laws which have
been adopted that might impair the ability of
the Company to proceed with the Exchange Offer.
As of the date hereof, none of these events had
occurred, and the Company believes their
occurrence to be unlikely. If any such
conditions do exist prior to the Expiration
Date, the Company may (i) refuse to accept any
Old Notes and return all previously tendered
Old Notes, (ii) extend the Exchange Offer or
(iii) waive such conditions. See "The Exchange
Offer-Conditions."
Procedures for Tendering Old Each Holder of Old Notes wishing to accept the
Notes......................... Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with such Old Notes to be
exchanged and any other required documentation
to The Bank of New York, as Exchange Agent (the
"Exchange Agent"), at the address set forth
herein and therein or effect a tender of such
Old Notes pursuant to the procedures for book-
entry transfer as provided for herein. By
executing the Letter of Transmittal or
effecting a book-entry transfer, each Holder
will represent to the Company that, among other
things, the New Notes acquired pursuant to the
Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such New Notes, whether or not such
person is the Holder, that neither the Holder
nor any such other person has an arrangement or
understanding with any person to participate in
the distribution of such New Notes and that
neither the Holder nor any such person is an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. Each
Participating Broker-Dealer that receives New
Notes not acquired directly from the Company
must acknowledge
6
<PAGE>
that it will deliver a copy of this Prospectus
in connection with any resale of such New
Notes. See "The Exchange Offer-- Procedures for
Tendering" and "Plan of Distribution."
Special Procedures for Any beneficial owner whose Old Notes are
Beneficial Owners............. registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Old Notes in the
Exchange Offer should contact such registered
Holder promptly and instruct such registered
Holder to tender such Old Notes on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on such beneficial
owner's own behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Old Notes,
either make appropriate arrangements to
register ownership of the Old Notes in such
beneficial owner's name or obtain a properly
completed bond power from the registered
Holder. The transfer of registered ownership
may take considerable time and may not be able
to be completed prior to the Expiration Date.
See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery Holders of Old Notes who wish to tender their
Procedures.................... Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent, or cannot
complete the procedure for book-entry transfer,
prior to the Expiration Date must tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date by delivering a written notice
of such withdrawal to the Exchange Agent in
conformity with certain procedures set forth
under "The Exchange Offer--Withdrawal of
Tenders."
Acceptance of Old Notes and
Delivery of New Notes......... The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. Any Old Notes not accepted for
exchange will be returned without expense to
the tendering Holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain Tax Considerations.... The exchange pursuant to the Exchange Offer
should not be a taxable event for federal
income tax purposes. See "Certain Federal
Income Tax Considerations."
Exchange Agent................ The Bank of New York.
7
<PAGE>
TERMS OF NEW NOTES
The Exchange Offer applies to up to $260,000,000 aggregate principal amount
at maturity of the Company's Old Notes. The New Notes will be obligations of
the Company evidencing the same Debt as the Old Notes and will be entitled to
the benefits of the same Indenture. See "Description of the New Notes." The
form and terms of the New Notes are the same as the form and terms of the Old
Notes in all material respects except that the New Notes have been registered
under the Securities Act and hence do not include certain rights to
registration thereunder and do not contain transfer restrictions or terms with
respect to additional interest payments applicable to the Old Notes. See
"Description of the New Notes."
New Notes Offered............. $260,000,000 aggregate principal amount at
maturity of 13 1/2% Senior Discount Notes due
2008, Series B.
Maturity...................... March 15, 2008.
Interest...................... The New Notes will be sold at a substantial
discount to their principal amount at maturity,
and will accrete in value through March 15,
2003 (the "Full Accretion Date") at a rate of
13.5% per annum, compounded semi-annually. Cash
interest will neither accrue nor be payable on
the New Notes prior to the Full Accretion Date.
Thereafter, the New Notes will bear interest at
the rate of 13.5% per annum, payable in cash
semi-annually in arrears on March 15 and
September 15, commencing September 15, 2003.
Ranking....................... The New Notes will be senior obligations of the
Company, will rank pari passu in right of
payment with all existing and future senior
Debt of the Company and will rank senior in
right of payment to all future subordinated
Debt of the Company, but will be effectively
subordinated to any secured Debt of the Company
and future Debt and other liabilities
(including subordinated Debt and trade
payables) of the Company's Subsidiaries. The
Indenture permits the incurrence of substantial
additional Debt, including secured Debt, by the
Company and its Subsidiaries, subject to
certain restrictions. See "Risk Factors--
Holding Company Structure; Restrictions on
Access to Subsidiary Cash Flow." As of March
31, 1998, the Company had approximately $
million of long-term obligations (including
current portion but net of the Debt Discount)
outstanding.
Sinking Fund.................. None.
Optional Redemption........... The New Notes may be redeemed at the option of
the Company, in whole or in part, at any time
on or after March 15, 2003, at a premium
declining to par on March 15, 2006, plus
accrued and unpaid interest through the
redemption date.
In addition, at any time prior to or on March
15, 2001, the Company may redeem up to 35% of
the aggregate principal amount at maturity of
the New Notes at a redemption price of 113.5%
of the Accreted Value to the date of
redemption, with the
8
<PAGE>
net cash proceeds of one or more Public Equity
Offerings or the sale of at least $35.0 million
of Capital Stock to one or more Strategic
Equity Investors; provided, however, that New
Notes representing at least $87.8 million of
initial aggregate Accreted Value of Old Notes
originally issued remain outstanding
immediately after the occurrence of such
redemption.
Change of Control............. In the event of a Change of Control, the
Holders of the New Notes will have the right to
require the Company to purchase the New Notes
at a price equal to 101% of the aggregate
principal amount or Accreted Value thereof, as
applicable, plus accrued and unpaid interest to
the date of purchase. There can be no assurance
that the Company will have the financial
resources necessary to repurchase the New Notes
upon a Change of Control.
Covenants..................... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as
defined) to make certain restricted payments,
incur additional indebtedness and issue
Disqualified Stock (as defined), pay dividends
or make other distributions, repurchase equity
interests or subordinated indebtedness, engage
in sale or leaseback transactions, create
certain liens, enter into certain transactions
with affiliates, sell assets of the Company or
its Restricted Subsidiaries, change their lines
of business, issue or sell equity interests of
the Company's Restricted Subsidiaries or enter
into mergers and consolidations. In addition,
under certain circumstances, the Company will
be required to offer to purchase the New Notes
at a price equal to 100% of the principal
amount or Accreted Value thereof, as
applicable, plus accrued and unpaid interest to
the date of purchase, with the proceeds of
certain asset sales. See "Description of the
Old Notes--Certain Covenants" and "Description
of the New Notes."
Exchange Rights............... Holders of New Notes will not be entitled to
any exchange or registration rights with
respect to the New Notes. Holders of Old Notes
are entitled to certain exchange rights
pursuant to the Registration Rights Agreement.
Under the Registration Rights Agreement, the
Company is required to offer to exchange the
Old Notes for New Notes having substantially
identical terms which have been registered
under the Securities Act. This Exchange Offer
is intended to satisfy such obligation. Once
the Exchange Offer is consummated, the Company
will have no further obligations to register
any Old Notes not tendered by the Holders
thereof for exchange. See "Risk Factors--
Consequences to Non-Tendering of Old Notes."
Form of New Notes............. The New Notes will be represented by one or
more permanent global Notes in definitive,
fully registered form, to be deposited with The
Bank of New York, as the Trustee (the
"Trustee")
9
<PAGE>
under the Indenture, as custodian for, and
registered in the name of, a nominee of DTC.
The New Notes sold in offshore transactions in
reliance on Regulation S under the Securities
Act will be represented by one or more
permanent global Notes in definitive, fully
registered form deposited with the Trustee as
custodian for, and registered in the name of, a
nominee of DTC for the accounts of Morgan
Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear and Cedel
Bank. See "The Exchange Offer--Book-Entry
Transfers; Delivery and Form."
Use of Proceeds...............
The Company will not receive any proceeds from
the Exchange Offer.
10
<PAGE>
CERTAIN CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and therefore may not be offered, sold or otherwise transferred
except in compliance with the registration requirements of the Securities Act
and any other applicable securities laws, or pursuant to an exemption therefrom
or in a transaction not subject thereto, and in each case in compliance with
certain other conditions and restrictions, including the Company's and the
Trustee's right in certain cases to require the delivery of opinions of
counsel, certifications and other information prior to any such transfer. Old
Notes which remain outstanding after consummation of the Exchange Offer will
continue to bear a legend reflecting such restrictions on transfer. In
addition, upon consummation of the Exchange Offer, Holders of Old Notes which
remain outstanding will not be entitled to any rights to have such Old Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions applicable
solely to the Initial Purchasers). The Company currently does not intend to
register under the Securities Act any Old Notes which remain outstanding after
consummation of the Exchange Offer (subject to such limited exceptions, if
applicable).
To the extent that Old Notes are tendered and accepted in the Exchange Offer
any trading market for Old Notes which remain outstanding after the Exchange
Offer could be adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will vote together as a single class for purposes of
determining whether Holders of the requisite percentage in outstanding
principal amount at maturity thereof have taken certain actions or exercised
certain rights under the Indenture. See "Description of the New Notes."
The Registration Rights Agreement provides that, if the Exchange Offer were
not consummated within the time period specified therein, additional interest
will accrue on the Old Notes at a rate of 0.50% per annum over the rate at
which interest is then accruing or, as applicable, principal is then accreting,
during the 90-day period immediately following the occurrence of any
Registration Default (as defined) and shall increase by 0.25% per annum at the
end of each subsequent 90-day period until such Registration Default has been
cured, but in no event would such additional interest exceed 2.0% per annum.
See "Description of the Old Notes--Registration Rights; Additional Interest."
Following consummation of the Exchange Offer, neither the Old Notes nor the New
Notes will be entitled to any such additional interest.
11
<PAGE>
SUMMARY FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein. The consolidated
statement of operations data for the year ended December 31, 1997, and the
consolidated balance sheet data at December 31, 1997 are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements and
the related Notes thereto included herein. The consolidated statement of
operations data for the three months ended March 31, 1998, and the consolidated
balance sheet data at March 31, 1998 are derived from unaudited consolidated
financial statements that include, in the opinion of management, all
adjustments, consisting of only normal, recurring adjustments, necessary for a
fair presentation of the information set forth therein. The consolidated
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of future results. For the three months ended March 31,
1997, the Company had no revenues and total expenses were not significant.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31, 1998
1997 (UNAUDITED)
----------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues.................................... $ 26
OPERATING EXPENSES:
Network and product costs................. 54
Sales, marketing, general and
administrative........................... 2,374
Depreciation and amortization............. 70
---------
Total operating expenses................ 2,498
---------
Loss from operations........................ (2,472)
INTEREST INCOME (EXPENSE):
Interest income........................... 167
Interest expense.......................... (12)
---------
Net interest............................ 155
---------
Net loss.................................... $ (2,317)
=========
Net loss per share.......................... $ 0.63
Weighted average shares used in computing
net loss per share......................... 3,672,138
OTHER DATA:
EBITDA(1)................................... $ (2,402)
Capital expenditures........................ 2,253
Ratio of earnings to fixed charges(2)....... --
Deficiency of earnings to cover fixed
charges(2)................................. $ 2,317
<CAPTION>
AS OF
AS OF MARCH 31, 1998
DECEMBER 31, 1997 (UNAUDITED)
----------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................... $ 4,378
Net property and equipment.................. 3,014
Total assets................................ 8,074
Long-term obligations, net, including
current portion............................ 783
Total stockholders' equity.................. 6,498
</TABLE>
12
<PAGE>
- --------
(1) EBITDA consists of net loss excluding net interest, depreciation and
amortization. EBITDA is presented to enhance an understanding of the
Company's operating results and is not intended to represent cash flow or
results of operations in accordance with generally accepted accounting
principles for the periods indicated and 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.
(2) For purposes of determining the ratio of earnings to fixed charges, and the
deficiency of earnings to cover fixed charges, "earnings" included pre-tax
loss from operations adjusted for fixed charges. "Fixed charges" include
interest expense, capitalized interest, amortization of debt discount and
financing costs, and that portion of interest expense which the Company
believes to be representative of interest.
13
<PAGE>
RISK FACTORS
An investment in the New Notes involves a high degree of risk. In addition
to the other information contained in this Prospectus, prospective investors
should carefully consider the following factors in evaluating an investment in
the New Notes offered hereby. No investor should participate in the Exchange
Offer unless such investor can afford a complete loss of the investment. In
addition, this Prospectus includes "forward-looking" statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved. Actual
results will differ from such plans, intentions and expectations, and such
differences may be material. Important factors that could cause actual results
to differ materially from the Company's forward-looking statements are set
forth below and elsewhere in this Prospectus. All forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth herein. The
Company disclaims any obligation to update information contained in any
forward-looking statement.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
As a result of the Old Note Issuance, the Company is highly leveraged. At
March 31, 1998, the Company and its Subsidiaries had approximately $ million
of long-term obligations (including current portion but net of the Debt
Discount). In addition, the Indenture permits the Company and its Subsidiaries
to incur substantial additional indebtedness subject to certain restrictions.
See "Description of the Old Notes--Certain Covenants." The Company plans to
incur substantial additional indebtedness to finance the continued
development, commercial deployment and expansion of its network and for
funding operating losses. The degree to which the Company is leveraged could
have important consequences to the Holders of the New Notes, including, but
not limited to, the following: (i) the Company's ability to obtain additional
financing or refinancing in the future for working capital, capital
expenditures, service development and enhancement, acquisitions, general
corporate purposes or other purposes may be materially limited or impaired;
(ii) the Company's cash flow, if any, may be unavailable for the Company's
business as a substantial portion of the Company's cash flow must be dedicated
to the payment of principal and interest on its indebtedness, including the
New Notes; (iii) the terms of future permitted indebtedness may limit the
Company's ability to redeem the New Notes in the event of a Change of Control;
and (iv) the Company's high degree of leverage may make it more vulnerable to
economic downturns, may limit its ability to withstand competitive pressures
and may reduce its flexibility in responding to changing business and economic
conditions.
The Company expects that it will continue to generate substantial operating
losses and negative cash flow for at least the next several years. No
assurance can be given that the Company will be successful in developing and
maintaining a level of cash flow from operations sufficient to permit it to
pay the principal, premium, if any, and interest on its indebtedness,
including the New Notes. The ability of the Company to make scheduled payments
with respect to indebtedness (including the New Notes) will depend upon, among
other things: (i) the Company's ability to achieve significant and sustained
growth in cash flow; (ii) the rate of and successful commercial deployment of
its network; (iii) the market acceptance, customer demand, rate of utilization
and pricing for the Company's services; (iv) the future operating performance
of the Company and the extent to which the Company's TeleSpeed service is
subject to performance problems; (v) the Company's ability to successfully
complete development, upgrades and enhancements of its network and (vi) the
Company's ability to complete additional financings, as necessary. Each of
these factors is, to a large extent, subject to economic, financial,
competitive and other factors, many of which are beyond the Company's control.
If the Company is unable to generate sufficient cash flow to service its
indebtedness, including the New Notes, it may have to reduce or delay network
deployments, restructure or refinance its indebtedness or seek additional
equity capital. There can be no assurance that any of these strategies could
be effected on satisfactory terms, if at all, in light of the Company's high
leverage, or that any such strategy would yield sufficient proceeds to service
and repay the Company's indebtedness, including the New Notes. Any failure by
the Company to satisfy its obligations with respect to the New Notes at
maturity or prior thereto would constitute a default under the Indenture and
could
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cause a default under agreements governing other indebtedness of the Company.
In the event of such default, the holders of such indebtedness would have
enforcement rights, including the right to accelerate such debt and the right
to commence an involuntary bankruptcy proceeding against the Company. Absent
successful commercial introduction of its service on a broad scale, ongoing
technical development of the network to achieve scalability and reduced costs
and significant growth of its cash flow, the Company will not be able to
service or repay its indebtedness, including the New Notes.
LIMITED OPERATING HISTORY; EARLY STAGE OF DEPLOYMENT
The Company was incorporated in October 1996, signed its first
interconnection agreement with an ILEC in April 1997, established its first
ILEC collocation facilities in July 1997 and introduced its service
commercially in December 1997. As a result of the Company's limited operating
history, the Company does not have historical financial data for any period
upon which an evaluation of the Company or its prospects can be based. In
addition, nearly all of the senior management team and other employees have
been working together at the Company for less than one year.
The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in new and rapidly
evolving markets. To address these risks, the Company must, among other
things, rapidly expand the geographic coverage of its services, attract and
retain customers, increase awareness of the Company's services, respond to
competitive developments, continue to attract, retain and motivate qualified
persons and continue to upgrade its technologies and commercialize its network
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks and failure to do so could
have a material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay its
indebtedness, including the New Notes.
FUTURE EXPECTED LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company has incurred net operating losses and experienced negative cash
flow each month since its inception. As of March 31, 1998, the Company had an
accumulated deficit of $ million. In addition, the Company currently intends
to increase its capital expenditures and operating expenses in order to expand
its network to support additional expected end-users in existing and future
markets and to market and provide the Company's services to a growing number
of potential end-users. As a result, the Company expects to incur substantial
additional operating and net losses and substantial negative cash flow for at
least the next several years. The Company's business strategy is unproven and,
to be successful, the Company must, among other things, develop and market
services that are widely accepted by enterprises and ISPs at prices that will
yield a profit. The Company's TeleSpeed services are its only planned services
and have only recently been launched in the San Francisco Bay Area. There can
be no assurance that these services will achieve broad customer or commercial
acceptance. The Company believes its TeleSpeed services have favorable
performance to price ratios when compared to alternative digital
communications services. However, the prices the Company charges for its
services are in some cases higher than those charged by providers for some
competing services. There can be no assurance that sufficient numbers of end-
users will be willing to pay the prices charged by the Company for its
TeleSpeed services. Additionally, prices for digital communications services
have fallen historically, and prices in the industry in general, and for the
services the Company offers and plans to offer in particular, are expected to
continue to fall. Accordingly, it is difficult to predict whether the
Company's pricing model will prove to be viable, whether demand for the
Company's services will materialize at the prices it expects to charge or
whether current or future pricing levels will be sustainable. The failure to
achieve or sustain projected pricing levels or to achieve or sustain broad
market acceptance could result in a material adverse effect on the Company's
business, prospects, operating results, financial condition and its ability to
repay its indebtedness, including the New Notes. Because of the foregoing
factors, among others, the Company may not be able to forecast its revenues or
the rate at which it will add new customers or end-users with any degree of
accuracy. There can be no assurance that the Company will be able to increase
its customer base in accordance with its forecasts. There can be no assurance
that the Company will ever achieve favorable operating results or
profitability, or cash flow sufficient
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to service or repay its indebtedness, including the New Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Business Strategy."
The Company's annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors, many of which are
outside the Company's control. Factors that may affect the Company's operating
results include the timing of the respective ILECs' ability to provide and
construct the required CO collocation facilities, the rate at which customers
subscribe to the Company's TeleSpeed service, the prices the customers pay for
such services and end-user churn rates. The Company believes its financial
performance depends to a great extent on retaining customers and on levels of
customer churn, which can result from a variety of sources, including employee
turnover within enterprise customers and relocation of end-users of ISP
customers. Additionally, the Company does not currently have long-term
contracts with any of its customers, and there can be no assurance that Covad
will not experience substantial customer churn as a result of customers
discontinuing the use of service or switching to an alternative service
provider. Further factors that may add to volatility in the Company's
operating results include the amount and timing of capital expenditures and
other costs relating to the expansion of the Company's network, the
introduction of new services by the Company or its competitors, price
competition by competitors, technical difficulties or network downtime,
general economic conditions and economic conditions specific to the Company's
industry. There can be delays in the commencement and recognition of revenue
because the installation of telecommunication lines to implement certain
services has lead times that are controlled by third parties. In addition, the
Company plans to increase operating expenses to fund operations, sales,
marketing, general and administrative activities and infrastructure. To the
extent that these expenses are not accompanied by an increase in revenues, the
Company could experience a material adverse effect on its business, prospects,
operating results, financial condition and its ability to service and repay
its indebtedness, including the New Notes.
UNCERTAIN AVAILABILITY OF COLLOCATION SPACE; DEPENDENCE ON ILECS TO PROVIDE
COLLOCATION SPACE, COLLOCATION AND TRANSMISSION FACILITIES AND TO ORDER AND
PROVISION COPPER LINES; DEPENDENCE ON INTERCONNECTION AGREEMENTS
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 20% of COs in the San Francisco Bay Area, the Company
has experienced rejections of its applications to obtain collocation space
from Pacific Bell. The Company has also experienced rejections in certain COs
in the Los Angeles region and, when it submits applications for collocation
space in its other target markets, expects it will face additional rejections
in COs, which may be a material number, in these and other regions as it
proceeds with its deployment. The Company cannot predict the extent of these
rejections or their impact on its ability to provide broad service
availability in its target markets. To the extent the Company's applications
for collocation space are rejected, the Company will encounter delays in, or
increased expenses associated with, the rollout of its service in its target
markets, which could result in a material adverse effect on its business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the New Notes.
Broad service availability is important for the Company's enterprise and ISP
customers which desire to provide RLAN access and Internet access on a
regional basis. The Company's inability to obtain physical collocation space
could have a material adverse impact on the Company's ability to secure and
retain customers. The availability of collocation space in high demand target
markets will also be affected to the extent that other CLECs are seeking or
have obtained collocation space to offer services. In such COs, the Company
has the option of virtual collocation (where the ILEC manages and operates the
Company's equipment), which the Company believes is an unattractive solution
due to restrictions on the Company's ability to maintain the quality of its
network. In addition, in some COs where the Company plans to collocate, the
Company believes space will become available at a later date. 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
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it will be able to obtain collocation space in these COs. The Company is
engaged in a variety of negotiations and is making a variety of legal
arguments to resolve situations where ILECs in initial target markets assert
that certain COs lack sufficient space for physical collocation by the
Company. There can be no assurances that the Company's legal disputes will be
resolved successfully or that it will achieve collocation arrangements in a
sufficient number of COs in one or more of its target markets within the
Company's desired time frame, if at all. Insofar as ILECs do not face similar
space limitations, the ILECs are less likely to confront collocation risks in
seeking to provide blanket DSL coverage in the Company's target markets.
Under the 1996 Act, and a December 31, 1997 ruling of the Federal District
Court for the Northern District of Texas (the "December 31, 1997 Ruling"), the
Regional Bell Operating Companies ("RBOCs"), formerly subject to antitrust
decree restrictions on interLATA (interexchange) long distance services, are
no longer barred from entry into this market. Moreover, the December 31, 1997
Ruling declares that the portions of the 1996 Act subjecting RBOCs to a prior
Federal Communications Commission ("FCC") approval process in order to provide
interLATA services are unconstitutional. Under the December 31, 1997 Ruling,
RBOCs are no longer compelled to prove to the FCC that, in the states where
they desire to provide interLATA services, they have entered into one or more
state utility commission-approved agreements with one or more facilities-based
competitors which provide business and residential local exchange service and
such agreement satisfies 14 specified interconnection requirements. As a
result of the December 31, 1997 Ruling, and to the extent such Ruling stands,
RBOCs will no longer have incentives to promote local facilities-based
competition and sign interconnection agreements as a quid pro quo for
obtaining approval to provide interLATA service. The December 31, 1997 Ruling
has been appealed to the U.S. Court of Appeals for the Fifth Circuit and it is
uncertain whether the December 31, 1997 Ruling will be upheld on appeal. On
February 11, 1998, the Federal District Court for the Northern District of
Texas stayed the effect of the December 31, 1997 Ruling pending appeal. The
outcome or the duration of this litigation may adversely affect the level of
cooperation the Company receives from the RBOCs.
The 1996 Act nevertheless continues to impose interconnection obligations on
ILECs and the obligation that ILECs provide CLECs, such as the Company, access
to its unbundled network elements ("UNEs"), and generally requires that
interconnection charges as well as charges for UNEs be cost-based and
nondiscriminatory. In particular, the Company depends on ILECs to provide
unbundled DSL-capable lines that connect each end-user to the Company's
equipment collocated in the COs. The nonrecurring and recurring monthly
charges for DSL-capable lines required by the Company vary greatly. These
rates are subject to the approval of the appropriate state regulatory
commission. The rate approval processes for DSL-capable lines typically
involve a lengthy review of the ILEC-proposed rates in each state. The
ultimate rates approved typically depend greatly on ILEC's initial rate
proposals, and such factors as the geographic deaveraging/averaging policy of
the state Public Utility Commission. These rate approval proceedings are time-
consuming and absorb scarce resources including legal personnel and cost
experts as well as participation by Company management. Consequently, the
Company is subject to the risk that the non-recurring and recurring charges
for DSL-capable lines will increase based on new rates proposed by the ILECs
and approved by state regulatory commissions from time to time.
The Company interconnects with and uses an ILEC's network to service its
customers, and accordingly, the Company is highly dependent upon the
technology and capabilities of the ILEC to meet certain telecommunications
needs of the Company's customers and to maintain its service standards. The
Company is also dependent to some extent on cooperation from the ILECs,
including the provision and repair of transmission facilities. This dependence
on the ILECs could cause the Company to encounter delays in establishing its
network. Any such delay could result in a material adverse impact on the
Company's relationships with its customers.
In particular, the Company has not yet established a history of ordering and
obtaining the provisioning and repair of large volumes of DSL-capable lines
from any ILEC. It is uncertain whether the Company will be successful in doing
so or whether the ordering and provisioning processes achieved by the Company
will be satisfactory for the retention and growth of its end-user base and the
retention and growth of its customer base.
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The success of the Company's strategy is dependent upon the Company's
ability to enter into interconnection agreements in each of its target markets
with the respective ILECs on a timely basis. The Company's interconnection
agreements have a maximum term of three years, requiring the Company to
renegotiate agreements with the ILECs. There is no guarantee that existing or
new agreements will be extended or renegotiated on terms favorable to the
Company. Additionally, the Company's interconnection agreements are subject to
interpretation by both parties and there may arise differences in
interpretation that cannot be resolved on favorable terms to the Company.
Finally the interconnection agreements are subject to state commission, FCC
and judicial oversight. There can be no guarantee that these bodies will not
modify the terms or prices of the Company's interconnection agreements in ways
that adversely affect the Company's business. See "Business--Network
Architecture and Technology," "--Interconnection Agreements with ILECs," "--
Government Regulation," and "--Legal Proceedings."
UNCERTAIN QUALITY AND AVAILABILITY OF THE ILEC COPPER LINES USED BY THE
COMPANY
The 1996 Act imposes obligations on ILECs, and generally requires that
interconnection charges and charges for UNEs and provisioning of
interconnection facilities and UNEs be cost-based and nondiscriminatory. The
Company's strategy requires the Company to interconnect with and use an ILEC's
copper telecommunications lines to service the Company's customers. As such,
the Company is dependent upon the technology and capabilities of the ILECs to
meet certain telecommunications needs of the Company's customers and maintain
its service standards. The Company is highly dependent on the quality and
availability of the ILECs' copper lines and the ILECs' maintenance of such
lines. There can be no assurance that the Company will be able to obtain the
services it requires from the ILECs and to do so at satisfactory rates, terms
and conditions to the Company, which would have a material adverse effect on
the Company's business, prospects, operating results, financial condition and
its ability to service and repay its indebtedness, including the New Notes.
COMPETITION
The markets for RLAN access and business Internet services are extremely
competitive, and the Company expects that competition will intensify in the
future. The Company's most immediate competitors are the ILECs, Cable Modem
Service Providers ("CMSPs"), National Long Distance Carriers ("IXCs"), Fiber-
Based CLECs ("FCLECs"), ISPs, On-Line Service Providers ("OSPs"), Wireless and
Satellite Data Service Providers ("WSDSPs") and other CLECs. Many of these
competitors are offering (or may soon offer) technologies and services that
will directly compete with some or all of the Company's high-speed digital
service offerings. Such technologies include ISDN, DSL, wireless data and
cable modems. Certain bases of competition in the Company's markets include
transmission speed, reliability of service, breadth of service availability,
price/performance, network security, ease of access and use, content bundling,
customer support, brand recognition, operating experience, capital
availability and exclusive contracts. The Company believes that it compares
unfavorably with its competitors with regard to, among other things, brand
recognition, operating experience, exclusive contracts and capital
availability. Many of the Company's competitors and potential competitors have
substantially greater resources than the Company and there can be no assurance
that the Company will be able to compete effectively in its target markets.
All of the largest ILECs which are present in the Company's target markets
are conducting technical and/or market trials of DSL-based data services. For
example, US West, Inc. is offering commercial DSL services in certain areas in
Arizona and Utah and Ameritech Corporation has announced commercial DSL
services beginning in certain areas in Michigan. The Company recognizes that
the ILECs have the potential to quickly overcome many of the issues that the
Company believes have slowed wide deployment of DSL services by ILECs in the
past; if and when they do so, the ILECs will represent strong competition in
all of the Company's target service areas. The ILECs have an established brand
name and reputation for high quality in their service areas, possess
sufficient capital to deploy DSL equipment rapidly, have their own copper
lines and can bundle digital data services with their existing analog voice
services to achieve economies of scale in serving customers. 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.
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In addition to the ILECs, many of the Company's potential competitors have
longer operating histories, greater name recognition and significantly greater
financial, technical and marketing resources than the Company. As a result,
they may be able to develop and adopt new or emerging technologies and respond
to changes in customer requirements or devote greater resources to the
development, promotion and sale of their products and services more
effectively than the Company. It is also possible that such competitors may
form new alliances and rapidly acquire significant market share. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
developing high-speed digital services. Such intense competition could
materially and adversely affect the Company's business, prospects, operating
results, financial condition and its ability to service and repay
indebtedness, including the New Notes. Further, as a strategic response to
changes in the competitive environment, the Company may make certain pricing,
service or marketing decisions or enter into acquisitions or new ventures that
could result in a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the New Notes.
The telecommunications industry is subject to rapid and significant changes
in technology, and the effect of technological changes on the business of the
Company, such as continuing developments in DSL technology and alternative
technologies for providing high-speed communications data, cannot be
predicted. There can be no assurance that technological developments in the
telecommunications industry will not have a material adverse effect on the
competitive position of the Company. For a detailed description of the current
and potential competition of the Company, including competition from ILECs,
CMSPs, IXCs, FCLECs, ISPs, OSPs, WSDSPs, and other CLECs, see "Business--
Competition" and "--Government Regulation."
RISKS ASSOCIATED WITH ANTICIPATED GROWTH
Although the Company is currently in the early stage of deployment, rapid
growth by the Company could place a significant strain on its management,
operating and financial resources. The Company plans to substantially expand
its network in the future. There can be no assurance that the Company will be
able to add services at the rate or according to the schedule presently
planned by the Company. The development and expansion of the Company's
operations will depend upon, among other things, the Company's ability to
identify and assess markets, design an adequate Operating Support System
("OSS"), design and construct regional data centers ("RDCs"), obtain CO
collocation facilities, obtain the required government authorizations (which
allow the Company to obtain cost-based pricing from the ILECs in each of its
target regions) and enter into and renew interconnection agreements with the
respective ILECs on satisfactory terms and conditions. To grow at its desired
pace, the Company must, among other things, (i) market to and acquire
substantial customers and end-users; (ii) continue to implement and improve
its operational, financial and management information systems, including its
billing, accounts receivable and payable tracking, fixed assets and other
financial management systems; (iii) hire and train additional qualified
personnel; and (iv) continue to expand and upgrade its network infrastructure.
The Company expects the demands on its network infrastructure and technical
support resources to grow rapidly along with the Company's customer base, and
if the Company is successful in implementing its marketing strategy, it may
experience difficulties responding to demand for its services and technical
support in a timely manner and in accordance with its customers' expectations.
These demands are expected to require the addition of new management personnel
and the development of additional expertise by existing management personnel.
There can be no assurance that the Company's network, procedures or controls
will be adequate to support the Company's operations or that management will
be able to keep pace with such growth. If the Company is unable to manage
growth effectively, the Company's business, prospects, operating results,
financial condition and its ability to service and repay its indebtedness,
including the New Notes, will be materially adversely affected. See
"Management."
SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS
The Company will require substantial additional funds for the continued
development, commercial deployment and expansion of its network. As of March
31, 1998, the Company had $ million in cash and cash equivalents. From
inception until March 31, 1998, the Company incurred operating expenses of
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approximately $ million in the development of its business, development of
technology and operating support systems, conducting of sales and marketing
activities and establishment of its management team. In addition, the Company
has made and expects to continue to make significant capital outlays in order
to continue required development activities, commercially deploy its service
and fund operations until such time, if at all, as the Company begins to
generate positive EBITDA. The Company believes its current capital resources
will be sufficient to fund the Company's aggregate capital expenditures and
working capital requirements, including operating losses, associated with the
rollout of its initial regions. While the Company believes that its current
capital resources will be sufficient to finance its expansion into the initial
regions, it may need to secure additional financing to enter new regions or to
meet higher-than-expected subscription rates for its services. If demand for
the Company's services is less than expected, the Company may require
additional financing at an earlier date, although the Company believes it
would be able to reduce certain costs that are, to a large extent, demand-
driven, or delay its entry into various of its targeted regions. There can be
no assurance that the Company will be able to implement its rollout strategy
in a timely fashion, if at all. There can be no assurance that the Company's
current estimates of EBITDA, which will depend on numerous future factors and
conditions described elsewhere in these "Risk Factors," many of which are
outside of the Company's control, will be accurate, and it is likely that
actual results will vary materially from such estimates.
Other than the Equity Commitment, the Company has no present commitments or
arrangements assuring it of any future equity or debt financing, and there can
be no assurance that any such equity or debt financing will be available to
the Company on favorable terms or at all. In addition, the Indenture contains
certain covenants restricting the Company's ability to incur further
indebtedness, and future borrowing instruments such as credit facilities are
likely to contain similar or more restrictive covenants and could require the
Company to pledge assets as security for borrowings thereunder. In the event
that the Company is unable to obtain such additional capital or is required to
obtain it on unsatisfactory terms, the Company will be required to delay the
expansion of its business or take or forego actions that could materially
adversely affect the Company's business, prospects, operating results,
financial condition and its ability to service and repay its indebtedness,
including the New Notes. In the event that the Company is unable to generate
sufficient cash flow and is otherwise unable to obtain funds necessary to meet
required payments on its indebtedness, the Company could be in default under
the terms of the agreements governing its indebtedness, including the New
Notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON NEW AND UNCERTAIN MARKETS
The markets for high bandwidth RLAN and small- and medium-sized business
Internet access are in the early stages of development. Since these markets
are new and because current and future competitors are likely to introduce
competing services, it is difficult to predict the rate at which these markets
will grow, if at all, or whether new or increased competition will result in
market saturation. Because packet-based high-speed data communications
services using copper telephone lines is a relatively new and evolving market,
it is difficult to predict its future growth rate and size. Various providers
of high-speed data communications services are testing products from various
suppliers for various applications, and no industry standard has been broadly
adopted. Certain critical issues concerning commercial use of RLAN and
Internet access, including security, reliability, ease and cost of access and
quality of service remain unresolved and may impact the growth of such
services. ISPs represent a market for a portion of the Company's business. The
Company's ISP customers are expected to provide through their marketing
channels a portion of the Company's services to small- and medium-sized
businesses and residential Internet users. The Company plans to build
relationships with multiple ISP customers in order to gain access and provide
its services to as many ISP business and residential end-users as possible. If
the number of business and residential users of the Company's services,
provided through the ISP channel, is significantly lower than the Company's
forecast, or if the ISPs with which the Company has entered into such
arrangements are unsuccessful in competing in their own intensely competitive
markets, the Company's business, prospects, operating results, financial
condition and its ability to service and repay its indebtedness, including the
New Notes, would be materially adversely affected. If the markets for the
services offered by the Company, including Internet access, fail to grow, grow
more slowly than anticipated or become saturated with competitors,
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the Company's business, prospects, operating results, financial condition and
its ability to service and repay its indebtedness, including the New Notes,
could be materially adversely affected. See "--Competition."
UNPROVEN NETWORK SCALABILITY AND SPEED
Due to the limited deployment of the Company's services, the ability of the
Company's DSL network to connect and manage a substantial number of online
end-users at high transmission speeds is still unknown, and the Company faces
risks related to its ability to scale its network up to its expected end-user
numbers while achieving superior performance. While peak digital data
transmission speeds across the Company's DSL network can approach 1.5 Mbps
downstream, the actual data transmission speeds over the Company's network
could be significantly slower and will depend on a variety of factors,
including the type of DSL technology deployed, the distance an end-user is
located from a CO, the configuration of the telecommunications line being
used, the existence of analog load coils, the number of bridged taps, the
gauge of the copper wires and the presence and severity of interfering
transmissions on nearby lines. As a result, there can be no assurance that the
Company's network will be able to achieve and maintain the highest possible
digital transmission speed. The Company's failure to achieve or maintain high-
speed digital transmissions would significantly reduce customer and end-user
demand for its services and have a material adverse effect on its business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the New Notes. See "Business--Network
Architecture."
DIGITAL COMMUNICATIONS SIGNAL COMPATIBILITY AND POTENTIAL NETWORK INTERFERENCE
Certain technical laboratory tests and field experience indicate that the
DSL technology the Company and others are using may cause interference with
and be interfered with by other signals present in an ILEC's copper plant,
usually with lines in close proximity, while other laboratory tests indicate
that this equipment does not cause interference. Interference, if present,
could cause degradation of performance of the Company's services or render the
Company unable to offer its services on selected lines. The amount and extent
of such interference will depend on the condition of the ILEC's copper plant
and the number and distribution of DSL and other signals in such plant and
cannot now be ascertained. When interference occurs it is difficult to detect,
the procedures to resolve interference issues between CLECs and an ILEC are
still being developed and there is no assurance that these procedures will be
effective. Although the Company has agreed to interference resolution
procedures with certain ILECs, there can be no assurance that the Company will
successfully negotiate similar procedures with other ILECs in future
interconnection agreements or in renewals of existing interconnection
agreements, or that the ILECs will not unilaterally take action to resolve
interference issues to the detriment of the Company's services. Further, this
degradation of performance, if widespread, would have a material adverse
effect on the Company's reputation, brand image, service quality, and customer
satisfaction and retention. As such, network interference could have a
material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay its
indebtedness, including the New Notes.
RISK OF SYSTEM FAILURE
The Company's operations are dependent upon its ability to support its
highly complex network infrastructure and avoid damages from fires,
earthquakes, floods, power losses, telecommunications failures, network
software flaws, transmission cable cuts and similar events. The occurrence of
a natural disaster or other unanticipated problem at the Company's Network
Operations Center ("NOC") or any of the Company's RDCs could cause
interruptions in the services provided by the Company. Additionally, failure
of an ILEC or other service provider, such as other CLEC service providers, to
provide communications capacity required by the Company, as a result of a
natural disaster, operational disruption or any other reason, could cause
interruptions in the services provided by the Company. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, prospects, operating results,
financial condition and its ability to service and repay its indebtedness,
including the New Notes. See "Business--Network Architecture."
21
<PAGE>
SECURITY RISK IN THE NETWORK
Despite the implementation of security measures, the Company's network may
be vulnerable to unauthorized access, computer viruses and other disruptive
problems. Corporate networks and ISPs have in the past experienced, and may in
the future experience, interruptions in service as a result of accidental or
intentional actions of Internet users, current and former employees and
others. Unauthorized access could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company's
customers and such customers' end-users, which might result in liability of
the Company to its customers and also might deter potential customers.
Although the Company intends to implement security measures that are standard
within the telecommunications industry, as well as newly Company-developed
security measures, the Company has not yet done so and there can be no
assurance that the Company will implement such measures in a timely manner or
to the degree that may be compatible with its various customers' expectations,
or that if and when implemented, such measures will not be circumvented.
Eliminating computer viruses and alleviating other security problems may
require interruptions, delays or cessation of service to the Company's
customers and such customers' end-users, which could have a material adverse
effect on the Company's business, prospects, operating results, financial
condition and its ability to service and repay its indebtedness, including the
New Notes. See "Business--Network Architecture."
DEPENDENCE UPON SUPPLIERS; 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 believes
that there are alternative suppliers for each of these technologies and it is
not constrained to use the same DSLAM or CPE vendor in multiple regions, it
could take a significant period of time to establish relationships with
alternative suppliers for each of these technologies and substitute their
technologies into the Company's network. The Company's reliance on third-party
manufacturers involves a number of additional risks, including the absence of
guaranteed capacity and reduced control over delivery schedules, quality
assurance, production yields and costs. The loss of any of the Company's
relationships with these suppliers could have a material adverse effect on the
Company's business, prospects, operating results, financial condition and its
ability to service and repay its indebtedness, including the New Notes. See
"Business--Network Architecture."
RELIANCE ON KEY PERSONNEL
The Company's performance is dependent on the performance of its officers
and key employees, most of whom have worked together for only a short period
of time. Given the Company's early stage of deployment, the Company is
dependent on its ability to retain and motivate high quality personnel,
especially its management. The Company does not have "key person" life
insurance policies on any of its employees. There can be no assurance that key
personnel will continue to be employed by the Company or that the Company will
be able to attract and retain qualified personnel in the future. The Company's
future success also depends on its continuing ability to identify, hire, train
and retain other highly qualified technical, sales, marketing and managerial
personnel. Competition for such qualified personnel is intense, particularly
in software development, network engineering and product management. There can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical, sales, marketing and managerial personnel in
the future. The inability to attract and retain its officers and key employees
and the necessary technical, sales, marketing and managerial personnel could
have a material adverse effect upon the Company's business, prospects,
operating results, financial condition and its ability to service and repay
its indebtedness, including the New Notes. See "Business--Employees" and
"Management."
22
<PAGE>
UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON THE COMPANY'S SERVICES
Telecommunications providers pay a variety of surcharges and fees on their
gross revenues from interstate services and intrastate services. Interstate
surcharges include Federal Universal Service Fees, Common Carrier Regulatory
Fees and TRS Fund fees. In addition, state regulators impose similar
surcharges and fees on intrastate services. The division of the Company's
services between interstate services and intrastate services is a matter of
interpretation and may in the future be contested by the FCC or relevant state
commission authorities. A change in the characterization of the jurisdiction
of its services could cause the Company's payment obligations pursuant to the
relevant surcharges to increase. In addition, pursuant to periodic revisions
by state and federal regulators of the applicable surcharges, the Company may
be subject to increases in the surcharges and fees currently paid.
GOVERNMENT REGULATION AND CURRENT INDUSTRY LITIGATION
The services offered by the Company are subject to federal, state and local
government regulation. The 1996 Act, which became effective in February 1996,
introduced widespread changes in the regulation of the telecommunications
industry, including the digital access services segment in which the Company
operates. The 1996 Act eliminates many of the pre-existing legal barriers to
competition in the telecommunications services business and sets basic
criteria for relationships between telecommunications providers.
Among other things, the 1996 Act removes barriers to entry in the local
exchange telephone market by preempting state and local laws that restrict
competition by providing competitors interconnection, access to UNEs and
retail services at wholesale rates. The FCC's primary rules interpreting the
1996 Act, which were issued on August 8, 1996 (the "FCC Order"), have been
reviewed by the U.S. Court of Appeals for the Eighth Circuit, which has
overruled certain of the FCC's pricing and nondiscrimination regulations and
upheld the FCC's definition of UNEs and OSS rules. The Company has entered
into competitive interconnection agreements using the federal guidelines
established in the FCC's interconnection order, which agreements remain in
effect notwithstanding the overruling of certain of the FCC's regulations. The
Eighth Circuit's overruling of the FCC Order has been appealed to the U.S.
Supreme Court, which has agreed to decide the case. The U.S. Supreme Court's
ruling, expected in 1999, could have a material adverse effect on the
Company's business, prospects, operating results, financial condition and its
ability to service and repay its indebtedness, including the New Notes.
No assurance can be given that changes to current regulations or the
adoption of new regulations by the FCC or state regulatory authorities or
legislative initiatives or court decisions would not have a material adverse
effect on the Company's business, prospects, operating results, financial
condition and its ability to service and repay its indebtedness, including the
New Notes. See "Business--Government Regulations" and "--Legal Proceedings."
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON ACCESS TO SUBSIDIARY CASH FLOW
The Company is a holding company, conducting substantially all of its
operations through its Subsidiaries. As of March 31, 1998, the Company had
approximately $ million of long-term obligations (including current portion
but net of the Debt Discount). The Indenture permits the Company and its
Subsidiaries to incur substantial additional indebtedness in the future. See
"Description of the Old Notes--Certain Covenants." In addition, the New Notes
will not be guaranteed by any of the Company's Subsidiaries, and,
consequently, the New Notes will be effectively subordinated in right of
payment to all indebtedness and other liabilities of the Company's
Subsidiaries, including subordinated indebtedness and trade payables.
In addition, in the event of any distribution or payment of the assets of
the Company in any foreclosure, dissolution, winding-up, liquidation or
reorganization, holders of any secured indebtedness will have a secured claim
to the assets of the Company that constitute their collateral, prior to the
satisfaction of any unsecured claim from such assets. The Indenture permits
the incurrence of indebtedness secured by assets of the Company and its
Subsidiaries. In the event of a bankruptcy, liquidation or reorganization of
the Company, Holders of the New Notes will be entitled to payment from the
remaining assets of the Company only after payment of, or provision for, all
secured indebtedness. In any of the foregoing events, there can be no
assurance that there would be sufficient assets to pay amounts due on the New
Notes.
23
<PAGE>
Because the Company conducts a substantial portion of its operations through
direct and indirect subsidiaries, the Company's cash flow and its ability to
service its indebtedness, including the New Notes, will depend upon the cash
flow of its Subsidiaries and payments of funds by those Subsidiaries to the
Company in the form of repayment of loans, dividends or otherwise. These
Subsidiaries are separate and distinct legal entities with no legal
obligation, contingent or otherwise, to pay any amounts due pursuant to the
New Notes or to make any funds available therefor whether in the form of
loans, dividends or otherwise. In addition, the Indenture permits these
Subsidiaries to incur indebtedness or become parties to financing
arrangements, which may contain limitations on the ability of such
Subsidiaries to pay dividends or to make loans or advances to the Company. In
certain circumstances, such limitations are permitted under the Indenture.
Further, any holders of indebtedness (including subordinated indebtedness and
trade payables) of Subsidiaries of the Company would be entitled to repayment
of such indebtedness from the assets of the affected Subsidiaries before such
assets were made available for distribution to the Company. See "Description
of the Old Notes--Certain Covenants."
In the event that the Company is unable to generate sufficient cash flow or
is otherwise unable to obtain funds necessary to meet required payments of
principal, premium, if any, and interest on its indebtedness, including the
New Notes, the Company would be in default under the terms of the agreements
governing such indebtedness, including the Indenture. In the event of such
default, the holders of such indebtedness could elect to declare all of the
funds borrowed thereunder to be due and payable together with accrued and
unpaid interest. If such an acceleration were effected and the Company did not
have sufficient funds to pay the accelerated indebtedness, the holders could
initiate foreclosure or other enforcement action against the Company. In any
such proceeding, the holders of the Company's senior indebtedness would be
entitled to receive payment of their claims prior to any distributions to
Holders of the New Notes. In addition, any holders of secured indebtedness of
the Company and its Subsidiaries would have certain rights to repossess,
foreclose upon and sell the assets securing such indebtedness. Any such
circumstances would materially adversely affect the market value of the New
Notes and the Company's ability to pay principal, premium, if any, and
interest on the New Notes.
CONCENTRATION OF OWNERSHIP; VOTING AGREEMENT
The Company's executive officers and directors and the Investors together
beneficially own over 90% of the outstanding Common Stock (assuming conversion
of all outstanding Preferred Stock into Common Stock) of the Company. In
addition, these stockholders have agreed to vote their shares of Common Stock
and Preferred Stock at any election of directors so as to fix the number of
directors of the Company at seven and to elect as members of the Board (i)
three persons designated by the Investors, (ii) two persons who are senior
officers of the Company and (iii) one person mutually designated by Warburg
and the Company. Accordingly, these stockholders will be able to determine the
composition of the Company's Board of Directors, will retain the voting power
to approve all matters requiring stockholder approval and will continue to
have significant influence over the affairs of the Company. This concentration
of ownership could have the effect of delaying or preventing a change in
control of the Company. See "Management," "Principal Stockholders" and
"Description of Capital Stock--Board Representation and Voting Agreement."
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Old Notes. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer, including any Holder
which is an "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the Company which cannot tender its Old Notes in the Exchange Offer,
will continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of
securities, provided that an opinion of counsel is furnished to the Company
that such an exemption is available. These restrictions may limit the trading
market and price for the Old Notes.
ABSENCE OF A PUBLIC MARKET FOR THE NEW NOTES; RESTRICTIONS ON TRANSFER
The New Notes are being offered to the Holders of the Old Notes. Prior to
this Exchange Offer, there was no existing trading market for the Old Notes
and there were no existing New Notes. The Company does not
24
<PAGE>
intend to apply for listing of the New Notes on any securities exchange or on
the Nasdaq National Market. Although the New Notes will be eligible for
trading in the PORTAL Market, the New Notes may trade at a discount from their
initial offering price, depending upon prevailing interest rates, the market
for similar securities, the Company's performance and other factors. In
connection with the Old Note Issuance, the Company was advised by the Initial
Purchasers that they intended to make a market in the Old Notes following the
Old Note Issuance; however, the Initial Purchasers are not obligated to do so
and any such market-making activities may be discontinued at any time without
notice. Therefore, there can be no assurance that an active market for the New
Notes will develop, either prior to or after performance of the Company's
obligations under the Registration Rights Agreements. See "Description of the
Old Notes--Registration Rights; Additional Interest" and "Plan of
Distribution."
FRAUDULENT CONVEYANCE RISKS
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if the Company, at the time of
issuance of, or making any payment in respect of, the New Notes, (a)(i) was or
was rendered insolvent thereby, was engaged or about to engage in a business
or transaction for which its assets constituted unreasonably small capital, or
intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they matured and (ii) the Company received less than
reasonably equivalent value or fair consideration for such issuance or (b) the
Company issued the New Notes or made any payment thereunder with intent to
hinder, defraud or delay any of its creditors, the obligations of the Company
under some or all of the New Notes could be voided or held to be unenforceable
by a court, the obligations of the Company under the New Notes could be
subordinated to claims of other subordinated creditors, or the New Note
Holders could be required to return payments already received. In particular,
if the Company were to cause a Subsidiary to pay a dividend in order to enable
the Company to make payments in respect of the New Notes, and such transfer
were deemed a fraudulent transfer, the New Note Holders could be required to
return the payment. In any of the foregoing cases, there could be no assurance
that the Holders would ultimately recover the amounts owing under the New
Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in any such case. Generally, however, the Company would
be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at a fair valuation, if it had
unreasonably small capital to conduct its business, or if the present fair
salable value of its assets were less than the amount that would be required
to pay the probable liability on its existing debts, including contingent
liabilities, as they become absolute and matured. The Company believes that it
will not be insolvent at the time of or as a result of the Exchange Offer,
that it will not engage in a business or transaction for which its remaining
assets constitute unreasonably small capital and that it did not and does not
intend to incur or believe that it will incur debts beyond its ability to pay
such debts as they mature. There can be no assurance, however, that a court
passing on such questions would agree with the Company's analysis.
The Indenture provides that, under certain circumstances, Subsidiaries of
the Company will be required to guarantee the obligations of the Company under
the Indenture and the New Notes. In the event any Subsidiary enters into such
a guarantee, if bankruptcy or insolvency proceedings were initiated by or
against that Subsidiary within 90 days (or, possibly, one year) after that
Subsidiary issued a guarantee, or if that Subsidiary incurred obligations
under its guarantee in anticipation of insolvency, all or a portion of the
guarantee could be avoided as a preferential transfer under federal bankruptcy
or applicable state law. In addition, a court could require Holders of the New
Notes to return all payments made within any such 90-day (or, possibly, one
year) period as preferential transfers.
ORIGINAL ISSUE DISCOUNT
The New Notes will be treated as issued with original issue discount for
U.S. federal income tax purposes. Consequently, purchasers of the New Notes
generally will be required to include amounts in gross income for U.S.
25
<PAGE>
federal income tax purposes in advance of receipt of the cash payments to
which the income is attributable. Furthermore, the New Notes will be subject
to the high yield discount obligation rules, which will defer and will, in
part, eliminate the Company's ability to deduct for U.S. federal income tax
purposes the original issue discount attributable to the New Notes.
Accordingly, the Company's after-tax cash flow might be less than if the
original issue discount on the New Notes was deductible when it accrued. See
"Certain Federal Income Tax Considerations" for a more detailed discussion of
the U.S. federal income tax consequences for the Company and the beneficial
owners of the New Notes resulting from their purchase, ownership and
disposition of the New Notes.
If a bankruptcy case were commenced by or against the Company under the
Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), after the
issuance of the New Notes, the claim of a Holder with respect to the principal
amount thereof may be limited to an amount equal the sum of (i) the initial
offering price and (ii) that portion of the original issue discount that is
not deemed to constitute "unmatured interest" for purposes of the Bankruptcy
Code. Any original issue discount that was not amortized as of the date of any
such bankruptcy filing would constitute "unmatured interest."
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in Section 27A of
the Securities Act and Section 21E of the Exchange Act), which can be
identified by the use of forward-looking terminology such as "estimates,"
"projects," "anticipates," "expects," "intends," "believes," or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. These forward-
looking statements, such as the Company's plans to expand its existing network
or to commence service in new areas, the market opportunity presented by the
Company's target regions, and statements regarding development of the
Company's business, the estimate of market sizes and addressable markets for
the Company's services and products, the Company's anticipated capital
expenditures, the effect of regulatory reform and other statements contained
in this Prospectus regarding matters that are not historical facts, are only
estimates or predictions and cannot be relied upon. No assurance can be given
that future results will be achieved; actual events or results may differ
materially as a result of risks facing the Company or actual results differing
from the assumptions underlying such statements. Such risks and assumptions
include, but are not limited to, the Company's ability to successfully market
its services to current and new customers, generate customer demand for its
services in the particular regions where it plans to market services, achieve
acceptable pricing for its services, access regions and negotiate suitable
interconnection agreements with the ILECs, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions, as well as
regulatory, legislative and judicial developments that could cause actual
results to vary materially from the future results indicated, expressed or
implied in such forward-looking statements. All written and oral forward-
looking statements made in connection with this Prospectus which are
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the "Risk Factors" and other cautionary
statements included in this Prospectus. The Company disclaims any obligation
to update information contained in any forward-looking statement.
YEAR 2000 ISSUES
The Company has determined that its systems do not require updating to
continue to function properly beyond 1999. The Company believes that adequate
resources have been allocated for this purpose and does not expect to incur
significant expenditures to address this issue. However, there can be no
assurance that the Company will identify all Year 2000 problems in its systems
in advance of their occurrence or that the Company will be able to
successfully remedy any problems that are discovered. The expenses of the
Company's efforts to address such problems, or the expenses or liabilities to
which the Company may become subject as a result of such problems, could have
a material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay
indebtedness, including the New Notes. In addition, the revenue stream and
financial stability of existing customers may be adversely impacted by Year
2000 problems, which could cause fluctuations in the Company's revenues and
operating profitability.
26
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered in the
Exchange Offer. In consideration for issuing the New Notes as contemplated in
this Prospectus, the Company will receive in exchange Old Notes in like
principal amount at maturity, the form and terms of which are the same in all
material respects as the form and terms of the New Notes except that the New
Notes (i) will have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer applicable to the Old
Notes and (ii) will not be entitled to certain registration or other rights
under the Registration Rights Agreement, including the provision in the
Registration Rights Agreement for additional interest of up to 2.0% per annum
upon failure by the Company to consummate the Exchange Offer. The Old Notes
surrendered in exchange for New Notes will be retired and canceled and cannot
be reissued. Accordingly, issuance of the New Notes will not result in any
increase in the indebtedness of the Company.
The net proceeds to the Company from the Old Note Issuance and the sale of
equity pursuant to the Equity Commitment and the Stock Purchase were
approximately $146.6 million, net of the Initial Purchasers' discount and
other estimated expenses payable by the Company incurred in connection with
the Old Note Issuance, the Equity Commitment and the Stock Purchase. The
Company expects to use the net proceeds from the Old Note Issuance to fund the
expenditures incurred in the continuing deployment of the Company's services
in the San Francisco Bay Area and the launch of the Company's services in
other regions, for expenses associated with continued development and sales
and marketing activities, to fund operating losses and for general corporate
purposes. The Company believes that these net proceeds will be sufficient to
fund the Company's aggregate capital expenditures and working capital
requirements, including operating losses, associated with the rollout of its
initial regions. The amounts actually expended by the Company for these
purposes will vary significantly depending upon a number of factors, including
future revenue growth, if any, capital expenditures and the amount of cash
generated by the Company's operations. Additionally, if the Company determines
it would be in its best interest, the Company may increase or decrease the
number, selection and timing of entry of its targeted regions. Accordingly,
the Company's management will retain broad discretion in the allocation of
such net proceeds. Although the Company may use a portion of the net proceeds
to pursue possible acquisitions of businesses, technologies or products
complementary to those of the Company in the future, there are no present
understandings, commitments or agreements with respect to any such
acquisitions. Pending use of such net proceeds for the above purposes, the
Company will be required to invest such funds in Cash Equivalents (as defined)
to the extent permitted by the Indenture. See "Risk Factors--Limited Operating
History; Early Stage of Deployment," "--Future Expected Losses; Potential
Fluctuations in Operating Results," "--Substantial Future Capital
Requirements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
intend to pay any dividends on its capital stock in the foreseeable future. In
addition, the terms of the Indenture restrict the Company's ability to pay
dividends on, or make distributions in respect of, its capital stock. See
"Description of the Old Notes--Certain Covenants."
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, as adjusted to give effect to the proceeds from the Equity
Commitment of $16.0 million (before deducting related expenses which are not
expected to be significant). See "Use of Proceeds." This table should be read
in conjunction with the Company's Consolidated Financial Statements and the
related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents............................... $
LONG-TERM OBLIGATIONS:
Capital lease obligations (including current por-
tion)................................................ $
13 1/2% Senior Discount Notes due 2008, net...........
Total long-term obligations (including current por-
tion)..............................................
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 15,000,000 shares
authorized, issued and outstanding proforma.....
Common Stock, $0.001 par value; 30,000,000 shares au-
thorized; shares issued and outstanding(1).......
Additional paid-in capital............................
Accumulated deficit...................................
----
Total stockholders' equity..........................
----
Total capitalization.............................. $
====
</TABLE>
- --------
(1) Excludes 1,698,000 shares of Common Stock reserved for issuance upon
exercise of outstanding options as of March 31, 1998, and 600,000 shares
reserved for issuance upon exercise of the outstanding warrants. See
"Description of Capital Stock."
28
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein. The consolidated
statement of operations data for the year ended December 31, 1997, and the
consolidated balance sheet data at December 31, 1997 are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements and
the related Notes thereto included herein. The consolidated statement of
operations data for the three months ended March 31, 1998, and the
consolidated balance sheet data at March 31, 1998 are derived from unaudited
consolidated financial statements that include, in the opinion of management,
all adjustments, consisting of only normal, recurring adjustments, necessary
for a fair presentation of the information set forth therein. The consolidated
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of future results. For the three months ended March 31,
1997, the Company had no revenues and total expenses were not significant.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, 1998
1997 (UNAUDITED)
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues................................. $ 26
OPERATING EXPENSES:
Network and product costs.............. 54
Sales, marketing, general and adminis-
trative............................... 2,374
Depreciation and amortization.......... 70
---------
Total operating expenses............. 2,498
---------
Loss from operations................... (2,472)
INTEREST INCOME (EXPENSE):
Interest income........................ 167
Interest expense....................... (12)
---------
Net interest......................... 155
---------
Net loss................................. $ (2,317)
=========
Net loss per share....................... $ 0.63
Weighted average shares used in computing
net loss per share...................... 3,672,138
OTHER DATA:
EBITDA(1)................................ $ (2,402)
Capital expenditures..................... 2,253
Ratio of earnings to fixed charges(2).... --
Deficiency of earnings to cover fixed
charges(2).............................. $ 2,317
<CAPTION>
AS OF
AS OF MARCH 31, 1998
DECEMBER 31, 1997 (UNAUDITED)
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 4,378
Net property and equipment............... 3,014
Total assets............................. 8,074
Long-term obligations, net, including
current portion......................... 783
Total stockholders' equity............... 6,498
</TABLE>
29
<PAGE>
- --------
(1) EBITDA consists of net loss excluding net interest, depreciation and
amortization. EBITDA is presented to enhance an understanding of the
Company's operating results and is not intended to represent cash flow or
results of operations in accordance with generally accepted accounting
principles for the periods indicated and 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.
(2) For purposes of determining the ratio of earnings to fixed charges, and
the deficiency of earnings to cover fixed charges, "earnings" included
pre-tax loss from operations adjusted for fixed charges. "Fixed charges"
include interest expense, capitalized interest, amortization of debt
discount and financing costs, and that portion of interest expense which
the Company believes to be representative of interest.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in the forward-looking statements as a result of
certain factors including, but not limited to, those discussed in "Risk
Factors," "Business" and elsewhere in this Prospectus. The Company disclaims
any obligation to update information contained in any forward-looking
statement.
OVERVIEW
The Company commenced the buildout of its network in the San Francisco Bay
Area in July 1997 and launched its services in this region in December 1997.
The Company plans to expand its operations to five additional geographic
regions during the next 18 months and to complete additional deployment in the
San Francisco Bay Area. The Company expects to deploy its network and
introduce its services in these initial regions by the end of the first
quarter of 1999. The Company expects that it will continue to generate
substantial operating losses and negative cash flow for at least the next
several years. The Company believes that its current capital resources will be
sufficient to fund the Company's aggregate capital expenditures and working
capital requirements, including operating losses, associated with the rollout
of its initial regions.
For each region, the Company has targeted three market segments: business
RLAN, business Internet and consumer Internet. Business RLAN services are sold
directly to enterprise customers and business Internet and consumer Internet
services are sold indirectly through ISPs. A key determinant of the Company's
revenues will be its service penetration into the addressable portion of these
market segments.
The Company expects to derive 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 and (ii) service activation, installation and other non-recurring
charges. The current prices for the Company's services range from $90 per
month for TeleSpeed 144 to $195 per month for TeleSpeed 1.1 and TeleSpeed 1.5,
before volume discounts. The Company expects prices for the major components
of both recurring and non-recurring charges to decrease each year. As prices
decline, the Company expects that the proportion of the Company's customers
purchasing its higher-speed services will increase. The Company also expects
to derive revenues from the sale of CPE which the Company provides to its
customers due to the general unavailability of CPE through retail channels;
the Company believes these revenues will decline over time as CPE becomes more
generally available. The Company expects that the prices charged to customers
for CPE will decrease each year.
The Company's network and product costs include costs of recurring and
nonrecurring circuit fees charged to the Company by ILECs and other CLECs,
including installation, activation, monthly line costs, maintenance and repair
of circuits between the Company's DSLAMs and its RDCs, customer backhaul, and
subscriber lines. Other costs the Company expects to incur include materials
used by the Company in installation and the servicing of customers and end-
users, and the cost of CPE. As the Company's end-user base grows, the largest
element of network and product cost is expected to be the ILECs' charges for
the Company's leased copper lines.
The Company's financial performance will vary from region to region due to
factors such as the size of the addressable markets in a region, the number of
COs and the cost of necessary infrastructure to service a region, the timing
of market entry and the cost to access the ILEC's UNEs.
As the Company continues to develop its network within regions, positive
EBITDA from more developed regions is expected to be offset partially or
completely by negative EBITDA from less developed regions, costs associated
with entering new regions and corporate overhead. This trend is expected to
continue until the
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Company has a sufficiently large customer and end-user base to absorb
operating costs of new regions or the Company ceases entering new regions.
The development and expansion of the Company's business will require
significant expenditures. The principal capital expenditure incurred during
the buildout phase of any region involves the procurement, design and
construction of the Company's CO collocation cages, end-user DSL line cards,
and expenditures for other elements of the Company's network design, which
includes an RDC in each region and the construction of the NOC. The Company
expects to deploy its network and launch its services in its initial regions
by the end of the first quarter of 1999. The number of targeted COs in a
region varies from approximately 40 to 150. Following the buildout of its
collocation facilities, the major portion of the Company's capital
expenditures will be the purchase of DSL line cards to support incremental
subscribers. Network expenditures will continue to increase with the number of
end-users. However, once an operating region is fully built out, a substantial
majority of the regional capital expenditures will be tied to incremental
customer and end-user growth.
In addition to developing the Company's network, the Company will use its
capital for marketing its services, acquiring enterprise and ISP customers,
and funding its customer care and field service operations. The Company
believes that it may take several months from the time a customer is first
contacted to the point at which it will be able to book and invoice a customer
for its services. In the case of enterprise customers, this long sales cycle
is partially due to the technical requirements that must be satisfied prior to
a customer's information technology manager allowing the Company's service to
be widely available to the customer's employees. In the case of ISP customers,
this sales cycle will depend on the time it takes the ISP to market and sell
the Company's services to its subscribers.
HISTORICAL RESULTS OF OPERATIONS
Since its inception on October 7, 1996, the Company has engaged principally
in the development of the technology and activities related to the
commencement of its business operations. Accordingly, the Company's historical
results of operations are not indicative of, and should not be relied upon as
an indicator of, the future performance of the Company.
Revenues
The Company commercially introduced its services in December 1997. Revenues
were first recognized in October 1997 from its services. Revenues for 1997
were approximately $26,000. The Company plans to enter additional regions and
to significantly increase sales activity throughout 1998, and believes this
will result in significantly greater revenues. Revenues may fluctuate based on
factors including the success and timing of deployment, the Company's success
in obtaining and retaining customers and pricing of the Company's services.
Network and Product Costs
Total Network and Product Costs for 1997 were approximately $54,000. These
costs consisted of monthly line costs between the Company's COs and its San
Francisco Bay Area RDC and customer and subscriber line installation and
monthly service costs charged to the Company by the ILECs. A small portion of
Network and Product Costs consists of the cost associated with the CPE
acquired for resale to the Company's customers. The Company expects line costs
to increase significantly during 1998 due to increased sales activity and
expected revenues as discussed above.
Sales, Marketing, General and Administrative Expenses
Total Sales, Marketing, General and Administrative expenses were
approximately $2.4 million for 1997 and consisted primarily of salaries and
related expenses for the development of the Company's business, technology and
software, the establishment of its management team, the development of
corporate identification, promotional and advertising materials and the
commencement of its operations. Sales, Marketing, General and Administrative
expenses are expected to significantly increase as the Company expands its
business.
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Depreciation and Amortization
Depreciation and Amortization include: (i) depreciation of network
infrastructure equipment, (ii) depreciation of information systems, furniture
and fixtures, (iii) amortization of improvements to COs, RDC and NOC
facilities and corporate facilities, (iv) amortization of software and (v)
amortization of deferred financing fees. In 1997, Depreciation and
Amortization was approximately $70,000 and consisted primarily of depreciation
costs for CO and RDC improvements and network equipment placed in service in
late 1997, for information systems, office equipment, furniture and fixtures
placed in service throughout 1997 and amortization of leasehold improvements
at corporate facilities. The Company expects Depreciation and Amortization
expense to increase significantly as the Company increases its capital
expenditures to expand its network.
Interest Income and Expense
Interest Income and Expense is expected to consist primarily of interest
income on the Company's cash balance and interest expense associated with the
Company's debt, including the Notes. Interest income will consist of interest
earned from investing the proceeds from the issuance of equity and debt
securities until such proceeds are needed for operating expenses and capital
expenditures. Interest expense will continue to consist primarily of interest
on the Company's debt and capital lease obligations. Interest expense will
increase significantly as a result of the Old Note Issuance. During 1997, net
interest was approximately $155,000, which was primarily attributable to the
interest income earned from the proceeds raised in the Company's Series B
Preferred Stock financing in July 1997.
Income Taxes
Income taxes will consist of federal, state and local taxes, when
applicable. The Company expects significant consolidated net losses for the
foreseeable future which should generate net operating loss ("NOL")
carryforwards. However, utilization of NOLs is subject to substantial annual
limitations. In addition, income taxes may be payable during this time due to
operating income in certain tax jurisdictions. Once the Company achieves
operating profits and the NOLs have been exhausted or have expired, the
Company may experience significant tax expense. The Company recognized no
provision for taxes as it operated at a loss throughout 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private placements of $8.8 million of equity securities and $831,000 of lease
financings. As of March 31, 1998, the Company had an accumulated deficit of
$ million, and cash and cash equivalents of $ million.
Net cash used in the Company's operating activities was approximately $1.9
million for 1997. The net cash used for operations during this period was
primarily due to net losses and increases in current assets, offset by
increases in accounts payable and accrued liabilities. Net cash used by the
Company for acquisitions of property and equipment was $2.3 million. Net cash
provided by financing activities for 1997 was $8.8 million and related to the
issuance of Common and Preferred Stock.
Subsequent to December 31, 1997, the Company obtained an 18 month $1.5
million revolving line of credit from a bank, secured by the Company's assets.
The annual interest rate charged on the outstanding balance of this line of
credit is the bank's prime rate plus 50 basis points. Upon closing of the Old
Note Issuance, the Company released the security interests and used
approximately $1.0 million of the net proceeds from the Old Note Issuance to
fully repay the outstanding balance of this line of credit.
The Company believes that the net proceeds from the Old Note Issuance, the
Equity Commitment and the Stock Purchase, approximately $146.6 million, will
be sufficient to fund the Company's aggregate capital expenditures and working
capital requirements, including operating losses, associated with the roll out
of its initial regions. While the Company believes that these proceeds,
together with cash on hand, will be sufficient to finance its expansion into
the initial regions, it may need to secure additional financing to enter
additional regions
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or to meet higher-than-expected subscription rates for its services. If demand
for the Company's services is less than expected, the Company may require
additional financing at an earlier date, although the Company believes it
would be able to reduce certain costs that are, to a large extent, demand-
driven, or delay its entry into various of its targeted regions. In addition,
depending on market conditions, the Company may determine to raise additional
capital. The Company may obtain additional funding through the sale of public
or private debt and/or equity securities or through securing a bank credit
facility. There can be no assurance as to the availability or the terms upon
which such financing might be available.
The Company expects to experience substantial negative cash flow for at
least the next several years due to continued development, commercial
deployment and expansion of its networks. The Company's future cash
requirements for developing, deploying and enhancing its networks and
operating its business, as well as the Company's revenues, will depend on a
number of factors including (i) the number of regions entered, the timing of
entry and services offered; (ii) network development schedules and associated
costs due to such issues as the physical requirements of the CO collocation
process; (iii) the rate at which customers and subscribers purchase the
Company's services and the pricing of such services; (iv) the level of
marketing required to acquire and retain customers and to attain a competitive
position in the marketplace; and (v) the rate at which the Company invests in
engineering and development and intellectual property with respect to existing
and future technology. In addition, the Company may wish to selectively pursue
possible acquisitions of businesses, technologies or products complementary to
those of the Company in the future in order to expand its geographic presence
and achieve operating efficiencies. There can be no assurance that the Company
will have sufficient liquidity, or be able to obtain additional debt or equity
financing on favorable terms or at all, in order to finance such an
acquisition. However, no acquisitions are currently contemplated. See "Risk
Factors--Substantial Future Capital Requirements."
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BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in the forward-looking statements as a result of
certain factors including, but not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus. The Company disclaims any
obligation to update information contained in any forward-looking statement.
Covad is a packet-based CLEC which provides high-speed data communication
services using DSL technology. The Company's services enhance remote access
from homes to enterprise LANs and enable ISPs to offer high-speed Internet
access to their end-users. The Company's services are provided over standard
copper telephone lines at speeds of up to 1.5 Mbps, approximately 50 times the
speed available through a standard 28.8 Kbps modem. The Company markets its
services directly to enterprises that are increasingly emphasizing RLAN access
to improve employee productivity and reduce operating costs. The Company also
markets its services indirectly through ISPs that wish to sell high-speed
Internet access initially to small- and medium-sized businesses, and
subsequently to consumers, using the Company's DSL lines.
The Company was founded in October 1996 and launched its services in its
first market, the San Francisco Bay Area, in December 1997. Covad has entered
into arrangements for pilot implementation with a number of enterprise
customers including, among others, Cisco, Intel, Oracle Corporation and
Stanford University. The Company has also entered into marketing arrangements
with 14 ISP customers, including Concentric Network Corporation and Verio Inc.
Covad's services are currently available for subscription to over one million
homes and businesses in the San Francisco Bay Area. The Company is
aggressively expanding its geographical coverage in the San Francisco Bay
Area. The Company plans to launch its services in other regions, initially
including Boston, Los Angeles, New York, Seattle and Washington, D.C.
Through its use of DSL technology, the Company can effectively leverage the
existing telephone network copper infrastructure to deploy service more
quickly and at lower costs than technologies such as cable modems and wireless
data networks that require large initial infrastructure investments before
service can be provided.
INDUSTRY BACKGROUND
Market Demand for Increased Digital Communications Bandwidth
The demand for high-speed data services is growing rapidly. Over the past
ten years, high-speed LANs have become increasingly important to enterprises
in order for employees to share information, send e-mail, search databases and
conduct business. The Company believes that a large majority of personal
computers used in enterprises are connected to LANs. Enterprises are now
seeking to extend this same high-speed connectivity to employees accessing the
LAN from home to improve employee productivity and reduce operating costs.
High-speed connectivity has also become important to small- and medium-sized
businesses due to the dramatic increase in Internet usage. High-speed Internet
connections are required for small- and medium-sized businesses to host Web
sites and access critical business information. High-speed data connections
are also becoming important to consumers as more high bandwidth information
and applications become available on the Internet.
The Company expects the market size for both RLAN access and small- and
medium-sized business Internet access to continue to grow rapidly as
businesses increase their use of the Internet, intranets and privately managed
networks. Industry analysts estimate that the number of remote access lines in
the U.S. will grow from approximately ten million in 1996 to approximately 30
million in 2000, a compound annual growth rate in excess of 30%.
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RLAN access and business and consumer Internet access are creating
increasing demands for high-speed data services. However, the full potential
of Internet and LAN applications cannot be realized without removing the
performance bottlenecks of the existing public switched telephone network.
Increases in telecommunications bandwidth have significantly lagged
improvements in microprocessor performance over the last ten years. Since 1988
microprocessor performance has improved nearly 80-fold, while the fastest
consumer modem connection has improved from 9.6 Kbps to 56 Kbps, a factor of
six. According to industry analysts, there are nearly 40 million personal
computers in U.S. homes today, and most of them can only connect to the
Internet or their corporate LAN by low-speed analog lines. Higher speed
connections are available, including ISDN, Frame Relay and T1 lines, and this
segment has recently experienced dramatic growth in the U.S. However, these
alternatives are expensive and complex to order, install and maintain.
Emergence of DSL Technology
DSL technologies emerged in 1990 and are commercially available today to
address the performance bottlenecks of the public switched telephone network.
DSL equipment, when deployed at each end of standard copper telephone lines,
increases the data carrying capacity of these lines from analog modem speeds
of 56 Kbps and ISDN speeds of 128 Kbps to DSL speeds of 144 Kbps to 6 Mbps
depending on the length and condition of the copper line. Also, recent
advances in semiconductor technology and Digital Signal Processing ("DSP")
algorithms have made the deployment of DSL technology on a widespread basis
more economical, with equipment prices falling by up to 75% over the last two
years. The Company anticipates that equipment prices will continue to fall as
a result of continued advances in semiconductor technologies and increases in
equipment production volumes.
DSL technology is significantly less expensive to deploy on a broad scale
than existing alternative high-speed data communications technologies. ISDN
has required widespread and expensive upgrading of CO switches. Other
technologies, such as cable modems, wireless data and satellite data, require
the up-front development of an extensive infrastructure past every home or
business regardless of the number of subscribers. By contrast, DSL, which
leverages the existing installed copper plant, requires relatively less
initial investment and a subsequent variable investment in DSL electronics
directly related to the number of paying customers. This "success-based"
investment characteristic makes DSL technology more economical to deploy
rapidly over a wide area and allows the Company to become profitable at lower
subscription rates than alternative technologies.
In January 1998, a number of companies, including Intel, Compaq Computer
Corp., Microsoft Corp. and certain of the major ILECs, jointly announced the
formation of the Universal ADSL Working Group (UAWG). The goal of UAWG is to
publish a standard specification for a low-cost, consumer oriented ADSL
hardware and software solution. Since the Company is a purchaser of ADSL
equipment and a service provider, the Company has joined the UAWG and supports
its objectives. The Company believes that the efforts of the UAWG will lead to
lower cost and more standardized ADSL hardware and software products.
Impact of the Telecommunications Act of 1996
The 1996 Act was passed to promote competition by, among other things,
creating the legal framework for telephone companies other than the ILECs to
provide local analog and digital communications services. These companies,
referred to as CLECs, can gain access to the ILEC network and use these
facilities to provide voice and data services in competition with the ILECs.
The 1996 Act requires ILECs, among other things, to allow CLECs to lease
copper lines on a line by line basis, to collocate equipment, including DSL
equipment, in the ILECs' COs to connect to these lines, to lease access on the
ILECs' inter-CO fiber backbone to link the CLECs' equipment and to use the
ILECs' own OSS to place orders and monitor ILECs' performance. In essence, the
1996 Act eliminated a substantial barrier to entry for CLECs. In lieu of
having to construct a competing infrastructure, CLECs can leverage the
existing telephone infrastructure, which required a $200 billion investment by
ILECs and ILEC ratepayers.
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THE COVAD SOLUTION
Covad was formed to capitalize on the substantial market opportunity created
by the growing demand for high-speed data communications, the commercial
availability of low cost DSL technology and the passage of the 1996 Act. Key
aspects of the Company's solution to provide high-speed data communication
services include: (i) an attractive value proposition that provides high-speed
connections at similar or lower prices than currently available to customers;
(ii) a widely available, always-connected, secure network that facilitates
deployment of Internet and intranet applications; and (iii) a management team
experienced in the data communications, telecommunications and personal
computer industries.
Attractive Value Proposition. The Company offers higher bandwidth data
connections than alternative services at similar or lower prices that do not
vary with usage. For the RLAN market, the Company's mid-range services are
three to six times the speed of ISDN and up to ten times the speed of analog
modems at monthly rates similar to or lower than those for heavily used ISDN
lines. For business Internet users, the Company's high-end services offer
comparable bandwidth to T1 and Frame Relay circuits at approximately 25% of
the cost. The Company believes that many of its enterprise customers can
justify deploying lines to their employees if productivity improves by only a
few hours per month based on increases in the number of hours worked and
decreases in commute time and time spent waiting for information.
Widely Available, Always-Connected, Secure Network. The Company's strategy
of providing blanket coverage is designed to ensure that the Company's
services are available to the vast majority of its customers' end-users in any
region it enters. The Company's network provides 24-hour, always-on
connectivity, unlike ISDN lines and analog modems which require customers to
connect to their LAN or the Internet for each use. Also, because the Company
uses dedicated connections from each end-user to the enterprise network or
ISP, its customers can obtain increased security which reduces the risk of
unauthorized access.
Experienced Management Team. The Company's management team includes
individuals with extensive experience in designing, marketing and financing
personal computer and networking equipment and services, including founders
Charles McMinn, President and Chief Executive Officer, Charles Haas, Vice
President of Sales and Marketing and Dhruv Khanna, Vice President, General
Counsel and Secretary (all of whom worked at Intel), Rex Cardinale, Vice
President of Engineering (former General Manager of the cc:Mail division of
Lotus Development Corporation), John Rugo, Vice President of Operations
(former Vice President of BBN Planet Corporation) and Timothy Laehy, Vice
President of Finance and Chief Financial Officer (former Vice President of
Corporate Finance and Treasurer of Leasing Solutions, Inc.).
BUSINESS STRATEGY
The Company's objective is to be the leading provider of high-speed data
communication services using DSL technology in each region that it enters. In
order to achieve this goal, the Company is implementing a business strategy
with the following key elements:
Secure CLEC Status and Sign Interconnection Agreements in the Top U.S.
Markets. To provide its services, the Company obtains CLEC status in each
state that it enters and signs interconnection agreements with the relevant
ILECs. To date, the Company has obtained CLEC regulatory approval in the
states of California, Illinois, Massachusetts, New York, Oregon and Washington
and intends to obtain such approval in other states necessary to cover the
Company's initial target regions. In the aggregate, the Company's initial
target regions represent over 20% of the U.S. population.
Roll Out Service Rapidly in These Markets. The Company seeks to be the first
company to roll out service in each region that it enters in order to: (i)
secure CO collocation space prior to competitors; (ii) secure and retain
customers before significant competition arises; (iii) maintain advantages
over competitors through superior coverage and high customer satisfaction; and
(iv) build the largest volume and market share in order to allow the Company
to reduce the costs and prices of its services and, where it is first to
market, maintain its leadership position.
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Provide Pervasive Coverage. The Company is pursuing a blanket coverage
strategy of providing service in almost every CO in each region that it enters
since the typical enterprise desires to offer RLAN access to all employees
regardless of where they reside in the region. Blanket coverage is also
important to the Company's ISP customers which desire to market their Internet
access services on a region-wide basis.
Focus on Packet Data Services. Although the Company is authorized to provide
both data and voice services, it is presently focusing exclusively on packet
data services and does not currently plan to offer analog voice services. The
Company believes that it can provide a superior data service while avoiding
the significant investment that would be required to compete in the already
crowded analog voice market.
Sell Directly to Enterprises and ISPs that Can Provide a Large Number of
End-Users. The Company's direct sales force specifically targets large
enterprises that it estimates have over 100 existing ISDN or analog modem-
based RLAN users. The Company offers these customers higher performance and
always-on services at similar or lower prices than those of alternative
technologies. Additionally, the Company targets ISPs which can offer their
end-users similar cost and performance advantages for Internet access using
the Company's services.
Employ a "Success-Based" Investment Strategy. Because it uses DSL
technology, a significant portion of the Company's capital expenditures are
"success-based." The Company estimates that over 50% of capital expenditures
over the next several years will be for DSL equipment that is directly related
to the Company's end-user subscription rate.
Cooperate with ISPs and Other Industry Participants. The Company does not
provide Internet access directly to any of its customers. Instead, the Company
provides connections to ISPs which offer high-speed Internet access using the
Company's lines. In this way, the Company: (i) carries the traffic of multiple
ISPs in any region, increasing its volume and reducing its costs; (ii)
leverages its selling efforts through the sales and support staff of these
ISPs; (iii) offers ISPs a non-competitive transport alternative, since the
ILEC typically provides its own Internet access services in competition with
ISPs; and (iv) provides ISPs a high-speed service offering to compete with
cable-based Internet access.
Provide a Superior Product and Service Solution. The Company believes that
it can build a significant competitive position by providing a comprehensive
product and service solution to its customers. The Company undertakes to
provide all of the necessary product and service elements required to
establish and maintain data services in its target markets including: (i)
managing the ILEC's installation and testing of copper lines used for its
service; (ii) installing any in-building wiring required to initiate service;
(iii) selling, configuring and installing the DSL modem required at each end-
user site; (iv) providing 24x7 monitoring of each end-user line; and (v)
designing and provisioning an enterprise's overall RLAN network including
equipment selection, programming and troubleshooting.
COVAD'S PRODUCT AND SERVICE OFFERINGS
Covad offers four flat rate data services under the TeleSpeed brand to
connect its customers' end-users to Covad's RDCs. In addition, enterprises and
ISP customers purchase one of two backhaul services from the Company to
connect their facilities to Covad's RDC.
TeleSpeed Services
The Company's TeleSpeed services connect individual end-users on standard
telephone lines to Covad DSL equipment in their serving CO and from there to
the Covad RDC serving that metropolitan area. An ILEC's infrastructure
consists of numerous COs which are connected by a fiber optic backbone to a
regional office that routes local and long distance traffic. Each CO collects
the individual copper lines from customers' premises in the neighborhood.
The four TeleSpeed services are TeleSpeed 144, TeleSpeed 384, TeleSpeed 1.1,
and TeleSpeed 1.5. The chart below compares the pricing, performance and
markets for each of these services. The particular TeleSpeed
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service available to an end-user depends on the user's distance to the CO. The
Company estimates that approximately 70% of end-users are within 18,000 feet
of a CO and can be served by the Company's TeleSpeed 384 services. The Company
believes the remaining 30% can be served with TeleSpeed 144. The Company also
believes at least a majority of end-users will be able to obtain any of the
other TeleSpeed offerings. However, the specific number of potential users for
the higher speeds will vary by CO and by region and will be affected by line
quality.
<TABLE>
<CAPTION>
SPEED TO SPEED FROM PRICE* RANGE**
SERVICE END-USER END-USER ($ /MONTH) (FEET) MARKET
------- -------- ---------- ---------- ------- ------------------------------------
<S> <C> <C> <C> <C> <C>
TeleSpeed 144........... 144 Kbps 144 Kbps $ 90 30,000 ISDN replacement, non-standard lines
TeleSpeed 384........... 384 Kbps 384 Kbps $ 125 18,000 RLAN, business Internet
TeleSpeed 1.1........... 1.1 Mbps 1.1 Mbps $ 195 15,000 Business Internet
TeleSpeed 1.5........... 1.5 Mbps 384 Kbps $ 195 12,000 High-speed Web surfing
</TABLE>
- --------
* Current price list for the San Francisco Bay Area. Prices may vary for
volume customers and in different regions.
** Approximate maximum distance from the end-user to the CO.
TeleSpeed 144. Covad's TeleSpeed 144 service operates at up to 144 Kbps in
each direction, which is similar to the performance of an ISDN line. This
service, which can use existing ISDN equipment at the end-user site, is
targeted at the ISDN replacement market where its $90 per month flat rate can
compare favorably to ISDN services from the ILEC when per-minute usage charges
apply. It is also the service that Covad offers on non-standard lines that are
either too long to carry the Company's higher speed services or are served by
Digital Loop Carriers or similar equipment where a continuous copper
connection is not available from the end-user site to the CO.
TeleSpeed 384. This service provides three to six times the performance of
ISDN at similar price points to heavily-used ISDN lines. The Company expects
TeleSpeed 384 to be the main service deployed within the RLAN market.
TeleSpeed 1.1. This service provides over two-thirds the bandwidth of a T1
data circuit at less than one-quarter of the $800 monthly price typical for T1
service. The target market for the TeleSpeed 1.1 service is small businesses
needing T1-level access to the Internet but have previously been unable to
afford the price of such service. The service also competes favorably from a
price/performance standpoint with traditional fractional T1 and Frame Relay
services for these same customers.
TeleSpeed 1.5. TeleSpeed 1.5 is the Company's only asymmetric service, i.e.,
with different speeds to and from the end-user. This service is intended for
end-users who consume more bandwidth than they generate, and is especially
useful for accessing Web sites. The service also provides the highest
performance of any TeleSpeed service to stream video or other multimedia
content to end-user locations.
Backhaul Services
Covad provides two backhaul services from its RDC to an enterprise or ISP
customer site. These services include the aggregation of all individual end-
users in a metropolitan area and transmission of the packet information to the
customer on a single high-speed line. The services, prices and suggested
maximum aggregation of end-user traffic are as follows:
Covad T1. Covad's T1 backhaul service is intended for the small business
with up to 50 RLAN end-users. The service operates at 1.5 Mbps and implements
a Frame Relay protocol compatible with most low-end and mid-range routers. The
price is $975 per month.
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Covad DS3. The Company's DS3 backhaul service is targeted to large
enterprises and ISPs with up to 1,000 end-users. The service utilizes an ATM
protocol that efficiently handles the high data rates involved and operates at
up to 45 Mbps. The price is $4,000 per month.
Activation Services
In addition to monthly service charges, Covad has a one-time activation
charge of $325 for RLAN end-users and $525 for ISP end-users. The Company also
charges $2,000 for T1 and $7,500 for DS3 activation. Customers must also
purchase a DSL modem, currently $300 to $600, from a third party for each end-
user of the TeleSpeed 144 service, or from the Company for $550 for higher
speed TeleSpeed services. Fees and charges are subject to change as equipment
costs change.
CUSTOMER RELATIONSHIPS
The Company offers its services to enterprises as well as to ISPs. According
to the U.S. Census, there are over 134,000 businesses in the U.S. with over
100 employees, of which the Company estimates that 3,000 are in the San
Francisco Bay Area. Since commercial introduction of its service in December
1997, Covad has entered into arrangements for pilot implementation with a
number of enterprises and has also entered into marketing arrangements with 14
ISPs.
In the current early stage of its deployment, the Company's practice for
enterprise customers has been to enter into an arrangement for a negotiated
price to install the service on a pilot basis to a small number of end-users
for a period of typically 60 to 90 days. After a successful pilot, the service
would be expanded to a larger group of end-users and then rolled out on a
broader scale. The Company estimates that the market potential of its current
enterprise customers is 5,000 end-user lines if these enterprise customers
fully roll out the Company's services to the extent that they have rolled out
ISDN to date.
The Company's agreements with ISPs generally have terms of at least one year
and provide for cooperative advertising of the TeleSpeed brand. The agreements
are nonexclusive and do not require the ISP to have a minimum number of
TeleSpeed users.
SALES AND MARKETING
The Company markets its RLAN services through a direct sales force to large
enterprises. In January 1998, the Company expanded its sales force from two to
six persons to accelerate its sales efforts in the San Francisco Bay Area. The
Company intends to further increase its sales force in 1998 to support
deployment into additional regions. The sales force deals directly with the
telecommunications manager responsible for remote access within an enterprise.
A typical target enterprise customer would have in excess of 100 RLAN users on
ISDN or dial-up connections. The Company's largest enterprise customers
currently have thousands of such users.
For the business and consumer Internet access markets, the Company sells its
service to ISPs which combine the Company's lines with their Internet access
services and resell the combination to their existing and new end-users. The
Company uses dedicated ISP channel sales and marketing personnel to address
this market.
The Company is also pursuing several types of joint marketing arrangements.
For example, the Company intends to provide its ISP customers with market
development funds when they promote the TeleSpeed service. Certain of the
Company's equipment suppliers, including Cisco, have proposed to promote the
Company's services through seminars to corporate communications managers in
the San Francisco Bay Area.
SERVICE DEPLOYMENT AND OPERATIONS
Corporate communications managers and ISPs typically have had to assemble
their data communications connections using multiple service and equipment
suppliers. This leads to additional work, cost and coordination problems. With
its TeleSpeed service, the Company emphasizes a one-stop total service
solution for its
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customers. This service solution includes: customer installation, end-user
line installation, end-user premises wiring and modem configuration, ongoing
network monitoring, customer reporting and customer service and technical
support.
Customer Installation. The Company works with its enterprise and ISP
customers to establish all required connectivity and configuration of the
backhaul connection from the customer to Covad's RDC. The Company orders the
backhaul circuit for the customer, tests the installed circuit, assists the
customer in configuring the router or switch that terminates the backhaul
circuit and monitors this circuit from the NOC.
End-User Line Installation. The Company orders all end-user connections from
the ILECs, monitors the ILECs' performance, tests the installed lines and
monitors the end-user lines from the NOC.
End-User Premises Wiring and Modem Configuration. The Company maintains its
own installation crews and trucks to install any required inside wiring at
each end-user site. The Company's installation crews also configure and
install end-user modems with information specific to each enterprise and ISP.
Network Monitoring. The Company monitors its network from the NOC on a
continuous basis which often enables the correction of potential network
problems before a customer or end-user is affected. The Company is also
developing network capability to provide enterprise and ISP customers direct
monitoring access of their end-users for more efficient monitoring of their
own network performance.
Customer Reporting. The Company communicates regularly with its customers
about the status of their end-users. The Company also operates a toll-free
customer care help line. Additionally, the Company is developing tools to
allow individual enterprise communications managers and ISPs to monitor their
end-users directly on an ongoing basis.
Customer Service and Technical Support. The Company provides 24x7 service
and technical support to its enterprise communications manager and its ISP
customers. The communication manager and the ISP serve as the initial contact
for service and technical support with the Company providing the second level
of support. By avoiding the higher cost of providing direct end-user support,
the Company believes it can grow its customer base more rapidly with lower
customer support costs. The Company's model is consistent with current
enterprise and ISP service contracts.
NETWORK ARCHITECTURE AND TECHNOLOGY
The key design principles of the Covad network are to provide: (i) robust
network security required for enterprise intranet applications, (ii)
consistent and scalable performance and (iii) intelligent end-to-end network
management.
Robust Network Security. Modem access to enterprise networks presents
significant security risks since any telephone can be used to attempt to
access such a network simply by dialing the telephone number. As a result,
enterprises expend significant effort and resources to prevent unauthorized
access. Enterprises also typically limit remote access users to reading e-mail
or other non-sensitive applications. The Covad network is designed to provide
enhanced security to ensure secure availability of all internal applications
and information for remote locations. The Company's Permanent Virtual Circuit
network architecture connects individual end-users at fixed locations to a
single enterprise which reduces the possibility of unauthorized access and
allows the Company's customers to safely transmit sensitive information and
applications over the Company's TeleSpeed lines.
Consistent and Scalable Performance. The Company believes that eventually
public packet networks will evolve to replace the 35 million modems currently
connected to circuit switched networks that have been deployed in the U.S. As
such, the Company designed its network for scalability and consistent
performance to all users as the network grows. The Company has designed a
"star topology" network similar to the most popular LAN networking
architecture currently used in high performance enterprise networks. In this
model, new
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capacity is added automatically as each new user receives a new line. The
Company also uses ATM switches in its RDCs that implement packet switching
directly in silicon circuits rather than slower router-based designs that
implement switching in router software.
Intelligent End-to-End Network Management. Because the customers' and end-
users' lines are "always-on" they can also always be monitored. The Company
uses this capability to provide proactive network monitoring and management.
The Company has visibility from the enterprise or ISP site across the network
and into the end-user's home or business. Because its network is centrally
managed, the Company can identify and dynamically enhance network quality,
service and performance and address network problems promptly.
The primary components of the Company's network are the NOC, RDCs, its high-
speed private metropolitan backbones, CO collocation spaces, including DSLAMs,
copper access lines and DSL modems.
NOC. The entire Covad network is managed from the NOC. The Company provides
end-to-end network management using advanced network management tools on a
24x7 basis which enhances its ability to address performance or connectivity
issues before they affect the end-user experience. From the NOC, the Company
can monitor the equipment and circuits in the RDC (including the ATM
switches), each CO (including the DSLAMs) and individual end-user lines
(including the DSL modems). Currently, the NOC is collocated with the
Company's San Francisco Bay Area RDC.
RDCs. The RDCs will act as service hubs for each metropolitan area the
Company enters. All traffic from each CO will be collected at the RDC and
switched by the Company's ATM switches located there. Each enterprise and ISP
also will be connected to the RDC so that the resultant traffic from each CO
can be sent to and from the enterprise or ISP on a single high-speed
connection. The Company plans to design the RDC for high availability
including battery backup power, redundant equipment and active network
monitoring.
Private Metropolitan Backbone. The Company expects to operate its own
private metropolitan backbone in each region that it enters. The backbone
network is expected to consist of a network of high-speed ATM communications
services that the Company leases to connect its RDCs to its equipment in
individual COs and to connect its RDCs to enterprises and ISPs. This backbone
network is planned to operate at a speed of 45 Mbps with portions of the
network currently targeted to be upgraded to 155 Mbps or more in 1998.
Collocation Spaces. Through its interconnection agreements with the ILECs,
the Company seeks to secure collocation space in every CO where it desires to
offer service. These collocation spaces are designed to offer the same high
reliability and availability standards as the ILEC's other CO collocation
space. The Company requires access to these collocation spaces for its
equipment and for persons employed by, or under contract with, the Company.
The Company places DSLAMs in its collocation spaces to provide the high-speed
DSL signals on each copper line to its end-users. The Company builds its
collocation spaces to handle thousands of end-user lines each. As of February
20, 1998, the Company had ten CO spaces operational in the San Francisco Bay
Area.
Copper Access Lines. The Company leases the copper lines running to end-
users from the ILEC under terms specified in its interconnection agreements.
The Company leases lines that, in many cases, must be specially conditioned by
the ILEC to carry digital signals, usually at an additional charge relative to
that for voice grade copper lines.
DSL Modems and On-Site Connectivity. The Company buys its DSL modems from
its suppliers for resale to its enterprise or ISP customers for use by their
end-users. The Company configures and installs these modems along with any
required on-site wiring needed to connect the modem to the copper line leased
from the ILEC. Currently, the DSL modem and DSLAM equipment used must come
from the same vendor for all services, except the equipment used in the
Company's TeleSpeed 144 services, since there are not yet interoperability
standards for the equipment used in the Company's higher-speed services.
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The Company is also pursuing a program of ongoing network development. The
Company's service development and engineering efforts focus on the design and
development of new technologies and services to increase the speed,
efficiency, reliability and security of the Covad network and to facilitate
the development of network applications by third parties that will increase
the use of the Company's network.
COMPETITION
The markets for RLAN access, business Internet and consumer Internet
services are extremely competitive, and the Company expects that competition
will intensify in the future. The Company's most immediate 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
will directly compete with some or all of the Company's high-speed digital
service offerings. Such technologies include ISDN, DSL, wireless data and
cable modems. Certain bases of competition in the Company's markets include
transmission speed, reliability of service, breadth of service availability,
price/performance, network security, ease of access and use, content bundling,
customer support, brand recognition, operating experience, capital
availability and exclusive contracts. The Company believes that it compares
unfavorably with its competitors with regard to, among other things, brand
recognition, operating experience, exclusive contracts, and capital
availability. Many of the Company's competitors and potential competitors have
substantially greater resources than the Company and there can be no assurance
that the Company will be able to compete effectively in its target markets.
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 of DSL-based data services. For example, US West, Inc. is offering
commercial DSL services in certain areas in Arizona and Utah, and Ameritech
Corporation has announced commercial DSL services beginning in certain areas
in Michigan. The Company recognizes that the ILECs have the potential to
quickly overcome many of the issues that the Company believes have slowed wide
deployment of DSL services by ILECs in the past; if and when they do so, the
ILECs will represent strong competition in all of the Company's target service
areas. The ILECs have an established brand name and reputation for high
quality in their service areas, possess sufficient capital to deploy DSL
equipment rapidly, have their own copper lines, and can bundle digital data
services with their existing analog voice services to achieve economies of
scale in serving customers. They are in a position to offer service from COs
where the Company is unable to secure collocation space and offer service
because of space restrictions.
Cable Modem Service Providers. CMSPs such as @Home Network and MediaOne (and
their respective cable partners) are deploying high-speed Internet access
services over Hybrid Fiber Coaxial cable networks. Where deployed, these
networks provide similar and in some cases higher-speed Internet access and
RLAN access than the Company provides. They also offer these services at lower
price points than the Company's TeleSpeed services and target residential
consumers, as well as business customers. They achieve these lower price
points in part by sharing the bandwidth available on the cable network among
multiple end-users. This architecture is less well-suited to the Company's
target markets of business Internet access and RLAN access where guaranteed
bandwidth, symmetric upstream and downstream bandwidth and network security
issues are more important than in the consumer market. In addition, different
regions within a metropolitan area may be served by different CMSPs, making it
more difficult to offer the blanket coverage required by potential RLAN access
and business customers. Also, much of the current cable infrastructure in the
U.S. must be upgraded to support cable modems, a process which the Company
believes is significantly more expensive and time-consuming than the
deployment of DSL-based networks. To date, approximately 10% of U.S.
households are passed by cable infrastructure that is capable of supporting
the use of cable modems. Nevertheless, actual or prospective CMSP competition
may have a significant negative effect on the ability of the Company to secure
customers and may create downward pressure on the prices the Company can
charge for its services.
National Long Distance Carriers. Long distance inter-exchange carriers, such
as AT&T Corp., MCI Communications Corp. (planned to be acquired by WorldCom,
Inc.), Sprint Corp. and WorldCom, Inc. have deployed large-scale Internet
access networks, sell connectivity to businesses and residential customers,
and have
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high brand recognition. They also have interconnection agreements with many of
the ILECs and a number of collocation spaces from which they could begin to
offer competitive DSL services.
Fiber-Based CLECs. Companies such as Teleport Communications Group, Inc.
(TCG) (planned to be acquired by AT&T Corp.), Brooks Fiber Properties, Inc.
(acquired by WorldCom, Inc.) and MFS (acquired by WorldCom, Inc.) have
extensive fiber networks in many metropolitan areas primarily providing high-
speed digital and voice circuits to large corporations. They also have
interconnection agreements with the ILECs pursuant to which they have acquired
collocation space in many markets targeted by Covad. These companies could
modify their current business focus to include residential and small business
customers using DSL in combination with their current fiber networks.
Internet Service Providers. ISPs such as BBN (acquired by GTE Corporation),
UUNET Technologies, Inc. (acquired by WorldCom, Inc.), Earthlink Networks
Inc., Concentric Network Corporation, Mindspring Enterprises, Inc., Netcom On-
Line Communication Services, Inc. (acquired by ICG) and PSINet, Inc. provide
Internet access to residential and business customers, generally using the
existing public switched telephone network at ISDN speeds or below. Some ISPs
such as HarvardNet Inc. in Massachusetts, InterAccess in Illinois and Vitts
Corporation in New Hampshire have begun offering DSL-based services. To the
extent the Company is not able to recruit ISPs as customers for its service,
ISPs could become DSL service providers competitive with the Company.
Online Service Providers. OSPs include companies such as America Online
("AOL"), Compuserve (acquired by AOL), MSN (a subsidiary of Microsoft Corp.),
Prodigy, Inc., and WebTV (acquired by Microsoft Corp.) that provide, over the
Internet and on proprietary online services, content and applications ranging
from news and sports to consumer video conferencing. These services are
designed for broad consumer access over telecommunications-based transmission
media, which enable the provision of digital services to the significant
number of consumers who have personal computers with modems. In addition, they
provide Internet connectivity, ease-of-use and consistency of environment.
Many of these OSPs have developed their own access networks for modem
connections. If these OSPs were to extend their access networks to DSL, they
would be competitors of the Company.
Wireless and Satellite Data Service Providers. WSDSPs are developing
wireless and satellite-based Internet connectivity. The Company may face
competition from terrestrial wireless services, including two Gigahertz
("Ghz") and 28 Ghz wireless cable systems (Multi-channel Microwave
Distribution System ("MMDS") and Local Multi-channel Distribution System
("LMDS")), and 18 Ghz and 39 Ghz point-to-point microwave systems. For
example, the FCC is currently considering new rules to permit MMDS licensees
to use their systems to offer two-way services, including high-speed data,
rather than solely to provide one-way video services. The FCC also is
currently auctioning LMDS licenses in all markets for wireless cable systems,
which can be used for high-speed data services as well. In addition, companies
such as Associated Communications Group, Advanced Radio Telecom Corp. and
WinStar Communications, Inc., hold point-to-point microwave licenses to
provide fixed wireless services such as voice, data and videoconferencing.
The Company also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Space and Communications Group (a subsidiary
of General Motors Corporation), Teledesic and others have filed applications
with the FCC for global satellite networks which can be used to provide
broadband voice and data services.
In January 1997, the FCC allocated 300 Mhz of spectrum in the 5 Ghz band for
unlicensed devices to provide short-range, high-speed wireless digital
communications. These frequencies must be shared with incumbent users without
causing interference. Although the allocation is designed to facilitate the
creation of new wireless LANs, it is too early to predict what kind of
equipment might ultimately be manufactured and for what purposes it might be
utilized.
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Other CLECs. Other companies can enter the market and offer high-speed data
services using a business strategy similar to that of the Company. The 1996
Act specifically grants any and all CLECs the right to negotiate
interconnection agreements with the ILEC. Further, the 1996 Act allows CLECs
to enter into interconnection agreements which are identical in all respects
to that of the Company. The Company has already had an interconnection
agreement copied in this manner.
As a first mover in selected markets that it enters, the Company seeks the
following strategic benefits: (i) securing and retaining customers before
competition is present, (ii) engendering end-user loyalty through superior
coverage and high customer satisfaction and (iii) capturing the largest market
share and thereby achieving economies of scale sufficient to drive down prices
and maintain a dominant market leadership position. The Company may not be
able to achieve these benefits if substantial competition from any of the
foregoing competitors exists or develops in the Company's markets.
INTERCONNECTION AGREEMENTS WITH ILECS
A critical aspect of the Company's business is its interconnection
agreements with the ILECs. These agreements cover a number of aspects
including: (i) the price the Company pays to lease access to the ILEC's copper
lines; (ii) the special conditioning the ILEC provides on certain of these
lines to enable the transmission of DSL signals; (iii) the price and terms for
collocation of Company equipment in the ILEC's COs; (iv) the price paid by the
Company and access the Company has to the ILEC's inter-CO transport facilities
that the Company uses to connect COs to its RDC; (v) the ability of the
Company to access conduits and other rights of way the ILEC has to construct
its own network facilities; (vi) the OSS and interfaces that the Company can
use to place orders and trouble reports and monitor the ILEC's response to
Company requests; (vii) the dispute resolution process the ILEC and the
Company use to resolve disagreements on the terms of the interconnection
contract; and (viii) the term of the interconnection agreement, its
transferability to successors, its liability limits and other general aspects
of the ILEC and Company relationship.
As of February 20, 1998, the Company had entered into voluntary agreements
with three different ILECs. It has not needed to obtain state commission
decisions to force an ILEC to sign an interconnection agreement arbitrated by
the state commission, as a number of other larger CLECs have done in the past.
The Company believes that the ILECs have been willing to sign voluntary
agreements with the Company to date for a variety of reasons including: (i)
the ILECs have a legal obligation to do so; (ii) the Company is perceived as a
start-up entity whose digital services are a small part of the ILEC's total
business; (iii) the Company is providing residential, facilities-based
competition to the ILEC, an element of competition that few other CLECs are
pursuing and an element of competition that can bolster the arguments of the
RBOC-ILECs to be permitted to enter the long distance voice business; and (iv)
the Company is not offering local analog voice services that could capture
revenue from the ILEC. There can be no guarantee that the Company will be able
to continue to sign voluntary interconnection agreements with subsequent
ILECs. The Company is currently negotiating agreements with several ILECs
which are necessary before the Company can expand its services into the
metropolitan areas served by such ILECs. The ILECs are also permitting CLECs
to adopt previously signed interconnection agreements. In certain instances,
the Company has adopted the interconnection agreement of another CLEC. Other
CLECs have also adopted the same or modified versions of the Company's
interconnection agreements, and may continue to do so in the future.
The Company's interconnection agreements have a maximum term of three years,
requiring the Company to renegotiate its existing agreements in the future.
Although the Company expects to renew its interconnection agreements and
believes the 1996 Act limits the ability of ILECs not to renew such
agreements, there can be no assurance that existing or new agreements will be
extended or renegotiated on terms favorable to the Company. Additionally, the
Company's interconnection agreements are subject to interpretation by both
parties and there may arise differences in interpretation that cannot be
resolved on favorable terms to the Company. Finally the interconnection
agreements are subject to state commission, FCC and judicial oversight. There
can be no assurance that these bodies will not modify the terms or prices of
the Company's interconnection agreements in
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ways that adversely affect the Company's business, prospects, operating
results, financial conditions and its ability to service and repay its
indebtedness, including the Notes.
GOVERNMENT REGULATION
Overview. The Company's services are subject to a variety of federal
regulations. With respect to certain activities and for certain purposes, the
Company has submitted its operations to the jurisdiction of state and local
authorities who may also assert more extensive jurisdiction over the
facilities and services of the Company. The FCC has jurisdiction over all
services and facilities of the Company to the extent that the Company provides
interstate and international services. To the extent the Company provides
identifiable intrastate services, the Company's services and facilities are
subject to state regulations. In addition, local municipal government
authorities also assert jurisdiction over the Company's facilities and
operations. The jurisdictional reach of the various federal, state and local
authorities is subject to ongoing controversy and judicial review, and the
Company cannot predict the outcome of such review.
Federal Regulation. The Company's provision of its services must comply with
the requirements of the Communications Act of 1934, as amended by the 1996
Act, as well as the FCC's regulations under the statute. The 1996 Act
eliminates many of the pre-existing legal barriers to competition in the
telecommunications and video programming communications businesses, preempts
many of the state barriers to local telecommunications service competition
that previously existed in state and local laws and regulations, and sets
basic standards for relationships between telecommunications providers. The
law delegates to the FCC and the states broad regulatory and administrative
authority to implement the 1996 Act.
Among other things, the 1996 Act removes barriers to entry in the local
telecommunications market by preempting state and local laws that are barriers
to competition and by requiring ILECs to provide nondiscriminatory access and
interconnection to potential competitors, such as cable operators, wireless
telecommunications providers, long distance companies and CLECs such as the
Company.
Regulations promulgated by the FCC under the 1996 Act specify in greater
detail the requirements of the 1996 Act imposed on the ILECs, among other
things, to open their networks to competition by providing competitors
interconnection, collocation space, access to UNEs, retail services at
wholesale rates and nondiscriminatory access to telephone poles, ducts,
conduits, and rights-of-way. As a result of these changes, companies such as
Covad are now able to interconnect with the ILECs in order to provide local
telephone exchange services and to use portions of the ILECs' existing network
to offer new and innovative services such as the Company is currently
offering. Numerous parties have appealed certain aspects of these regulations.
The appeals have been consolidated and have been reviewed by the U.S. Court of
Appeals for the Eighth Circuit, which has overruled certain of the FCC's
pricing and nondiscrimination regulations and upheld others. The Eighth
Circuit Court's ruling has been appealed to the U.S. Supreme Court which has
agreed to accept the case for review. Covad has entered into competitive
interconnection agreements using the federal guidelines established in the
FCC's interconnection order, which agreements may be modified to conform to
the Court of Appeals rulings and any subsequent rulings of the U.S. Supreme
Court.
The 1996 Act also allows the RBOCs to enter the long distance market within
their own local service regions. The timing of the various RBOCs' entry into
their respective in-region long distance service businesses is also extremely
uncertain. The timing of the various RBOCs' in-region long distance entry will
likely affect the level of cooperation the Company receives from the RBOCs.
In addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
Precisely when and to what extent the ILECs will secure pricing flexibility
for their services is uncertain. For example, on January 26, 1998, Bell
Atlantic Corporation filed a petition at the FCC seeking to eliminate the
application of certain regulations that apply to its provision of services
that are competitive with those of the Company. The timing and the extent of
regulatory freedom and
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pricing flexibility granted to the ILECs will affect the competition the
Company faces from the ILECs' competitive services.
In addition, the 1996 Act provides the FCC with the authority to forbear
from regulating entities such as the Company who are classified as "non-
dominant" carriers. The FCC has exercised its forbearance authority. As a
result, the Company is not obligated to obtain prior certificate approval from
the FCC for its interstate services or file tariffs for such services. The
Company has determined not to file tariffs for its interstate services. The
Company provides its interstate services to its customers on the basis of
contracts rather than tariffs. The Company believes that it is unlikely that
the FCC will require the Company to file tariffs for its interstate services
in the future.
Changes in applicable federal law and regulations, in particular, changes in
its interconnection agreements with ILECs, the prospective entry of the RBOCs
into the in-region long distance business and grant of regulatory freedom and
pricing flexibility to the ILECs, could have a material adverse impact on the
Company's business.
State Regulation. To the extent the Company provides identifiable intrastate
services or has otherwise submitted itself to the jurisdiction of the relevant
state telecommunications regulatory commissions, the Company is subject to
such jurisdiction. In addition, certain states have required prior state
certification as a prerequisite for processing and deciding an arbitration
petition for interconnection under the 1996 Act. The Company has obtained
certification from six states and currently has three additional applications
pending. The Company has filed three arbitration petitions in three different
states for interconnection arrangements with the relevant ILECs. The Company
has concluded the arbitration proceeding in one state by entering into a
voluntary agreement with the relevant ILEC and withdrawing its arbitration
petition. The other two arbitration proceedings and interconnection
negotiations are presently ongoing. The Company has filed tariffs in certain
states for intrastate services as required by state law or regulation. The
Company is also subject to periodic financial and other reporting requirements
of these states with respect to its intrastate services.
The different state commissions have various proceedings to determine the
rates, charges and terms and conditions for UNEs, as well as the discount for
wholesale services purchased by the Company from the relevant ILEC. The rates
set forth in the Company's interconnection agreements are interim rates and
will be prospectively, and, in some cases, retroactively, affected by the
permanent rates set by the various state commissions for such UNEs as
unbundled loops and interoffice transport. The state commission rate
determinations could have a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the Notes.
The applicability of the various state regulations on the Company's business
and compliance requirements will be affected to the extent to which the
Company's services are determined to be intrastate services. Jurisdictional
determinations of the Company's services as intrastate services could have a
material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay its
indebtedness, including the Notes.
Local Government Regulation. The Company in certain instances may be
required to obtain various permits and authorizations from municipalities in
which it operates its own facilities. Whether various actions of local
governments over the activities of telecommunications carriers such as the
Company, including requiring payment of franchise fees or other surcharges,
pose barriers to entry for CLECs which may be preempted by the FCC is the
subject of litigation. Although the Company relies primarily on the UNEs of
the ILECs, in certain instances the Company deploys its own facilities,
including fiber optic cables, and therefore may need to obtain certain
municipal permits or other authorizations. The actions of municipal
governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other
authorizations could have a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the Notes.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation affecting the telecommunications
industry. Other existing federal regulations are currently the subject
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of judicial proceedings, legislative hearings and administrative proposals,
which could change, in varying degrees, the manner in which communications
companies operate in the U.S. The ultimate outcome of these proceedings, and
the ultimate impact of the 1996 Act or any final regulations adopted pursuant
to the 1996 Act on the Company or its business cannot be determined at this
time but may well be adverse to the Company's interests. The Company cannot
predict the impact, if any, that future regulation or regulatory changes may
have on its business and there can be no assurance that such future regulation
or regulatory changes will not have a material adverse effect on the Company's
business, prospects, operating results, financial condition and its ability to
service and repay its indebtedness, including the Notes.
INTELLECTUAL PROPERTY
The Company regards its technology as proprietary and attempts to protect it
with copyrights, trademarks, trade secret laws, restrictions on disclosure and
other methods. There can be no assurance these methods will be sufficient to
protect the Company's technology. The Company also generally enters into
confidentiality or license agreements with its employees and consultants, and
generally controls access to and distribution of its documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products,
services or technology without authorization, or to develop similar technology
independently. Currently the Company holds no patents, but is preparing a
patent application and intends to prepare additional applications and to seek
patent protection for its system and services to the extent possible. There is
no assurance that the Company will obtain any issued patents or that any such
patents would protect the Company's intellectual property from competition
which could seek to design around or invalidate such patents. In addition,
effective patent, copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries, and the global nature of
the Internet makes it virtually impossible to control the ultimate destination
of the Company's proprietary information. There can be no assurance that the
steps taken by the Company will prevent misappropriation or infringement of
its technology. In addition, litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
prospects, operating results, financial condition and its ability to service
and repay its indebtedness, including the New Notes. In addition, certain of
the Company's information, including its CLEC status in individual states and
its interconnection agreements, are a matter of public record and can be
readily obtained by the Company's competitors and potential competitors,
possibly to the Company's detriment.
EMPLOYEES
As of December 31, 1997, the Company had 42 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 in
the Company's industry and geographical location in the San Francisco Bay
Area, particularly in software development, network engineering and product
management.
FACILITIES
The Company is headquartered in facilities consisting of approximately
18,000 square feet in Santa Clara, California, which the Company occupies
under a two-year lease with a one-year renewal option. In addition, the
Company's San Francisco RDC consists of approximately 2,000 square feet and is
located in San Jose, California, which the Company occupies under a ten-year
lease with two five-year renewal options. The Company considers its San
Francisco Bay Area RDC space to be adequate for the foreseeable future.
Currently, and until a permanent location is secured, the Company utilizes a
portion of the San Francisco Bay Area RDC
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space to operate its NOC. The Company will require additional headquarters
space in 1998 as its business expands. The Company also leases collocation
space in COs in the San Francisco Bay Area under the terms of its
interconnection agreements with SBC Communications Inc. and GTE California
Incorporated (a subsidiary of GTE Corporation) and the collocation tariff
obligations imposed by the California Public Utilities Commission and the FCC.
While the terms of these leases are perpetual under the tariff, the productive
use of the Company's collocation facilities are subject to the terms of its
interconnection agreements which expire on or before June 5, 2000. The Company
will increase its collocation space as it expands its network in the San
Francisco Bay Area and other regions.
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings that could
have a material adverse effect on the Company's business, prospects, operating
results, financial condition and its ability to service and repay its
indebtedness, including the New Notes. The Company is, however, subject to
state commission, FCC and court decisions as they relate to the interpretation
and implementation of the 1996 Act, the interpretation of CLEC interconnection
agreements in general and the Company's interconnection agreements in
particular. In some cases, the Company may be deemed to be bound by the
results of ongoing proceedings of these bodies or the legal outcomes of other
contested interconnection agreements that are similar to the Company's
agreements. The results of any of these proceedings could have a material
adverse effect on the Company's business, prospects, operating results,
financial condition and its ability to service and repay its indebtedness,
including the New Notes. On 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. Failure to resolve this controversy and obtain space in
most of these contested COs could have a material adverse effect on the
Company's business, prospects, operating results, financial condition and its
ability to service and repay its indebtedness, including the New Notes.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages, and positions of the directors and
executive officers of the Company. All directors hold office until their
successors are duly elected and qualified and all executive officers hold
office at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------------------------------------------------------------
<S> <C> <C>
Charles McMinn.......... 46 President, Chief Executive Officer and Director
Timothy Laehy........... 41 Chief Financial Officer, Treasurer and Vice President, Finance
Robert Hawk............. 56 Director
Henry Kressel........... 64 Director
Joseph Landy............ 36 Director
Daniel Lynch............ 56 Director
Frank Marshall.......... 50 Director
Rich Shapero............ 50 Director
Rex Cardinale........... 45 Vice President, Engineering
Charles Haas............ 38 Vice President, Sales and Marketing
Dhruv Khanna............ 38 Vice President, General Counsel and Secretary
John Rugo............... 40 Vice President, Operations
</TABLE>
CHARLES MCMINN is a founder of the Company and has been its President, Chief
Executive Officer and a member of its Board of Directors since October 1996.
Mr. McMinn has over 20 years of experience in creating, financing, operating
and advising high technology companies. From July 1995 to October 1996, and
from August 1993 to June 1994, Mr. McMinn managed his own consulting firm,
Cefac Consulting, which focused on strategic development for information
technology and communications businesses. From June 1994 to November 1995, he
served as Principal, Strategy Discipline, at Gemini Consulting. From August
1992 to June 1993, he served as the first president and Chief Executive
Officer of Visioneer Communications, Inc. and from October 1985 to June 1992
was a general partner at the venture capital firm, InterWest Partners. Mr.
McMinn began his Silicon Valley career as the product manager for the 8086
microprocessor at Intel.
TIMOTHY LAEHY joined the Company in August 1997 as its Chief Financial
Officer, Treasurer and Vice President, Finance. Prior to joining the Company,
Mr. Laehy served as Vice President, Corporate Finance and Treasurer of Leasing
Solutions, Inc., a computer equipment leasing company from February 1991 to
August 1997. From 1990 through 1991, Mr. Laehy served as senior associate at
Recovery Equity Partners, a private venture capital investment fund. From 1985
through 1990, he served in various capacities at Guarantee Acceptance
Corporation, an investment bank, Liberty Mutual Insurance Company and Union
Carbide Corporation.
ROBERT HAWK has served as a member of the Company's Board of Directors since
April 1998. Mr. Hawk is President of Hawk Communications and recently retired
as President and Chief Executive Officer of US West Multimedia Communications,
Inc., where he headed the cable, data and telephony communications business
from May 1996 to April 1997. He was president of the Carrier Division of US
West Communications from September 1990 to May 1996. Prior to that time, Mr.
Hawk was Vice President of Marketing and Strategic Planning for CXC
Corporation. Prior to joining CXC Corporation, Mr. Hawk was director of
Advanced Systems Development for AT&T/American Bell. He currently serves on
the boards of Xylan Corporation, PairGain Technologies, Inc., Premisys
Communications, Concord Communications and Radcom.
HENRY KRESSEL has served as a member of the Company's Board of Directors
since July 1997. Dr. Kressel has been with E.M. Warburg, Pincus & Co., LLC
since 1983 and is currently a managing director of the firm. He is also a
partner of Warburg, Pincus & Co., the general partner of Warburg, Pincus
Investors, L.P. Prior to that time, he served as Staff Vice President of the
RCA Corporation responsible for research and development of
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optoelectronics, semiconductors and related software and technologies. Dr.
Kressel serves as a director of Level One Communications, Inc., IA
Corporation, Zilog, Inc., TresCom International, Inc., NOVA Corporation, Inc.
and several privately held companies.
JOSEPH LANDY has served as a member of the Company's Board of Directors
since July 1997. Mr. Landy has been with E.M. Warburg, Pincus & Co., LLC since
1985 and is currently a managing director and a partner of the firm.
Throughout his career at Warburg, Mr. Landy has focused primarily on
investments in information technology and specialty semiconductors. Mr. Landy
is a director of four publicly traded companies including CN Biosciences,
Inc., Indus International, Inc., Level One Communications, Inc. and NOVA
Corporation, and of several privately held companies.
DANIEL LYNCH has served as a member of the Company's Board of Directors
since April 1997. Mr. Lynch is also a founder of CyberCash, Inc. (CYCH) and
has served as chairman of its board of directors since August 1994. He has
served as a director of Exodus Communications (EXDS) since January 1998. Mr.
Lynch founded Interop Company in 1986, which is now a division of ZD Comdex
and Forums. As a member of the Association for Computing Machinery and the
Internet Society, Mr. Lynch is active in computer networking with a primary
focus on promoting the spread of the Internet. Mr. Lynch 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 (USC-ISI),
where he led the Arpanet team that made the transition from the original NCP
protocols to the current TCP/IP based protocols. Mr. Lynch previously served
as a member of the board of directors at UUNET Technologies, Inc. from April
1994 until August 1996. Mr. Lynch also held various positions at SRI
International, including Director of Computing Facilities and manager of the
computing laboratory for the Artificial Intelligence Center. While at SRI, he
performed initial debugging of the TCP/IP protocols in conjunction with Bolt,
Beranek and Newman (BBN).
FRANK MARSHALL has served as a member of the Company's Board of Directors
since October 1997. Mr. Marshall currently serves on the board of directors of
PMC-Sierra Inc. and several private companies. Mr. Marshall also serves on the
technical advisory board of several high technology private companies. He is a
member of the technical advisory board of InterWest Partners and a Venture
Partner at Sequoia Capital. From 1992 to 1997, Mr. Marshall served as Vice
President of Engineering and Vice President and General Manager, Core Business
Unit of Cisco Systems Inc. From 1982 to 1992, he served as Senior Vice
President, Engineering at Convex Computer Corporation.
RICH SHAPERO has served as a member of the Company's Board of Directors
since July 1997. Mr. Shapero serves as a member of the board of directors of
PowerWave Corporation. Mr. Shapero has been a general partner of Crosspoint, a
venture capital investment firm, since April 1993. From January 1991 to June
1992, he served as Chief Operating Officer of Shiva Corporation, a computer
network company. Previously, he was a Vice President of Sun Microsystems,
Senior Director of Marketing at AST, and held marketing and sales positions at
Informatics General Corporation and UNIVAC's Communications Division.
REX CARDINALE has served as the Company's Vice President, Engineering since
June 1997. From February 1996 to March 1997, Mr. Cardinale served as Chief
Executive Officer and Vice President, Engineering at GlobalCenter Inc., an
Internet service provider for small businesses. From January 1994 to February
1996, Mr. Cardinale served as Vice President and General Manager, Internet
Services Division, at Global Village Communication. From June 1992 to
September 1993, Mr. Cardinale was Vice President and General Manager of the
cc:Mail division of Lotus Development Corporation. Prior to that time, he
served for five years as Vice President, Engineering for Ultra Network
Technologies, a provider of high-speed networking systems for supercomputers
and for ten years in various engineering management roles at Rolm Corporation.
CHARLES HAAS is a founder of the Company and has served as the Company's
Vice President, Sales and Marketing since May 1997. Mr. Haas has over fourteen
years of sales and business development experience with Intel where he held
various positions from July 1982 to April 1997. At Intel, Mr. Haas served as
manager of
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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).
DHRUV KHANNA is a founder of the Company and has served as the Company's
Vice President, General Counsel and Secretary since October 1996. Between 1987
and 1993, Mr. Khanna was an associate at Morrison & Foerster where his clients
included Teleport Communications Group, McCaw Cellular Communications, Inc.
(now AT&T Wireless), and Southern Pacific Telecom (now Qwest). He was an in-
house counsel for Intel Corporation's communications products division and its
Senior Telecommunications Attorney between 1993 and 1996. Mr. Khanna has
extensive experience with regulatory matters and business transactions
involving the RBOCs and other telecommunications companies. While at Intel, he
helped shape the computer industry's positions on the Telecommunications Act
of 1996 and the FCC's rules implementing the 1996 Act.
JOHN RUGO has served as the Company's Vice President, Operations since June
1997. Mr. Rugo has more than fifteen years of experience deploying and
operating wide area data networks. From October 1996 to June 1997, he was the
director of marketing for Service Provider Systems at Cisco. From August 1994
to September 1996, Mr. Rugo held various positions at BBN Planet Corporation,
including Vice President, Business Development and Vice President and General
Manager, Western Region. He founded BBN's Internet services business,
establishing NEARNet as the premier regional network in New England.
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. Below is a list of the Company's Board of Advisors as
of March 31, 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 President Clinton's Policy
Advisory Committee on Information Technology and the Next Generation Internet
(PACIT).
BILL LANE is the former Chief Financial Officer at Intuit Inc. and is a
board member of MetaCreations Corporation, Quarterdeck Corporation, Expert
Software Inc., Storm Technology Inc. and several private companies.
DANIEL LYNCH is a member of the Company's Board of Directors. For a
description of his professional background, see "--Directors and Executive
Officers."
FRANK MARSHALL is a member of the Company's Board of Directors. For a
description of his professional background, see "--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.
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DAVID STROM is the president of David Strom, Inc. and was the founding
editor-in-chief of Network Computing Magazine.
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. The Company does not pay
additional amounts for committee participation or special assignment of the
Board of Directors, except for reimbursement of their expenses in attending
Board and committee meetings.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and the four most highly compensated
executive officers whose aggregate cash compensation exceeded $100,000 during
the fiscal year ended December 31, 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
---------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
NAME(1) SALARY BONUS OPTIONS/SARS COMPENSATION(2)
------- ---------- ----- --------------------- ---------------
<S> <C> <C> <C> <C>
Charles McMinn,
President and Chief
Executive Officer(3).. $87,500.00 -- -- $203.00
</TABLE>
- --------
(1) Since no executive officer earned more than $100,000 in total annual
salary and bonus during fiscal year 1997, only the compensation
information of the Chief Executive Officer is listed above.
(2) The dollar amount in this column represents premium payments made by the
Company with respect to life insurance policies.
(3) Based on an annual salary of $150,000 for fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted by the Company to the Company's Named
Executive Officer during fiscal year 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
There were no exercises of stock options by the Company's Named Executive
Officer during the year ended December 31, 1997.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company has entered into written employment agreements with Dhruv Khanna
and Rex Cardinale and one other employee (the "Employees") whereby the Company
has agreed to hire each Employee for a two-year term. 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
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<PAGE>
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" (as defined in the 1997 Stock Plan), or the
sale of all or substantially all of the assets of the Company, the options
will fully vest and become exercisable one year after the change of control or
earlier in the event the individual is constructively terminated or terminated
without cause or in the event the successor corporation refuses to assume the
options. See "--1997 Stock Plan."
The Company has also entered into restricted stock purchase agreements with
certain officers and directors of the Company. The Common Stock issued
pursuant to the restricted stock purchase agreements are subject to a
repurchase right on the part of the Company that is subject to vesting. The
agreements include similar provisions to the stock options, providing for
accelerated vesting in the event of a change of control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company currently has no Compensation Committee. Compensation of
executive officers is determined by the Board of Directors. No executive
officer of the Company, except Mr. McMinn, serves as a member of the Board of
Directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors.
1997 STOCK PLAN
As of March 31, 1998, the Company had reserved 1,756,750 shares of Common
Stock for issuance pursuant to its 1997 Stock Plan (the "1997 Stock Plan"),
which has been approved by the Company's Board of Directors and stockholders.
The 1997 Stock Plan provides for the granting to employees (including officers
and directors) of qualified "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, and for the
granting to employees (including officers and directors) and consultants of
nonqualified stock options. The 1997 Stock Plan also provides for the granting
of restricted stock. As of March 31, 1998, options to purchase an aggregate of
1,698,000 shares were outstanding, 55,750 shares remained available for future
grants and 3,000 options were exercised.
The 1997 Stock Plan is administered by the Board of Directors or a committee
appointed by the Board of Directors. Options granted generally vest at a rate
of 12.5% of the shares subject to the option on the vesting commencement date
and 1/48th of the shares subject to the option at the end of each one-month
period thereafter and generally expire eight years from the date of grant.
Nonstatutory stock options granted to members of the Company's Board of
Advisors generally vest at a rate of 25% of the shares subject to the option
on the vesting commencement date and 1/4th of the shares subject to the option
at the end of each calendar quarter thereafter; provided, that the optionee
continues to serve on the Board of Advisors and attends its quarterly
meetings.
Common Stock issuable upon exercise of the options are subject to a right of
first refusal on the part of the Company upon certain transfers to third
parties. This right of first refusal terminates upon an initial public
offering of the Company's Common Stock.
All stock options and restricted stock grants to officers, employees,
directors and consultants provide that in the event of a merger of the Company
with or into another corporation resulting in a "change of control" (as
defined in the 1997 Stock Plan), 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.
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The exercise price of incentive stock options granted under the 1997 Stock
Plan must be at least equal to the fair market value of the Company's Common
Stock on the date of grant. The exercise price of options to an optionee who
owns more than 10% of the Company's outstanding voting securities must equal
at least 110% of the fair value of the Common Stock on the date of grant.
MANAGEMENT BONUS PLAN
The Company has adopted a bonus plan for its officers whereby each of its
officers will be paid three dollars ($3.00) for every end-user served by Covad
Communications Company, a wholly-owned subsidiary of the Company ("Covad
California") as of June 30, 1998, if Covad California serves up to 10,000 end-
users and four dollars ($4.00) for every end-user served by Covad California
in excess of 10,000 up to 50,000 end-users. Any bonus for end-users in excess
of 50,000 will be determined by the Board of Directors. Payments to corporate
officers under the bonus plan will only be owed and paid for end-users that
are "paying end-users" (i.e., end-users for whom Covad California receives
payment that is booked as revenue to Covad California by July 1, 1998
consistent with generally accepted accounting principles).
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law, and the Company's Bylaws
provide that the Company shall indemnify its directors and officers and may
indemnify its other employees and agents to the fullest extent permitted by
law. The Company has also entered into agreements to indemnify its directors
and executive officers, in addition to the indemnification provided for in the
Company's Bylaws. The Company believes that these provisions and agreements
are necessary to attract and retain qualified directors and executive
officers. At present, there is no pending litigation or proceeding involving
any director, officer, employee or agent of the Company where indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been
informed that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE EQUITY COMMITMENT
On February 20, 1998, the Company entered into a Series C Preferred Stock
and Warrant Subscription Agreement (the "Subscription Agreement") with the
Investors pursuant to which Warburg and Crosspoint unconditionally agreed to
purchase an aggregate of 1,921,381 shares of Series C Preferred Stock and
warrants to purchase an aggregate of 1,576,500 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. A proposed alternate equity financing providing for a price per share
greater than or equal to $8.33 and securities that are pari passu 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 $8.33
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 564,716 shares of the
Company's Common Stock at a purchase price of $0.01 per share (the "Common
Warrants"). For a description of the terms of the Series C Preferred Stock,
see "Description of Capital Stock--Preferred Stock."
The Series C Warrants issuable in connection with the closing of the Equity
Commitment will have five-year terms, have purchase prices of $8.33 per share
of Series C Preferred Stock (subject to adjustment in certain events), are
immediately exercisable and contain a net exercise provision. The Common
Warrants issued upon the signing of the Subscription Agreement have five-year
terms (but must be exercised prior to the closing of an initial public
offering of equity securities by the Company), have purchase prices of $0.01
per share, are immediately exercisable and contain net exercise provisions.
The Company amended the Stockholder Rights Agreement among it and certain of
its stockholders, including all of the holders of the outstanding Preferred
Stock, to extend the rights held by the Investors to the Common Warrants, the
Series C Preferred Stock and the Series C Warrants issued or issuable to the
Investors pursuant to the Subscription Agreement. For a description of the
rights set forth in the Stockholder Rights Agreement, see "Description of
Capital Stock--Registration Rights," "--Preemptive Rights, Rights of First
Refusal and Co-Sale Right" and "--Board Representation and Voting Agreement."
THE STOCK PURCHASE
Pursuant to the Stock Purchase, Intel purchased 120,048 shares of Series C
Preferred Stock and Series C Warrants to purchase an aggregate of 98,500
shares of Series C Preferred Stock for an aggregate purchase price of
$1,000,000 concurrently with the closing of the Old Note Issuance; provided,
that the Company does not have any obligation to issue such Series C Warrants
to Intel until such time as Warburg and Crosspoint fund their respective
commitments under the Equity Commitment. In connection with its agreement to
purchase such Series C Preferred Stock and Series C Warrants, the Company
issued to Intel Common Warrants to purchase an aggregate of 35,284 shares of
Common Stock at a purchase price of $0.01 per share.
TRANSACTIONS IN CONNECTION WITH THE FORMATION OF THE DELAWARE HOLDING COMPANY
The Company originally was incorporated in California as Covad California in
October 1996. In July 1997, the Company was incorporated as part of the
Company's strategy to operate through a holding company structure and to
conduct substantially all of its operations through subsidiaries. To effect
the holding company structure, in July 1997 the Company entered into an
Exchange Agreement with the existing holders of the Common Stock and Series A
Preferred Stock of Covad California to acquire all of such stock in exchange
for a like number of shares of Common Stock and Preferred Stock in the
Company, so that after giving effect to the exchange Covad California became a
wholly-owned Subsidiary of the Company. In addition, the Company entered into
an
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<PAGE>
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 consultants of the
Company.
ISSUANCE OF SERIES B PREFERRED STOCK
In July 1997, the Company sold an aggregate of 5,666,667 shares of Series B
Preferred, of which 4,000,000 shares were sold to Warburg, 1,000,000 shares
were sold to Crosspoint and 666,667 shares were sold to Intel. The purchase
price of the Series B Preferred was $1.50 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 33,334 shares of Series
B Preferred at a purchase price of $3.00 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 has obtained equipment lease financing through a sale lease-back
transaction with Charter Financial, Inc. ("Charter Financial") whereby the
Company is obligated to make aggregate payments of $860,000. Through December
31, 1997, total lease payments to Charter Financial, including principal and
interest payments, were approximately $26,000. Warburg, a principal
stockholder of the Company, owns a majority of the capital stock of Charter
Financial. The Company believes that the terms of the lease financing with
Charter Financial were completed at rates similar to those available from
alternative providers.
VENDOR RELATIONSHIP
Crosspoint, a principal stockholder of the Company, owns approximately 12%
of the capital stock of Diamond Lane, a vendor of the Company. The Company's
payments to Diamond Lane through December 31, 1997 totaled approximately
$85,000. The Company believes that the terms of its transactions with Diamond
Lane were completed at rates similar to those available from alternative
vendors.
REGISTRATION RIGHTS
Certain holders of Common Stock and Common Stock issuable upon conversion of
the Preferred Stock are entitled to registration rights. See "Description of
Capital Stock--Registration Rights."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
officers. See "Management--Employment Agreements and Change in Control
Arrangements."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding ownership of
the Company's Common and Preferred Stock as of March 31, 1998 by (i) each
Named Executive Officer, (ii) each director of the Company, (iii) all
executive officers and directors as a group, and (iv) all persons who directly
own 5% or more of the Company's Common Stock on an as-converted basis.
<TABLE>
<CAPTION>
SHARES OF TOTAL EQUITY
COMMON SHARES OF ASSUMING OWNERSHIP
BENEFICIAL OWNER STOCK PREFERRED STOCK CONVERSION PERCENTAGE(1)
---------------- --------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Charles McMinn........... 1,000,000 50,000 1,050,000 10.65%
Robert Hawk.............. -- -- -- --
Henry Kressel(2)......... 451,773 4,000,000 4,451,773 43.18
Joseph Landy(2).......... 451,773 4,000,000 4,451,773 43.18
Daniel Lynch(3) ......... 51,000 100,000 151,000 1.53
Frank Marshall(3)........ 51,000 33,334 84,334 *
Rich Shapero(4).......... 112,943 1,000,000 1,112,943 11.16
All executive officers
and directors as a
group(5)................ 4,198,383 5,283,334 9,481,717 90.56
Warburg, Pincus Ventures,
L.P.(6)................. 451,773 4,000,000 4,451,773 43.18
Crosspoint Venture
Partners, L.P.(7)....... 112,943 1,000,000 1,112,943 11.16
Intel Corporation(8)..... 35,284 786,715 821,999 8.31
</TABLE>
- --------
* Less than 1% of the outstanding voting stock.
(1) Based on 3,788,068 shares of Common Stock and 6,070,049 shares of
Preferred Stock outstanding as of March 31, 1998. Beneficial ownership is
determined in accordance with the rules of the Commission. In computing
the aggregate number of shares beneficially owned by the individual
stockholders and groups of stockholders described above and the percentage
ownership of such individuals and groups, shares of Common Stock subject
to options or warrants that are currently exercisable or exercisable
within 60 days of March 31, 1998 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of the other stockholders or groups of stockholders.
Except as otherwise indicated, the address of each of the persons in this
table is as follows: c/o Covad Communications Group, Inc., 3560 Bassett
Street, Santa Clara, CA 95054.
(2) All of the shares indicated are owned of record by WPV and are included
because of Mr. Kressel's and Mr. Landy's affiliation with WPV. Mr. Kressel
and Mr. Landy disclaim beneficial ownership of these shares within the
meaning of Rule 13d-3 under the Exchange Act. The address of Mr. Kressel
and Mr. Landy is c/o E.M. Warburg, Pincus & Co., LLC, 466 Lexington
Avenue, New York, NY 10017-3147.
(3) Includes 3,000 shares of Common Stock subject to options exercisable
within 60 days of March 31, 1998.
(4) All of the shares indicated are owned of record by Crosspoint and are
included because of Mr. Shapero's affiliation with Crosspoint. Mr. Shapero
disclaims beneficial ownership of these shares within the meaning of Rule
13d-3 under the Exchange Act. The address of Mr. Shapero is c/o Crosspoint
Venture Partners, The Pioneer Hotel Building, 2925 Woodside Road,
Woodside, CA 94062.
(5) Includes options to purchase 47,666 shares of Common Stock subject to
options exercisable within 60 days of March 31, 1998. Also includes
564,716 shares of Common Stock subject to immediately exercisable
warrants.
(6) The sole general partner of WPV is Warburg, Pincus & Co., a New York
general partnership ("WP"). E.M. Warburg, Pincus & Co., LLC, a New York
limited liability company ("EMW LLC"), manages WPV. The members of EMW LLC
are substantially the same as the partners of WP. Lionel I. Pincus is the
managing partner of WP and the managing member of EMW LLC and may be
deemed to control both WP and EMW LLC. WP has a 15% interest in the
profits of WPV as a general partner and also owns approximately 1.3% of
the limited partnership interests in WPV. Mr. Kressel and Mr. Landy,
directors of the Company, Managing Directors and members of EMW LLC and
partners of WP and as such may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares beneficially owned by WPV. See Note 2
above. Includes 451,773 shares
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<PAGE>
of Common Stock subject to immediately exercisable warrants issued to WPV
in connection with the Equity Commitment. Excludes 1,537,105 shares of
Series C Preferred Stock and 1,261,200 shares subject to warrants to
purchase Series C Preferred Stock that the Company will have the right to
sell to WPV pursuant to the Equity Commitment. See "Certain Relationships
and Related Transactions--The Equity Commitment." The address of WPV is c/o
E.M. Warburg, Pincus & Co., LLC, 466 Lexington Avenue, New York, NY 10017-
3147.
(7) Mr. Shapero, a director of the Company, is affiliated with Crosspoint and
as such may be deemed to have an indirect pecuniary interest (within the
meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion
of the shares beneficially owned by Crosspoint. See Note 4 above. Includes
112,943 shares of Common Stock subject to immediately exercisable warrants
issued to Crosspoint in connection with the Equity Commitment. Excludes
384,276 shares of Series C Preferred Stock and 315,300 shares subject to
warrants to purchase Series C Preferred Stock that the Company will have
the right to sell to Crosspoint pursuant to the Equity Commitment. See
"Certain Relationships and Related Transactions--The Equity Commitment."
The address of Crosspoint is The Pioneer Hotel Building, 2925 Woodside
Road, Woodside, CA 94062.
(8) Includes 35,284 shares of Common Stock subject to immediately exercisable
warrants issued to Intel pursuant to the Equity Commitment. Excludes
98,500 shares subject to warrants to purchase Series C Preferred Stock
that the Company will be obligated to issue to Intel pursuant to the
Equity Commitment. See "Certain Relationships and Related Transactions--
The Stock Purchase." The address of Intel is 2200 Mission College
Boulevard, Mail Stop SC4-210, Santa Clara, CA 95052-8199.
59
<PAGE>
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Old Notes were sold by the Company to the Initial Purchasers, who
subsequently resold the Old Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and non-U.S. persons pursuant
to offers and rates that occurred outside the U. S. pursuant to Regulation S.
In connection with the issuance of the Old Notes, the Company agreed to use
its reasonable best efforts to cause to become effective within the time
period specified in the Registration Rights Agreement, a registration
statement with respect to the Exchange Offer (the "Exchange Offer Registration
Statement"). However, if (i) the Company is not required to file the Exchange
Offer Registration Statement or permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or SEC policy or
(ii) any Holder of Old Notes notifies the Company prior to the 20th day
following consummation of the Exchange Offer that (a) it is prohibited by law
or SEC policy from participating in the Exchange Offer or (b) that it may not
resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Exchange
Offer Registration Statement is not appropriate or available for such resales
or (c) that it is a broker-dealer and owns Old Notes acquired directly from
the Company or an affiliate of the Company, the Company will file with the SEC
a shelf registration statement (the "Shelf Registration Statement") to cover
resales of the Old Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement. Once the Exchange Offer is
consummated, the Company will have no further obligation to register any of
the Old Notes not tendered by the Holders for exchange. See "Risk Factors--
Consequences to Non-Tendering Holders of Old Notes." A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Based on an interpretation by the Staff of the SEC set forth in the Staff's
Exxon Capital Holdings Corp. SEC No-Action Letter (available April 13, 1989),
Morgan Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991),
Shearman & Sterling SEC No-Action Letter (available July 7, 1993), and other
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by Holders thereof without
compliance with the registration and prospectus delivery provisions of the
Securities Act. However, any Holder who is an "affiliate" of the Company or
who intends to participate in the Exchange Offer for the purpose of
distributing the New Notes (i) cannot rely on the interpretation by the staff
of the SEC set forth in the above referenced no-action letters, (ii) cannot
tender its Old Notes in the Exchange Offer, and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements. See "Risk
Factors--Consequences to Non-Tendering Holders of Old Notes."
In addition, each Participating Broker-Dealer that receives New Notes for
its own account in exchange for Old Notes not acquired directly from the
Company must acknowledge that it will deliver a prospectus in connection with
any resale of such New Notes. See "Plan of Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other transfer of New Notes.
TERMS OF THE EXCHANGE OFFER
General. Upon the terms and subject to the conditions of the Exchange Offer
set forth in this Prospectus and the Letter of Transmittal, the Company will
accept any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue
$1,000 principal amount at maturity of New Notes in exchange for each $1,000
principal amount at maturity of outstanding Old
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<PAGE>
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer; provided, that Old Notes may be
tendered only in integral multiples of $1,000 principal amount at maturity.
As of April 20, 1998, there was $260,000,000 of aggregate principal amount
at maturity of the Old Notes outstanding and 18 registered Holders of Old
Notes. This Prospectus, together with the Letter of Transmittal, is being sent
to such registered Holder(s) as of April , 1998.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as depositary. The New Notes will be issued and
transferable in book-entry form through DTC. See "--Book-Entry Transfer;
Delivery and Form."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering Holder thereof or the appropriate
book-entry transfer will be made, in each case, as promptly as practicable
after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay the expenses, other
than certain applicable taxes, of the Exchange Offer. See "--Fees and
Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD
NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL
POSITION AND REQUIREMENTS.
Expiration Date; Extensions; Amendments. The term "Expiration Date" shall
mean , 1998, unless the Company in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent and the record Holders of Old Notes of any extension by oral (followed
by written) notice, each prior to 9:00 a.m., New York City time, on the
business day following the previously scheduled Expiration Date. Such notice
may state that the Company is extending the Exchange Offer for a specified
period of time or on a daily basis until 5:00 p.m., New York City time, on the
date on which a specified percentage of Old Notes are tendered.
The Company reserves the right to delay accepting any Old Notes, to extend
the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange
Offer and not accept Old Notes not previously accepted if any of the
conditions set forth herein under "--Conditions" shall have occurred and shall
not have been waived by the Company by giving oral or written notice of such
delay, extension, amendment or termination to the Exchange Agent as promptly
as practicable. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose
such amendment in a manner reasonably calculated to inform the Holders of such
amendment and the Company will extend the Exchange
61
<PAGE>
Offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to Holders of the
Old Notes, if the Exchange Offer would otherwise expire during such five to
ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
ACCRETION OF THE NEW NOTES AND THE OLD NOTES; INTEREST
The Old Notes will continue to accrete in principal amount through (but not
including) the date of issuance of the New Notes. Any Old Notes not tendered
or accepted for exchange will continue to accrete in principal amount at the
rate of 13.5% per annum in accordance with its terms. From and after the date
of issuance of the New Notes, the New Notes shall accrete in principal amount
at the rate of 13.5% per annum, but no cash interest will accrue or be payable
in respect of the New Notes prior to March 15, 2003. Thereafter, the New Notes
will bear interest at a rate equal to 13.5% per annum. Interest on the New
Notes will be payable semi-annually in arrears on March 15 and September 15 of
each year, commencing on September 15, 2003.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder of certificated Old Notes must
complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by Instruction 3 of the
Letter of Transmittal, and mail or otherwise deliver such Letter of
Transmittal or such facsimile, together with the Old Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. If delivery of the Old Notes is to be made
through book-entry transfer into the Exchange Agent's account at DTC, tenders
of the Old Notes must be effected in accordance with DTC's Automated Tender
Offer Program ("ATOP") procedures. See "--Book-Entry Transfer; Delivery and
Form."
The tender by a Holder of Old Notes will constitute an agreement between
such Holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders of Old Notes may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect the
above transactions for such Holders.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY.
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "Holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
Any beneficial Holder whose Old Notes are registered in the name of its
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered Holder promptly and instruct such
registered Holder to tender on its behalf. If such beneficial Holder wishes to
tender on its own behalf, such beneficial Holder must, prior to completing and
executing the Letter of Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
Holder's
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<PAGE>
name or obtain a properly completed bond power from the registered Holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined) unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered Holder
who has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the U.S. (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers signed as the name of the registered
Holder or Holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons shall so indicate when signing and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of Old
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
Holders of Old Notes, unless otherwise provided in the Letter of Transmittal,
as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth under "--Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of such Holder's business, that such Holder
has no arrangement with any person to participate in the distribution of such
New Notes, and that such Holder is not an "affiliate," as defined under Rule
405 of the Securities Act, of the Company. If the Holder is a Participating
Broker-Dealer that will receive New Notes for its own account in exchange for
Old Notes that were not acquired directly from the Company, such Holder by
tendering will acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
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<PAGE>
BOOK-ENTRY TRANSFER; DELIVERY AND FORM
The Old Notes were initially represented (i) in the case of Old Notes
initially purchased by "qualified institutional buyers" (as such term is
defined in Rule 144A under the Securities Act), by two global Old Notes in
fully registered form, all registered in the name of a nominee of the DTC, and
(ii) in the case of Old Notes initially purchased by persons other than U.S.
persons in reliance upon Regulation S under the Securities Act, by one global
Regulation S Old Note in fully registered form, all registered in the name of
a nominee of DTC for the accounts of Euroclear and Cedel Bank. The New Notes
exchanged for the Old Notes represented by the global Old Notes and global
Regulation S Old Note will be represented (a) in the case of "qualified
institutional buyers", by one global New Note in fully registered form,
registered in the name of the nominee of DTC, and (b) in the case of persons
outside of the U. S., by one global Regulation S New Note in fully registered
form, registered in the name of the nominee of DTC for the accounts of
Euroclear and Cedel Bank. The global New Note and global Regulation S New Note
will be exchangeable for definitive New Notes in registered form, in
denominations of $1,000 principal amount at maturity and integral multiples
thereof. The New Notes in global form will trade in The Depository Trust
Company's Same-Day Funds Settlement System, and secondary market trading
activity in such New Notes will therefore settle in immediately available
funds.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish an account with respect to the
Old Notes at DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with DTC's ATOP procedures for such
book-entry transfers. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at DTC, the
exchange for Old Notes so tendered will only be made after timely confirmation
(a "Book-Entry Confirmation") of such book-entry transfer of the Old Notes
into the Exchange Agent's account, and timely receipt by the Exchange Agent of
a Book-Entry Confirmation with an Agent's Message (as defined). The term
"Agent's Message" means a message, transmitted by DTC and received by the
Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received express acknowledgment from a participant tendering Old
Notes that such participant has received and agrees to be bound by the terms
of the Letter of Transmittal, and that such agreement may be enforced against
such participant.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount at
maturity of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Old Notes to be
tendered in proper form for transfer and any other documents required by
the Letter of Transmittal, or a Book-Entry Confirmation, as the case may
be, will be delivered by the Eligible Institution to the Exchange Agent;
and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer and all other documents required by
the Letter of Transmittal, or a Book-Entry Confirmation, as the case may
be, are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
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WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at
its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number
or numbers and principal amount at maturity of such Old Notes), (iii) be
signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes into the name of the person withdrawing the tender,
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered. Any
Old Notes which have been tendered but which are not accepted for exchange
will be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures, described above under "--Procedures for Tendering" at
any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for, any Old Notes
not theretofore accepted for exchange, and may terminate or amend the Exchange
Offer as provided herein before the acceptance of such Old Notes, if any of
the following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder,
violates applicable law or any applicable interpretation of the SEC;
(b) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might impair the ability of the
Company to proceed with the Exchange Offer;
(c) any law, statute, rule or regulation is adopted or enacted which, in
the sole judgment of the Company, might materially impair the ability of
the Company to proceed with the Exchange Offer;
(d) a banking moratorium is declared by U.S. federal or California or New
York state authorities which, in the Company's judgment, would reasonably
be expected to impair the ability of the Company to proceed with the
Exchange Offer;
(e) trading on the New York Stock Exchange or generally in the U.S. over-
the-counter market is suspended by order of the SEC or any other
governmental authority which, in the Company's judgment, would reasonably
be expected to impair the ability of the Company to proceed with the
Exchange Offer; or
(f) a stop order is issued by the SEC or any state securities authority
suspending the effectiveness of the Registration Statement or proceedings
are initiated or, to the knowledge of the Company, threatened for that
purpose.
If any such conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of Holders to withdraw
such Old Notes (see""--Withdrawal of Tenders") or (iii) waive certain of such
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn or revoked. If such waiver constitutes
a material change to the Exchange Offer, the Company will promptly disclose
such waiver in a manner reasonably calculated to inform Holders of Old Notes
of such waiver.
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The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Letters of Transmittal and Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail: By Overnight Courier:
Attention: Attention:
Reorganization Section Reorganization Section
The Bank of New York The Bank of New York
101 Barclay Street, Floor 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Ground Floor
New York, New York 10286
By Hand: By Facsimile:
Attention: (212) 815-
Reorganization Section Attention:
The Bank of New York Reorganization Section
101 Barclay Street
Corporate Trust Services Window Confirm by telephone:
Ground Floor (212) 815-
New York, New York 10286
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by
them in forwarding copies of this Prospectus and related documents to the
beneficial owners of the Old Notes, and in handling or forwarding tenders for
exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, are estimated in the aggregate to be approximately
$ and include fees and expenses of the Exchange Agent and the Trustee under
the Indenture and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts at maturity not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered
Holder of the Old Notes tendered, or if tendered Old Notes are registered in
the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered Holder or any other
persons) will be payable by the tendering Holder. If satisfactory evidence of
payment of such taxes or exception therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering Holder.
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ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value as reflected in the Company's accounting records on the
date of the Exchange Offer. Accordingly, no gain or loss for accounting
purposes will be recognized upon consummation of the Exchange Offer. The
issuance costs incurred in connection with the Exchange Offer will be
capitalized and amortized over the term of the New Notes.
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DESCRIPTION OF THE OLD NOTES
GENERAL
The Old Notes were issued pursuant to the Indenture between the Company and
The Bank of New York, as trustee, in a private transaction that was not
subject to the registration requirements of the Securities Act. The terms of
the Old Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Old Notes are subject to all such terms, and
Holders of Old Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of the material provisions of
the Indenture and the Registration Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to such agreements,
including the definitions therein of certain terms used below. Copies of such
agreements have been filed as exhibits to the Registration Statement of which
this Prospectus is a part and are available from the SEC or as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." For
purposes of this summary, the term "Company" refers only to Covad
Communications Group, Inc. and not to any of its Subsidiaries and the term
"Notes" refers only to the Old Notes.
The Old Notes are senior obligations of the Company, rank pari passu in
right of payment with all existing and future Debt of the Company and senior
in right of payment to any future subordinated Debt of the Company but are
effectively subordinated to any secured Debt of the Company and future Debt
and other liabilities (including subordinated Debt and trade payables) of the
Company's Subsidiaries. The Indenture permits the incurrence of substantial
additional Debt, including secured Debt by the Company and its Subsidiaries,
subject to certain restrictions. See "Risk Factors--Holding Company Structure;
Restrictions on Access to Subsidiary Cash Flow." As of March 31, 1998, the
total amount of long-term obligations (including current portion but net of
the Debt Discount) of the Company was approximately $ million.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Old Notes. See "Risk
Factors--Holding Company Structure; Restrictions on Access to Subsidiary Cash
Flow."
As of the date of the Indenture, the Company had two Subsidiaries, both of
which had been designated as Restricted Subsidiaries. Under certain
circumstances, the Company will be able to designate Subsidiaries of the
Company, including Subsidiaries that it creates or acquires in the future, to
be Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants set forth in the Indenture. See "--Certain
Covenants--Restricted Payments."
PRINCIPAL, MATURITY AND INTEREST
The Notes were limited in initial aggregate Accreted Value to $185.0
million, of which approximately $135.1 million of Notes were issued in the Old
Note Issuance and $50.0 million of Notes will be available for issuance in the
future, subject to the covenant described under "--Certain Covenants--
Incurrence of Debt." The Notes will mature on March 15, 2008. The Notes were
offered at a substantial discount from their principal amount at maturity, to
generate gross proceeds of approximately $135.1 million. See "Certain Federal
Income Tax Considerations--The New Notes--Original Issue Discount." Until the
Full Accretion Date, no interest will accrue or be payable on the Notes, but
the Accreted Value will accrete (representing the amortization of original
issue discount) between the date of issuance and the Full Accretion Date, on a
semi-annual bond equivalent basis using a 360-day year comprised of twelve 30-
day months such that the Accreted Value shall be equal to the full principal
amount at maturity of the Notes on the Full Accretion Date. Beginning on the
Full Accretion Date, interest on the Notes will accrue at the rate of 13.5%
per annum and will be payable in cash semi-annually in arrears on March 15 and
September 15, commencing on September 15, 2003, to Holders of record on the
immediately preceding March 1 and September 1. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Full Accretion Date. Interest will be
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computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Company maintained for such purpose within the City
and State of New York or, at the option of the Company, payment of interest
may be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes; provided that all
payments of principal, premium, if any, and interest with respect to Notes of
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York, New York will be the
office of the applicable Trustee maintained for such purpose. The Notes were
issued in denominations of $1,000 principal amount at maturity and integral
multiples thereof.
OPTIONAL REDEMPTION
Except as noted below, the Notes will not be redeemable at the Company's
option prior to March 15, 2003. Thereafter, the Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days notice, at the redemption prices
(expressed as percentages of principal amount at maturity) set forth below,
plus accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on March 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.............................................................. 106.75%
2004.............................................................. 104.50%
2005.............................................................. 102.25%
2006 and thereafter............................................... 100.00%
</TABLE>
In addition, at any time on or prior to March 15, 2001, the Company, at its
option, may use the net cash proceeds (but only to the extent such proceeds
consist of cash or Cash Equivalents) of one or more Public Equity Offerings or
the sale of at least $35.0 million of Capital Stock (other than Disqualified
Stock) to one or more Strategic Equity Investors in a single transaction or a
series of related transactions to redeem up to an aggregate of 35% of the
Accreted Value of Notes originally issued under the Indenture at a redemption
price of 113.5% of the Accreted Value, plus accrued and unpaid interest, if
any, to the date of redemption; provided that Notes representing at least
$87.8 million of the aggregate initial Accreted Value of the Notes remain
outstanding immediately after the occurrence of such redemption. In order to
effect the foregoing redemption, the Company must mail a notice of redemption
no later than 30 days after the related Public Equity Offering and must
consummate such redemption within 60 days of the closing of such Public Equity
Offering. Neither the Equity Commitment nor the Stock Purchase shall
constitute an investment or any part of any investment by a Strategic Equity
Investor.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 principal amount at maturity or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder
of Notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
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MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, Indenture requires the Company
to make an offer to each Holder of Notes to repurchase all or any part (equal
to $1,000 principal amount at maturity or an integral multiple thereof) of
such Holder's Notes pursuant to the offer described below (the "Change of
Control Offer") at an offer price in cash (the "Change of Control Payment")
equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon to the date of purchase (or if such Change of Control
Offer is prior to the Full Accretion Date, 101% of the Accreted Value thereof
on the date of repurchase, plus accrued and unpaid, thereon to the date of
repurchase). Within ten days following any Change of Control, the Company will
mail a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the applicable
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii)deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount or Accreted Value, as applicable, of Notes or
portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each Holder of Notes so tendered the Change of Control
Payment for such Notes, and the Trustee will promptly authenticate and mail
(or cause to be transferred by book-entry) to each Holder a new Note equal in
principal amount at maturity to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount at maturity of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above are applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 85% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of any combination of cash or Cash Equivalents;
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provided that the amount of (a) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or such
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any guarantee thereof) that
are assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Company or such Restricted Subsidiary
from further liability and (b) any securities, notes or other obligations
received by the Company or such Restricted Subsidiary from such transferee
that are contemporaneously (subject to ordinary settlement periods) converted
by the Company or such Restricted Subsidiary into cash (to the extent of the
cash received), shall be deemed to be cash for purposes of this provision.
The Company and its Restricted Subsidiaries will be permitted to consummate
an Asset Sale without complying with clause (ii) of the immediately proceeding
paragraph if (i) the Company or the applicable Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets or other property sold, issued or
otherwise disposed of and (ii) at least 85% of the consideration for such
Asset Sale constitutes any combination of cash, Cash Equivalents and
Productive Assets; provided that any cash consideration, any non-cash
consideration not constituting Productive Assets received by the Company or
any of its Restricted Subsidiaries in connection with such Asset Sale that is
converted into or sold or otherwise disposed of for cash or Cash Equivalents
at any time within 270 days after such Asset Sale and any Productive Assets
constituting cash or Cash Equivalents received by the Company or any of its
Restricted Subsidiaries in connection with such Asset Sale shall constitute
Net Cash Proceeds subject to the provisions set forth above.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company (or such Restricted Subsidiary, as the case may be) may, subject
to the provisions of the Indenture described under "--Certain Covenants--
Restricted Payments," apply such Net Proceeds to (i) permanently reduce the
amounts permitted to be borrowed by the Company or such Restricted Subsidiary
under the terms of any of its Debt that is not subordinated Debt or (ii) the
purchase of Telecommunications Related Assets or Voting Stock of any Person
engaged in the Telecommunications Business in the U.S. (provided that such
Person concurrently becomes a Restricted Subsidiary of the Company). Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce revolving credit borrowings or otherwise invest such Net Proceeds in
any manner that is not prohibited by the Indenture. Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be
required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
repurchase the maximum principal amount of Notes that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount of the Notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase (or, if such Asset Sale
Offer is to be consummated prior to the Full Accretion Date, 100% of the
Accreted Value of the Notes, plus accrued and unpaid interest thereon, if any,
to the date of purchase), in accordance with the procedures set forth in the
Indenture. To the extent that any Excess Proceeds remain after consummation of
an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate Accreted Value or
principal amount, as the case may be, of Notes tendered pursuant to such Asset
Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable to the repurchase of Notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue thereof.
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CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) or to the direct
or indirect holders of the Company's or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or to the Company or a Restricted Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent
of the Company (other than any such Equity Interests owned by the Company or
any Restricted Subsidiary of the Company); (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or retire for
value, any Debt that is subordinated to the Notes, except a payment of
interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable two-quarter Measurement Period, have
been permitted to incur at least $1.00 of additional Debt pursuant to the
Debt to Annualized Cash Flow Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of Debt and
Issuance of Disqualified Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Closing Date (excluding Restricted Payments
permitted by clauses (ii), (iii) and (iv) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the Closing Date as a contribution to its common equity capital or from the
issue or sale of Equity Interests of the Company (other than Disqualified
Stock and other than $16.0 million of net proceeds received by the Company
pursuant to the Equity Capital Investment) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company), plus (iii) to the extent that any Restricted Investment that
was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment.
The foregoing provisions will not prohibit: (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Debt or Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of, other Equity Interests of
the Company (other than any Disqualified Stock); provided that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c)(ii) of
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the preceding paragraph; (iii) the defeasance, redemption, repurchase or other
acquisition of subordinated Debt with the net cash proceeds from an incurrence
of Permitted Refinancing Debt; (iv) the payment of any dividend by a
Restricted Subsidiary of the Company to the holders of its common Equity
Interests on a pro rata basis; and (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company or
any Restricted Subsidiary of the Company held by any member of the Company's
or any of its Restricted Subsidiaries' management; provided, that (A) the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $250,000 in any twelve-month period and (B)
no Default or Event of Default shall have occurred and be continuing
immediately after such transaction.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
by the Board of Directors whose resolution with respect thereto shall be
delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $5.0 million. Not later
than the date of making any Restricted Payment, the Company shall deliver to
the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash
or Cash Equivalents) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in
an amount equal to the fair market value of such Investments at the time of
such designation. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
"Restricted Payments" covenant.
If, at any time, any Unrestricted Subsidiary would fail to meet the
requirements of the definition of an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Debt of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Debt is not
permitted to be incurred as of such date under the covenant described under
the caption "--Incurrence of Debt and Issuance of Disqualified Stock," the
Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Debt by a Restricted
Subsidiary of the Company of any outstanding Debt of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Debt is
permitted under the covenant described under the caption "Incurrence of Debt
and Issuance of Disqualified Stock", calculated on a pro forma basis as if
such designation had occurred at the beginning of the two-quarter Measurement
Period, and (ii) no Default or Event of Default would be in existence
following such designation.
Incurrence of Debt and Issuance of Disqualified Stock
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any Debt
(including Acquired Debt) and that
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the Company will not issue any Disqualified Stock; provided, however, that the
Company may incur Debt (including Acquired Debt) or issue shares of
Disqualified Stock if the Company's Debt to Annualized Cash Flow Ratio is no
greater than (a) 5.5 to 1.0, if such incurrence or issuance is on or prior to
March 15, 2001, and (b) 5.0 to 1.0, if such incurrence or issuance is after
March 15, 2001.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Debt (collectively, "Permitted
Debt"), each such item to be given independent effect:
(i) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt under Credit Facilities in an aggregate principal
amount (with letters of credit being deemed to have a principal amount
equal to the maximum reimbursement obligations of the Company and/or any of
its Restricted Subsidiaries thereunder) not to exceed $25.0 million at any
one time outstanding, less the aggregate amount of all Net Proceeds of
Asset Sales applied to permanently reduce the commitments with respect to
such Debt pursuant to the covenant described above under the caption "--
Asset Sales;"
(ii) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Vendor Debt, provided that the aggregate amount of such
Vendor Debt incurred does not exceed 80% of the total cost of the
Telecommunications Related Assets financed therewith;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Debt;
(iv) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt in an aggregate principal amount not to exceed $5.0
million at any one time outstanding;
(v) the incurrence by the Company of Debt (other than secured Acquired
Debt) in an aggregate principal amount not to exceed 2.0 times the sum of
the net cash proceeds received by the Company after the date of the
Indenture in connection with any issuance and sale of Equity Interests
(other than Disqualified Stock and other than $16.0 million of net proceeds
received by the Company pursuant to the Equity Capital Investment), plus
the fair market value of Equity Interests (other than Disqualified Stock)
issued after consummation of a Public Equity Offering in connection with an
acquisition of a Telecommunications Business or Telecommunications Related
Assets; provided that such Debt does not mature prior to the Stated
Maturity of the Notes or has an Average Life to Stated Maturity at least
equal to the Notes;
(vi) the incurrence by the Company of Debt represented by, and accreting
or accruing in respect of, the $260.0 million in principal amount at
maturity of Notes originally issued under the Indenture;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to refund, refinance or replace Debt (other than intercompany
Debt) that was permitted by the Indenture to be incurred under the first
paragraph hereof or clauses (iii) or (vi) of this paragraph;
(viii) the incurrence by the Company or any of its Wholly Owned
Restricted Subsidiaries of intercompany Debt; provided, however, that (a)
any subsequent issuance or transfer of Equity Interests that results in any
such Debt being held by a Person other than the Company or a Wholly Owned
Restricted Subsidiary of the Company and (b) any sale or other transfer of
any such Debt to a Person that is not either the Company or a Wholly Owned
Restricted Subsidiary of the Company shall be deemed, in each case, to
constitute an incurrence of such Debt by the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(viii);
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Debt that is
permitted by the terms of this Indenture to be outstanding; and
(x) the incurrence by the Company or any of its Restricted Subsidiaries
of Purchase Money Debt, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of development, construction,
maintenance, enhancement or improvement of Productive Assets; provided,
however, that the aggregate principal amount of Purchase Money Debt shall
not exceed $25.0 million at any one time
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outstanding, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the commitments with respect to such Debt
pursuant to the covenant described above under the caption "--Asset Sales."
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (x) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall,
in its sole discretion, classify such item of Debt in any manner that complies
with this covenant. Accrual of interest and accretion or amortization of
original issue discount will not be deemed to be an incurrence of Debt for
purposes of this covenant.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or
any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii)
transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of (a) Existing Debt
as in effect on the Closing Date, (b) the Indenture and the Notes, (c)
applicable law, (d) any instrument governing Debt or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Debt was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Debt, such Debt was permitted by the
terms of the Indenture to be incurred, (e) customary non-assignment provisions
in contracts entered into in the ordinary course of business, (f) customary
restrictions on encumbrance, transfer or disposition of financed assets
pursuant to agreements governing Purchase Money Debt and Vendor Debt permitted
by the Indenture on the property so acquired, (g) any agreement for the sale
of a Restricted Subsidiary that restricts distributions by that Restricted
Subsidiary pending its sale, (h)Permitted Refinancing Debt, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Debt are no more restrictive, taken as a whole, than those contained in the
agreements governing the Debt being refinanced, (i) secured Debt otherwise
permitted to be incurred pursuant to the provisions of the covenant described
above under the caption "--Liens" that limits the right of the debtor to
dispose of the assets securing such Debt, (j) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business
and (k) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business. The
Indenture will provide that the Company or any of its Restricted Subsidiaries
will not create any Subsidiary after the date of the Indenture that is not
either an Unrestricted Subsidiary or a Wholly Owned Restricted Subsidiary.
Merger, Consolidation, or Sale of Assets
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries may consolidate or merge with or into (whether or not the Company
or such Restricted Subsidiary is the surviving corporation), or
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sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity, unless (i) the Company
or such Restricted Subsidiary is the surviving corporation or the entity or
the Person formed by or surviving any such consolidation or merger (if other
than the Company or such Restricted Subsidiary) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company or such Restricted Subsidiary) or the entity or Person to which
such sale, assignment, transfer, lease, conveyance or other disposition shall
have been made assumes all the obligations of the Company under the Notes and
the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (a) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (b) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at
the beginning of the applicable two-quarter Measurement Period, be permitted
to incur at least $1.00 of additional Debt pursuant to the Debt to Annualized
Cash Flow Ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of Debt and Issuance of
Disqualified Stock" or any other Person which (x) assumes or guarantees the
obligations of the Company under the Notes, the Indenture and the Registration
Rights Agreement pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, (y) would, as a result of the applicable
transaction, properly classify the Company or such Restricted Subsidiary as a
consolidated subsidiary in accordance with GAAP and (C) would, if the
conditions set forth in clauses (a) and (b) above were tested substituting
such Person for the Company, satisfy such conditions.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers
to the Trustee (a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(i) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and (b) with respect to
any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $5.0 million, an opinion as to
the fairness to the Holders of such Affiliate Transaction from a financial
point of view issued by an accounting, appraisal or investment banking firm of
national standing. Notwithstanding the foregoing, the following items shall
not be deemed to be Affiliate Transactions: (i) any employment agreement and
related arrangement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business; (ii) transactions between or
among the Company and/or its Restricted Subsidiaries; (iii) payment of
reasonable directors fees to Persons who are not otherwise Affiliates of the
Company; and (iv) Restricted Payments that are permitted by the provisions of
the Indenture described above under the caption "--Restricted Payments."
Limitations on Issuances of Guarantees of Debt
The Indenture provides that the Company will not permit any Subsidiary,
directly or indirectly, to guarantee, assume or in any other manner become
liable with respect to any Pari Passu Debt or Subordinated Debt of the
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Company unless such Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a guarantee of the Notes
on the same terms as the guarantee of such Debt except that (i) such guarantee
need not be secured unless required pursuant to "--Liens" and (ii) if such
Debt is by its terms expressly subordinated to the Notes, any such assumption,
guarantee or other liability of such Subsidiary with respect to such Debt
shall be subordinated to such Subsidiary's guarantee of the Notes at least to
the same extent as such Debt is subordinated to the Notes; provided, that this
paragraph shall not apply to any guarantee or assumption of liability of Debt
permitted under the Indenture described in clauses (i), (vi), (vii), (viii)
and (ix) of the second paragraph under "--Incurrence of Debt and Issuance of
Disqualified Stock."
Notwithstanding the foregoing, any guarantee by a Subsidiary of the Notes
shall provide by its terms that it (and all Liens securing the same) shall be
automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's Capital Stock in, or all or substantially all of the assets of,
such Subsidiary, which transaction is in compliance with the terms of the
Indenture and such Subsidiary is released from its guarantees of other Debt of
the Company or any of its Subsidiaries.
Issuances and Sales of Equity Interests in Wholly Owned Restricted
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any of its Wholly Owned Restricted Subsidiaries to, transfer, convey, sell,
lease or otherwise dispose of any Equity Interests in any Wholly Owned
Restricted Subsidiary of the Company to any Person (other than the Company or
another Wholly Owned Restricted Subsidiary, unless (a) such transfer,
conveyance, sale, lease or other disposition is of all of the Equity Interests
in such Wholly Owned Restricted Subsidiary and (b) the Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in
accordance with the covenant described above under the caption "--Repurchase
at the Option of Holders--Asset Sales," and (ii) will not permit any Wholly
Owned Restricted Subsidiary of the Company to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company or
another Wholly Owned Restricted Subsidiary.
Business Activities
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, engage in any business other than the
Telecommunications Business.
Limitations on Sale and Leaseback Transactions
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, enter into, assume, guarantee or otherwise become
liable with respect to any Sale and Leaseback Transactions; provided, that the
Company or any Restricted Subsidiary of the Company may enter into any such
transaction if (i) the Company or such Restricted Subsidiary would be
permitted under the covenants described above under "--Incurrence of Debt and
Issuance of Disqualified Stock" and "--Liens" to incur secured Debt in an
amount equal to the Attributable Debt with respect to such transaction, (ii)
the consideration received by the Company or such Restricted Subsidiary from
such transaction is at least equal to the Fair Market Value of the property
being transferred and (iii) the Net Proceeds received by the Company or such
Restricted Subsidiary from such transaction are applied in accordance with the
covenant described above under the caption "--Asset Sales."
Payments for Consent
The Indenture provides that neither the Company nor any of its Affiliates
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered
to be paid or agreed to be paid to all Holders of the Notes that consent,
waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
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Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes and file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its
Restricted Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of the Company) and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports, in each case within the time periods specified in the
Commissions rules and regulations. In addition, for so long as any Notes are
outstanding, the Company will furnish to the Holders of the Notes, securities
analysts and prospective investors or beneficial owners of the Notes, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following will constitute an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes (including any Additional Interest); (ii) default in payment when due of
the principal of or premium, if any, on the Notes; (iii) failure by the
Company or any of its Restricted Subsidiaries to comply with the provisions
described under the captions "--Change of Control," "--Asset Sales," "--
Restricted Payments," "--Incurrence of Debt and Issuance of Disqualified
Stock" or "--Merger, Consolidation, or Sale of Assets;" (iv) failure by the
Company or any of its Restricted Subsidiaries for 30 days after notice to
comply with any of its other agreements in the Indenture or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Debt for money
borrowed by the Company or any of its Restricted Subsidiaries (or the payment
of which is guaranteed by the Company or any of its Restricted Subsidiaries),
whether such Debt or guarantee now exists or is created after the Closing
Date, which default (a) is caused by a failure to pay principal of or premium,
if any, or interest on such Debt prior to the expiration of the grace period
provided in such Debt on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Debt prior to its express maturity and, in
each case, the principal amount of any such Debt, together with the principal
amount of any other such Debt under which there has been a Payment Default or
the maturity of which has been so accelerated, aggregates $5.0 million or
more; (vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; (vii) the failure by the
Company for any reason to consummate by March 11, 1999 the Equity Capital
Investment or the repudiation by any of the Investors of their respective
obligations under the Equity Commitment; and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Restricted
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount at maturity of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company, any
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Notes
will become due and payable without further action or notice. Holders of the
Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice
of any continuing Default or Event of Default (except a Default
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or Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
March 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to such date, then the premium
specified in the Indenture shall also become immediately due and payable to
the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders
of all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations under the Notes discharged ("Legal Defeasance") except for (i) the
rights of Holders of outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due from the trust referred to below, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
the Company's obligations in connection therewith, and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Notes on the stated maturity or on the applicable redemption date,
as the case may be, and the Company must specify whether the Notes are being
defeased to maturity or to a particular redemption
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date; (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (a) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (b)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute
a default under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that
(assuming that no Holder of any Notes would be considered an insider of the
Company under applicable bankruptcy or insolvency law) after the 91st day
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or Event
of Default or compliance with any provision of the Indenture or the Notes may
be waived with the consent of the Holders of a majority in aggregate principal
amount at maturity of the then outstanding Notes (including, without
limitation, consents obtained in connection with a purchase of, or tender
offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders;" (iii) reduce the
rate of or change
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the time for payment of interest on any Note; (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount at maturity of the Notes and a
waiver of the payment default that resulted from such acceleration); (v) make
any Note payable in money other than that stated in the Notes; (vi) make any
change in the provisions of the Indenture relating to waivers of past Defaults
or the rights of Holders of Notes to receive payments of principal of or
premium, interest on the Notes; (vii) waive a redemption payment with respect
to any Note (other than a payment required by one of the covenants described
above under the caption "--Repurchase at the Option of Holders"); or (viii)
make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements
of the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act or otherwise to comply with applicable
law.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured or waived), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Covad
Communications Group, Inc., 3560 Bassett Street, Santa Clara, California
34054, Attention: General Counsel.
REGISTRATION RIGHTS; ADDITIONAL INTEREST
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to a registered offer
to exchange the Old Notes for New Notes of the Company having terms
substantially identical in all material respects to the Old Notes (except that
the New Notes will not contain terms with respect to transfer restrictions,
registration rights or payment of Additional Interest (as defined)). Upon the
effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the Holders of Transfer Restricted Securities (as defined) who are
able to make certain representations the opportunity to exchange their
Transfer Restricted Securities for New Notes pursuant to the Exchange Offer.
If (i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any
Holder of Transfer Restricted Securities notifies
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the Company prior to the 20th day following consummation of the Exchange Offer
that (a) it is prohibited by law or Commission policy from participating in
the Exchange Offer or (b) that it may not resell the New Notes acquired by it
in the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (c) that it is a broker-dealer
and owns Notes acquired directly from the Company or an affiliate of the
Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its best efforts to
cause the applicable registration statement to be declared effective as
promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Note until (i) the date on which
such Note has been exchanged by a person other than a broker-dealer for an
Exchange Note in the Exchange Offer, (ii) following the exchange by a broker-
dealer in the Exchange Offer of a Note for an Exchange Note, the date on which
such Exchange Note is sold to a purchaser who receives from such broker-dealer
on or prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Note has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which
such Note is distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Closing Date, (ii) the Company will use its best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to
issue, on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission,
Exchange Notes in exchange for all Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company will use its best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
and to cause the Shelf Registration to be declared effective by the Commission
on or prior to 120 days after such obligation arises. If (a) the Company fails
to file any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
Registration Statements is not declared effective by the Commission on or
prior to the date specified for such effectiveness (the "Effectiveness Target
Date"), (c) the Company fails to consummate the Exchange Offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement, or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then interest ("Additional Interest") will accrue on
the Notes and the Exchange Notes (in addition to the stated interest on the
Notes and the Exchange Notes) from and including the date on which any such
Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured. Additional Interest will accrue at a
rate of 0.50% per annum over the rate at which interest is then otherwise
accruing or, as applicable, principal is then accreting during the 90-day
period immediately following the occurrence of any Registration Default and
shall increase by 0.25% per annum at the end of each subsequent 90-day period,
but in no event shall such Additional Interest exceed 2.0% per annum.
Additional Interest will be payable in cash, semiannually in arrears on each
March 15 and September 15, regardless of whether any such date is otherwise an
Interest Payment Date. All references herein and in the Indenture to
"interest" on the Notes and the New Notes shall be deemed to include any
Additional Interest that may become payable thereon according to the
provisions of this paragraph.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order
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to have their Notes included in the Shelf Registration Statement and benefit
from the provisions regarding Additional Interest set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" is defined to mean, for any date of calculation, the amount
calculated pursuant to (i), (ii), (iii) or (iv) for each $1,000 of principal
amount at maturity of Notes:
(i) if such date of calculation occurs on one or more of the following
dates (each a "Semi-Annual Accrual Date"), the Accreted Value will equal
the amount set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
------------------------ ---------
<S> <C>
March 15, 1998................................................. $ 520.40
September 15, 1998............................................. 555.53
March 15, 1999................................................. 593.02
September 15, 1999............................................. 633.05
March 15, 2000................................................. 675.78
September 15, 2000............................................. 721.40
March 15, 2001................................................. 777.09
September 15, 2001............................................. 822.08
March 15, 2002................................................. 877.57
September 15, 2002............................................. 936.80
March 15, 2003................................................. 1,000.00
</TABLE>
(ii) if such date of calculation occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (a) $519.62 and (b)
an amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less $519.62 multiplied by (2) a fraction, the
numerator of which is the number of days from the issue date of the Notes
to such date of calculation, using a 360-day year of twelve 30-day months,
and the denominator of which is the number of days elapsed from the issue
date of the Notes to the first Semi-Annual Accrual Date, using a 360-day
year of twelve 30-day months;
(iii) if such date of calculation occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value of
Semi-Annual Accrual Date immediately preceding such date of calculation and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to such date of calculation, using a
360-day year of twelve 30-day months, and the denominator of which is 180;
or
(iv) if such date of calculation occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of any
other Person existing at the time such other Person is merged with or into or
becomes a Restricted Subsidiary of such specified Person, including, without
limitation, Debt incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Restricted Subsidiary of such
specified Person, and (ii) Debt secured by a Lien encumbering any asset
acquired by such specified Person.
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"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of services in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "--Change of Control" and/or the provisions described
above under the caption "--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following shall not be deemed to
be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned
Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary; (ii) an issuance of
Equity Interests by a Wholly Owned Restricted Subsidiary to the Company or to
another Wholly Owned Restricted Subsidiary; (iii) a Restricted Payment that is
permitted by the covenant described above under the caption "--Restricted
Payments"; (iv) disposals or replacements of obsolete, uneconomical,
negligible, worn-out or surplus property in the ordinary course of business;
or (v) a conveyance constituting or pursuant to a Permitted Lien.
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction, the present value at the time of determination (discounted at a
rate consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the applicable lease
(including any period for which such lease has been extended or may, at the
option of the lessee be extended) or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of a penalty
(in which case the rental payments shall be calculated to include such
penalty), after excluding all amounts required to be paid on account of
maintenance and repairs, insurance, taxes, assessments, water, utilities and
similar charges.
"Average Life to Stated Maturity" means, as of any date of determination
with respect to any Debt, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from the date of determination to the date
or dates of each successive scheduled principal payment of such Debt
multiplied by (b) the amount of each such principal payment; by (ii) the sum
of all such principal payments.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
of such Rules that a Person shall be deemed to have beneficial ownership of
all securities that such Person has a right to acquire within 60 days;
provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (1) arises solely as
a result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and
(2) is not also then reportable on Schedule 13D or Schedule 13G (or any
successor schedule) under the Exchange Act.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on the balance sheet of the
lessee in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests
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(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of (other than distributions of assets in respect
of Debt), the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers acceptances with maturities not
continued exceeding six months and overnight bank deposits, in each case with
any domestic commercial bank having capital and surplus in excess of $500
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within six months after the date of acquisition and (vi) money market
and mutual funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to any Person or group (as
such term is used in Section 13(d)(3) and 14 (d)(2) of the Exchange Act), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) any Person or group (as defined above) other than the Permitted
Holders is or becomes the Beneficial Owner, directly or indirectly, of more
than 50% of the total Voting Stock or Total Common Equity of the Company,
including by way of merger, consolidation or otherwise or (iv) the first day
on which a majority of the members of the Board of Directors of the Company
are not Continuing Directors.
"Closing Date" shall mean the first date on which Notes are issued by the
Company.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the
Nasdaq National Market or, if such shares are not listed or admitted to
trading on any national securities exchange or quoted on Nasdaq National
Market but the issuer is a Foreign Issuer (as defined in Rule 3b-4(b) under
the Exchange Act) and the principal securities exchange on which such shares
are listed or admitted to trading is a Designated Offshore Securities Market
(as defined in Rule 902(a) under the Securities Act), the average of the
reported closing bid and asked prices regular way on such principal exchange,
or, if such shares are not listed or admitted to trading on any national
securities exchange or quoted on Nasdaq National Market and the issuer and
principal securities exchange do not meet such requirements, the average of
the closing bid and asked prices in the over-the-counter market as furnished
by any New York Stock Exchange member firm is selected from time to time by
the Company for that purpose and is reasonably acceptable to the Trustee.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted.
"Common Stock" means the common stock, par value $0.001 per share, of the
Company.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries
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for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest
expense of such Person and its Restricted Subsidiaries for such period,
whether paid or accrued and whether or not capitalized (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Restricted Subsidiaries for
such period to the extent that such depreciation, amortization and other non-
cash expenses were deducted in computing such Consolidated Net Income, minus
(v) non-cash items increasing such Consolidated Net Income for such period, in
each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or
profits of, and the depreciation and amortization and other non-cash expenses
of, a Restricted Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
that a corresponding amount would be permitted at the date of determination to
be paid as a dividend to the Company by such Restricted Subsidiary without
prior governmental approval (that has not been obtained), and without direct
or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or the
holders of its Capital Stock.
"Consolidated Debt" means, with respect to any Person as of any date of
determination, the sum, without duplication, of (i) the total amount of Debt
of such Person and its Restricted Subsidiaries, plus (ii) the total amount of
Debt of any other Person, to the extent that such Debt has been guaranteed by
the referent Person or one or more of its Restricted Subsidiaries, plus (iii)
the aggregate liquidation value of all preferred stock of Restricted
Subsidiaries of such Person, in each case, determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to such Restricted Subsidiary or
its stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (a) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Closing Date
in the book value of any asset owned by such Person or a consolidated
Restricted Subsidiary of
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such Person, (b) all investments as of such date in unconsolidated
Subsidiaries and in Persons that are not Restricted Subsidiaries and (c) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of issuance or (ii) was nominated for election to such
Board of Directors with the affirmative vote of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election or who was elected or appointed in the ordinary course by Continuing
Directors or other directors so elected or appointed.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities or commercial paper facilities with
any combination of banks, other institutional lenders and other Persons
extending financial accommodations or holding corporate debt obligations in
the ordinary course of their business, providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables
to such lenders or to special purpose entities formed to borrow from such
lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time by the same or different institutional
lenders.
"Debt" means, with respect to any Person, any indebtedness of such Person,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Debt of others secured
by a Lien on any asset of such Person (whether or not such Debt is assumed by
such Person, valued, if not assumed, at the lesser of the Fair Market Value of
the encumbered assets or the amount of Debt so secured) and, to the extent not
otherwise included, the guarantee by such Person of any indebtedness of any
other Person. The amount of any Debt outstanding as of any date shall be (i)
the accreted value thereof, in the case of any Debt issued with original issue
discount and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other Debt.
"Debt to Annualized Cash Flow Ratio" means, as of any date of determination,
the ratio of (a) the Consolidated Debt of the Company as of such date to (b)
two times the Consolidated Cash Flow of the Company for the two most recent
full fiscal quarters ending immediately prior to such date for which internal
financial statements are available (the "Measurement Period"), determined on a
pro forma basis after giving effect to all acquisitions or dispositions of
assets made by the Company and its Restricted Subsidiaries from the beginning
of such two-quarter period through and including such date of determination
(including any related financing transactions) as if such acquisitions and
dispositions had occurred at the beginning of such two-quarter period. In
addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the two-quarter Measurement Period or
subsequent to such Measurement Period and on or prior to the date of
calculation shall be deemed to have occurred on the first day of the two-
quarter Measurement Period and Consolidated Cash Flow for such Measurement
Period shall be calculated without giving effect to clause (iii) of the
proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
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"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 of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "Certain Covenants--Restricted Payments."
"Equity Capital Investment" means the purchase of $16.0 million in Equity
Interests (other than Disqualified Stock) of the Company (i) pursuant to the
Equity Commitment or (ii) by any other equity investor, pursuant to a
"Replacement Financing" of the kind contemplated by the Equity Commitment, in
each case no later than March 11, 1999.
"Equity Commitment" means the collective purchase by a Warburg Entity and
Crosspoint Venture Partners 1996 of $16.0 million in Equity Interests (other
than Disqualified Stock) of the Company, no later than March 11, 1999,
pursuant to the Series C Preferred Stock and Warrant Subscription Agreement
dated as of February 20, 1998 among the Company and the Investors.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act), and the rules and regulations thereunder.
"Existing Debt" means Debt of the Company and its Restricted Subsidiaries in
existence on the Closing Date.
"Fair Market Value" means with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Closing Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"guarantee" means, with respect to any Person, without duplication, a
guarantee (other than by endorsement of negotiable instruments for collection
in the ordinary course of business), direct or indirect, in any manner
(including, without limitation, by way of a pledge of assets or through
letters of credit or reimbursement agreements in respect thereof), of all or
any part of any Debt of another Person.
"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to
execute a guarantee of the Notes pursuant to the "Limitations on Issuance of
Guarantees of Debt" covenant until a successor replaces such party pursuant to
the applicable provisions of the Indenture and, thereafter, shall mean such
successor.
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"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.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations), advances
or capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Debt, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the
Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--
Restricted Payments".
"Investor" means any Warburg Entity, Intel Corporation or Crosspoint Venture
Partners 1996.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Measurement Period" shall have the definition set forth above under "Debt
to Annualized Cash Flow Ratio."
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Debt of such Person or any of its
Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Debt secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Debt (i) as to which neither the Company nor any
of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Debt), (b) is directly or indirectly liable (as a guarantor or otherwise) or
(c) constitutes the lender; (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action
against an Unrestricted Subsidiary) would permit (upon notice, lapse of time
or both) any holder of any other Debt of the Company or any of its Restricted
Subsidiaries to declare a default on such other Debt or cause the payment
thereof to be accelerated or payable prior to its stated maturity; and (iii)
as to which
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the lenders have been notified in writing that they will not have any recourse
to the stock or assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"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.
"Permitted Holder" means (i) any Warburg Entity or (ii) Charles J. McMinn,
his spouse, his lineal descendants, whether acting in their own name or as a
majority of persons having the power to exercise the voting rights attached
to, or having investment power over, shares held by others, any Affiliate of
such persons, any trust principally for the benefit of one or more members of
such persons, (whether or not any such person is a trustee of such trust) and
any charitable foundation whose majority of members, trustees or directors, as
the case may be, are any of such persons.
"Permitted Investments" means (i) any Investment in the Company or in any
Wholly Owned Restricted Subsidiary of the Company; (ii) any Investment in Cash
Equivalents; (iii) any Investment by the Company or any Wholly Owned
Restricted Subsidiary of the Company in a Person if, as a result of such
Investment, (a) such Person becomes a Wholly Owned Restricted Subsidiary of
the Company or (b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its Debt, Equity Interests
or other securities to, or is liquidated into, the Company or a Wholly Owned
Restricted Subsidiary of the Company, (iv) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales;" (v) any
acquisition of assets to the extent acquired in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company and (vi) any
Investment by the Company in joint ventures or one or more Wholly Owned
Unrestricted Subsidiaries of the Company; provided, however, that the
aggregate amount of Investments made pursuant to this clause (vi) shall not
exceed $20.0 million at any one time outstanding and provided, further, that
Investments in joint ventures which are not also Unrestricted Subsidiaries
shall not exceed $10.0 million at any one time outstanding; (vii) accounts
receivable created or acquired in the ordinary course of business of the
Company or any Restricted Subsidiary and on ordinary business terms; and
(viii) Investments arising from transactions by the Company or any Restricted
Subsidiaries with trade creditors or customers in the ordinary course of
business (including any such Investment received pursuant to any plan of
reorganization or similar arrangement pursuant to the bankruptcy or insolvency
of such trade creditors or customers or otherwise in settlement of a claim).
"Permitted Liens" means (i) Liens in favor of the Company or Holders of the
Notes; (ii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Restricted Subsidiary of
the Company; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company;
(iii) Liens on property existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary of the Company; provided that such Liens
were in existence prior to the contemplation of such acquisition; (iv) Liens
to secure the performance of statutory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (v) Liens existing on the Closing Date; (vi)
Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (vii) Liens securing Vendor Debt or
Purchase Money Debt permitted by the Indenture, in each case, on the property
together with proceeds, product, accessions, substitutions and replacements
thereof; (viii) Liens created by "notice" or "precautionary" filings in
connection with operating leases or other transactions pursuant to which no
Debt or Attributable Debt is Incurred by the Company or any Restricted
Subsidiary; (ix) Liens on securities constituting "margin stock" within the
meaning of Regulation G, T, U or X
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promulgated by the Board of Governors of the Federal Reserve System, to the
extent that the Investment by the Company or any Restricted Subsidiary in such
margin stock is not prohibited by the Indenture; (x) Liens on Capital Stock of
Unrestricted Subsidiaries; (xi) Liens in favor of the Trustee arising under
the Indenture; and (xii) Liens incurred in the ordinary course of business of
the Company or any Subsidiary of the Company with respect to obligations that
do not exceed $2.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Restricted Subsidiary.
"Permitted Refinancing Debt" means any Debt of the Company or any of its
Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other Debt of
the Company or such Restricted Subsidiary (other than intercompany Debt);
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Debt does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Debt so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Debt has a final maturity date later than the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Debt being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Debt being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right
of payment to the Notes, such Permitted Refinancing Debt has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Notes on terms at least as favorable to the holders of Notes
as those contained in the documentation governing the Debt being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Debt is
incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Debt being extended, refinanced, renewed, replaced, defeased or
refunded.
"Public Equity Offering" means an underwritten offering of Common Stock with
gross proceeds to the Company of at least $35.0 million pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-
8 or otherwise relating to equity securities issuable under any employee
benefit plan of the Company).
"Productive Assets" means assets (including assets owned directly or
indirectly through Capital Stock of a Restricted Subsidiary) of a kind used or
usable in the Telecommunications Business of the Company.
"Purchase Money Debt" means Debt of the Company (including Acquired Debt and
Debt represented by Capital Lease Obligations, mortgage financings and
purchase money obligations), including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or restated from
time to time incurred for the purpose of financing all or any part of the cost
of development, construction, acquisition or improvement by the Company or any
Restricted Subsidiary of the Company of any Productive Assets of the Company
or any Restricted Subsidiary of the Company.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. If no referent Person is
identified, the term "Restricted Subsidiaries" shall be deemed to refer to
Restricted Subsidiaries of the Company.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary, or, in the case of the
Company, a Restricted Subsidiary of such Person and is thereafter leased back
from the purchaser or transferee thereof by such Person or one of its
Subsidiaries or, in the case of the Company, one of its Restricted
Subsidiaries.
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"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the
Closing Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Debt, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation governing
such Debt, and shall not include any contingent obligations to repay, redeem
or repurchase any such interest or principal prior to the date originally
scheduled for the payment thereof.
"Strategic Equity Investor" means any Investor or other Person which is (or
a controlled Affiliate of any Person which is) engaged in the
Telecommunications Business and 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 such Guarantor, as the case
may be.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership, limited liability
company or similar pass-through entity, (a) the sole general partner or the
managing general partner or managing member of which is such Person or a
Subsidiary of such Person or (b) the only general partners, managing members,
or Persons, however designated in corresponding roles, of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in the business of transmitting, or
providing services relating to the transmission of, voice or data through
leased transmission facilities.
"Telecommunications Related Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, real or personal,
used or to be used, in connection with a Telecommunications Business.
"Total Common Equity" of any Person means, as of any date of determination
the product of (i) the aggregate number of outstanding primary shares of
Common Stock of such Person on such day (which shall not include any options
or warrants on, or securities convertible or exchangeable into, shares of
Common Stock of such Person) and (ii) the average Closing Price of such Common
Stock over the 20 consecutive Trading Days immediately preceding such day. If
no such Closing Price exists with respect to shares of any such class, the
value of such shares for purposes of clause (ii) of the preceding sentence
shall be determined by the Board of Directors of the Company in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee.
"Trading Day", with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (i) has no Debt other
than Non-Recourse Debt; (ii) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company, unless such
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agreement, contract, arrangement or understanding constitutes a Restricted
Payment permitted by the Indenture; (iii) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (a) to subscribe for additional Equity Interests or (b) to
maintain or preserve such Persons financial condition or to cause such Person
to achieve any specified levels of operating results; (iv) has not guaranteed
or otherwise directly or indirectly provided credit support for any Debt of
the Company or any of its Restricted Subsidiaries; and (v) has at least one
director on its board of directors that is not a director or executive officer
of the Company or any of its Restricted Subsidiaries or has at least one
executive officer that is not a director or executive officer of the Company
or any of its Restricted Subsidiaries.
"Vendor Debt" means any Debt of the Company or any Restricted Subsidiary
incurred in connection with the acquisition or construction of
Telecommunications Related Assets.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Warburg Entities" means Warburg, Pincus Ventures, L.P. or any wholly owned
Subsidiary thereof.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
DESCRIPTION OF THE NEW NOTES
The terms of the New Notes will be identical in all material respects to
those of the Old Notes, except that the New Notes (i) will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes and (ii) will not
be entitled to certain registration rights under the Registration Rights
Agreement, including the provision for Additional Interest of up to 2.0% on
the Old Notes. Holders of Old Notes should review the information set forth
under "Summary--Certain Consequences of a Failure to Exchange Old Notes" and
"--Terms of New Notes."
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
actual terms of the capital stock contained in the Company's Amended and
Restated Certificate of Incorporation and other agreements referenced below.
The Company's Amended and Restated Certificate of Incorporation authorizes
the issuance of up to 30,000,000 shares of Common Stock and 15,000,000 shares
of Preferred Stock, of which 250,000 shares are designated as Series A
Preferred, 5,700,001 shares are designated as Series B Preferred, and
3,716,429 shares are designated SeriesC Preferred. At March 31, 1998, the
Company had outstanding 3,788,068 shares of Common Stock, 250,000 shares of
Series A Preferred, 5,700,001 shares of Series B Preferred and 120,048 shares
of Series C Preferred (the Series A Preferred, Series B Preferred and Series C
Preferred are collectively referred to herein as the "Preferred Stock"). As of
such date, there were ten (10) holders of record of Common Stock and eight (8)
holders of record of Preferred Stock. The Common Stock and Preferred Stock
each have a par value of $0.001 per share. No shares of undesignated Preferred
Stock are currently outstanding. As of March 31, 1998, options to purchase
1,698,000 shares of Common Stock at a weighted average exercise price of
$.3819 per share were outstanding. The Company also has outstanding warrants
to purchase an aggregate 600,000 shares of Common Stock at an exercise price
of $0.01 per share.
The Company's Board of Directors and stockholders have authorized an
amendment to the Company's Certificate of Incorporation, contingent upon the
closing of the Equity Commitment if such closing would cause Warburg to own
more than 49% of the Company's outstanding voting securities, (i) to create a
second class of Common Stock designated as "Class B Common" and (ii) to create
a new series of Preferred Stock designated as "Series C-1 Preferred." The
Class B Common Stock will have the same rights, preferences, privileges and
restrictions as the Common Stock except that the Class B Common Stock will
have very limited voting rights and will not vote for the election of
directors and will be convertible into Common Stock solely to the extent that
such conversion would not result in the holder of such converted shares having
greater than 49% of the Company's outstanding voting securities. The Series C-
1 Preferred will have the same rights, preferences, privileges and
restrictions as the Series C Preferred, except that the Series C-1 Preferred
will have very limited voting rights and will not vote for the election of
directors and will be convertible into Series C Preferred or Class B Common.
The conversion of Series C-1 Preferred into Series C Preferred will not be
permitted if the conversion would result in the holder of such converted
shares having greater than 49% of the Company's outstanding voting securities.
See "Certain Relationships and Related Transactions--The Equity Commitment."
COMMON STOCK
The holders of Common Stock are entitled to receive dividends when and if
declared by the Board of Directors, except that no dividend or distribution
may be paid on any shares of Common Stock during any fiscal year unless (i)
all dividend preferences of the Preferred Stock have been paid or declared and
set aside during that fiscal year and any prior year in which dividends
accumulated but remain unpaid and (ii) a dividend is paid on all outstanding
shares of Preferred Stock, in an amount for each such share of Preferred Stock
equal to or greater than the aggregate amount of such dividends as would be
paid for all shares of Common Stock into which that share of Preferred Stock
could then be converted. Upon liquidation, dissolution, merger or sale of all
or substantially all of the assets of the Company, after paying in full the
preferential amounts due the holders of the Preferred Stock, all remaining
assets will be distributed ratably among the holders of Preferred Stock and
Common Stock based upon the number of shares of Common Stock then held by each
holder on an as-converted basis. The holders of Common Stock are entitled to
one vote for each share held of record on all matters submitted to a vote of
stockholders. The Common Stock has no preemptive or other subscription rights,
and there are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and non-
assessable.
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PREFERRED STOCK
Dividends
The holders of Series A Preferred, Series B Preferred and Series C Preferred
are entitled to receive dividends in preference to Common Stock at a rate of
$0.05 per share, $0.12 per share and $0.67 per share, respectively, per annum.
Unpaid dividends on the Preferred Stock are cumulative. Any accrued and unpaid
dividends are payable only in the event of a liquidation, dissolution or
winding up of the Company or other Liquidity Event (as defined); provided,
that in the event the Liquidity Event is an underwritten public offering, such
unpaid dividends on the Series B Preferred and the Series A Preferred shall be
paid in shares of Common Stock valued at the initial public offering price per
share of Common Stock (prior to any underwriting discounts and commissions).
Liquidation Preference
Upon a liquidation, dissolution or winding up of the Company, the holders of
Series A Preferred, Series B Preferred and Series C Preferred are entitled to
receive in preference to the holders of Common Stock an amount equal to the
Initial Series A Preferred Price (as defined) for each share of Series A
Preferred, an amount equal to the Initial Series B Preferred Price (as
defined) for each share of Series B Preferred and an amount equal to the
Initial Series C Preferred Price (as defined) for each share of Series C
Preferred, respectively, plus any cumulated but unpaid dividends. The Series A
Preferred, the Series B Preferred and Series C Preferred rank in parity with
regard to the receipt of the respective preferential amounts. Thereafter, any
remaining assets shall be distributed ratably among the holders of Common
Stock and Preferred Stock on an as-converted basis. The "Initial Series A
Preferred Price" (i) in the event that the Liquidation Preference Threshold
(as defined) is achieved, is $0.00 for each share of Series A Preferred then
held, or (ii) in the event that the Liquidation Threshold is not achieved, is
$1.00 for each such share. The "Initial Series B Preferred Price" (i) in the
event that the Liquidation Preference Threshold is achieved, is $0.00 for each
share of Series B Preferred then held, or (ii) in the event that the
Liquidation Preference Threshold is not achieved, is $1.50 for each such
share. The "Initial Series C Preferred Price" is $8.33 for each share of
Series C Preferred then held. The "Liquidation Preference Threshold" is deemed
achieved if the quotient obtained by dividing (i) (A) the aggregate value to
be received by the holders of the Company's capital stock upon a liquidation,
dissolution or winding up or other Liquidity Event or, if the Liquidity Event
is an underwritten public offering of the Company's Common Stock, the pre-
offering valuation of the Company, less (B) the sum of the aggregate purchase
price received by the Company for the Series B Preferred plus the aggregate
purchase price received by the Company for the Series A Preferred, less (C)
the sum of the cumulated but unpaid dividends on the Series B Preferred plus
the cumulated but unpaid dividends on the Series A Preferred, by (ii) the
total number of shares of the Company's Common Stock outstanding on the date
of such event on a fully-diluted, as converted basis, equals or exceeds $6.00,
as adjusted for any stock splits, combinations, stock distributions or
dividends.
A consolidation or merger of the Company with or into any other corporation,
or a sale of all or substantially all of the assets of the Company, the
effectuation of a transaction or series of related transactions in which more
than 50% of the voting power of the Company is disposed of, or an underwritten
public offering pursuant to an effective registration statement under the
Securities Act of shares of the Company's Common Stock (each, a "Liquidity
Event"), is considered a liquidation, dissolution or winding up of the Company
(except that an underwritten public offering is only deemed to be such a
liquidation, dissolution or winding up with respect to the holders of the
Series A Preferred and the Series B Preferred). In the event of a deemed
liquidation in connection with an underwritten public offering in which the
Liquidation Preference Threshold is not achieved, in addition to (and not in
lieu of) their respective conversion rights, the holders of the Series A
Preferred and the Series B Preferred will be entitled to receive immediately
upon the closing of such underwritten public offering, that number of shares
of Common Stock of the Company equal to the quotient obtained by dividing (i)
the full preferential amount to which such holder of Series A Preferred and
Series B Preferred is entitled by (ii) the public offering price per share
(prior to any underwriters' discounts and commissions) in such underwritten
public offering.
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Conversion
The Preferred Stock is convertible into Common Stock at the rate of its
initial conversion price divided by the conversion price in effect at the time
of conversion and may be converted by the holder at any time. The initial
conversion prices of the Series A Preferred, Series B Preferred and Series C
Preferred are $1.00, $1.50 and $8.33, respectively. The conversion price of
the Preferred Stock is subject to adjustment for stock splits, stock
dividends, consolidations, combinations, reclassifications, and other like
events. The conversion prices of the Preferred Stock may also be subject to
adjustment for certain dilutive issues of stock at a price per share below the
applicable conversion price of such respective series of Preferred Stock prior
to the closing of the Equity Commitment or an alternative financing, each
adjustment as to the Series C Preferred will result in the conversion price
being adjusted to the price per share in the dilutive issue; thereafter the
adjustment will be based on the weighted average dilution to such series. The
Series A Preferred and Series B Preferred are automatically convertible into
Common Stock upon the earlier of (i) the consent of holders of 70% of the
outstanding number of shares of Series A Preferred and Series B Preferred
voting together as a single class on an as-converted basis, or (ii) the
closing of an underwritten public offering of the Company's capital stock with
aggregate net proceeds of at least $15 million ("IPO"). The Series C Preferred
is automatically convertible into Common Stock upon the earlier of (i) the
consent of the holders of 70% of the outstanding Series C Preferred, or (ii)
the closing of an underwritten public offering covering the offer and sale of
securities for the account of the Company to the public at a per share price
of $8.33 or greater (prior to any underwriters' discounts or commissions) and
with aggregate gross proceeds to the Company of not less than $16.0 million.
Voting Rights
The holders of Common Stock are entitled to one vote for each share of
Common Stock and the holders of Preferred Stock are entitled to vote on an as-
converted basis.
Protective Provisions
So long as any shares of Series B Preferred or Series C Preferred are
outstanding, the Company may not, without first obtaining the approval of the
holders of at least a majority of the then-outstanding shares of Series A,
Series B Preferred and Series C Preferred, voting together as a class on an
as-converted basis, take any action that (i) alters the rights, preferences or
privileges of the Preferred Stock; (ii) creates any new class or series of
shares that has a preference over or is on a parity with the Preferred Stock
with respect to voting, dividends or liquidation preferences; (iii)
reclassifies stock into shares having a preference over or in parity with the
Preferred Stock with respect to voting, dividends or liquidation preferences;
(iv) repurchases, redeems or retires capital stock of the Company (subject to
certain exceptions); (v) results in the sale, merger or reorganization of the
Company or a sale of all or substantially all of the assets of the Company;
(vi) materially alters the strategic direction of the Company or business
operations of the Company in a manner that is not contemplated by the
Company's most recent Board-approved operating plan; (vii) increases the
authorized number of directors as set forth in the Bylaws of the Company;
(vii) amends the Certificate of Incorporation or Bylaws; (viii) results in a
change in accounting policies or in the auditors of the Company; (ix) permits
a Subsidiary of the Company to sell stock to a third party; (x) results in a
dissolution, liquidation or winding up of the Company; (xi) causes aggregate
capital expenditures that are not included in the Company's most recent annual
operating plan to exceed $500,000 in any given 12-month period; (xii) results
in the acquisition of stock or assets of any other business for an aggregate
consideration in excess of $500,000; (xiii) results in an encumbrance on any
assets of the Company not in the ordinary course of business; or (xiv) results
in the issuance of any equity securities of the Company, other than stock
options, warrants or other rights to purchase equity securities approved by
the Board of Directors, or issuance of any long-term debt.
The Amended and Restated Certificate of Incorporation does not contain any
restriction on the purchase or redemption of shares by the Company while there
is an arrearage in the payment of dividends. There are no sinking fund
provisions applicable to the Preferred Stock.
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REGISTRATION RIGHTS
Pursuant to the Amended and Restated Stockholder Rights Agreement dated
February 20, 1998 (the "Stockholder Rights Agreement"), certain holders of
outstanding shares of Preferred Stock (collectively, the "Rights Holders") are
entitled to certain rights with respect to the registration under the
Securities Act of the Common Stock issuable upon conversion of the Preferred
Stock, the Common Stock issuable upon exercise of the Common Warrants and any
Common Stock issued as a dividend or other distribution with respect to or in
exchange for or in replacement of the foregoing ("Registrable Securities").
The Rights Holders are entitled to demand, "piggy-back" and S-3 registration
rights, subject to certain limitations and conditions. The number of
securities requested to be included in a registration involving the exercise
of demand and "piggy-back" rights are subject to a pro rata reduction based on
the number of Registrable Securities held by each Rights Holder and any other
security holders exercising their respective registration rights to the extent
that the Company is so advised by the managing underwriter, if any, therefor
that the total number of securities requested to be included in the
underwriting is such as to materially and adversely affect the success of the
offering.
The registration rights terminate as to any Rights Holder at the later of
(i) two years after the Company's IPO, or (ii) such time as such Rights Holder
may sell under Rule 144 in a three month period all Registrable Securities
then held by such Rights Holder.
PREEMPTIVE RIGHTS, RIGHTS OF FIRST REFUSAL AND CO-SALE RIGHT
Preemptive Rights
Under the Stockholder Rights Agreement, the Company may not sell or issue
certain new securities for consideration other than cash without the prior
written consent of the holders of a majority of the outstanding Series B
Preferred and Series C Preferred. In addition, the Investors have the right to
purchase their pro rata portion of certain new issues of the Company's
securities for consideration solely in cash on the same terms and conditions
as the Company proposes to issue such securities, subject to certain
conditions and limitations. These preemptive rights shall terminate as to any
Investor at such time as the holder ceases to own any shares of Series B
Preferred and Series C Preferred or Common Stock issuable upon conversion of
the Series B Preferred and Series C Preferred and shall terminate as to all
Investors upon the closing of an IPO.
Right of First Refusal and Co-Sale Right
Except in certain situations, in the event any holder of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred or certain
holders of Common Stock (each a "Selling Holder") proposes to sell such shares
to a third party, the Company has a right of first refusal to acquire some or
all such shares from such Selling Holder under the same terms and conditions.
If the Company does not elect to exercise such right of first refusal, the
remaining holders of Common Stock and Preferred Stock who are parties to the
Stockholder Rights Agreement (the "Remaining Holders") may purchase their pro
rata portion of the Selling Holder's shares under the same terms and
conditions. If any Remaining Holder fails to exercise his or her pro rata
portion, the Selling Holder must give Warburg the option to buy the shares. If
Warburg does not purchase all of the shares, the Selling Holder may then sell
the unsubscribed shares to a third party buyer, subject to the right of the
Remaining Holders to sell a pro rata portion of their shares of Common Stock
or Preferred Stock to the buyer in such transaction. The rights of first
refusal and co-sale terminate on the earlier of (i) the closing of the
Company's IPO; or (ii) as to any stockholder at such time as such stockholder
holds less than 2.5% of the total number of shares of Common Stock held by all
stockholders (assuming the conversion of all shares of Preferred Stock into
Common Stock).
BOARD REPRESENTATION AND VOTING AGREEMENT
The Stockholder Rights Agreement provides that in all elections of directors
of the Company, certain holders of Common Stock and all holders of Series A,
Series B and Series C Preferred Stock shall vote all
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Common Stock and Preferred Stock owned or controlled by such stockholder to
fix the number of directors of the Company at seven and to elect (i) three
board members designated by Warburg and Crosspoint, two of whom must be
designees of Warburg and one of whom must be a designee of Crosspoint
(provided, however, that so long as the aggregate investment in the Company of
Crosspoint is less than $5,000,000, if Crosspoint fails to invest on a pro
rata basis with Warburg in subsequent equity financings of the Company, the
designee of Crosspoint must resign and his or her vacancy must be filled by a
person mutually designated by Warburg and the Company); (ii) two board members
who are senior officers of the Company, one of whom shall be the chief
executive officer of the Company; and (iii) one board member mutually
designated by Warburg and the Company. The parties to the Stockholder Rights
Agreement also agree to vote in favor of removing a director only if the
grounds for removal involve bad faith or wilful misconduct. This voting
agreement terminates in its entirety on July 16, 2007 or until such time as
any stockholder ceases to own voting stock of the Company.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of certain U.S. federal income
tax considerations relating to the Exchange Offer and to the purchase,
ownership and disposition of the New Notes. The tax consequences of these
transactions are uncertain. The discussion of the federal income tax
consequences set forth below is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), and judicial decisions and administrative
interpretations thereunder, as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below. There can be no assurance
that the Internal Revenue Service (the "IRS") will not successfully challenge
one or more of the tax consequences described herein, and the Company has not
obtained, nor does it intend to obtain, a ruling from the IRS or an opinion of
counsel with respect to the U.S. federal income tax consequences of acquiring
or holding New Notes. The discussion below pertains only to U.S. Holders,
except as described below under the caption "Tax Treatment of the Ownership
and Disposition of New Notes by Non-U.S. Holders." As used herein, a U.S.
Holder means (i) citizens or residents (within the meaning of Section 7701(b)
of the Code) of the U.S., (ii) corporations, partnerships or other entities
created in or under the laws of the U.S. or any political subdivision thereof,
(iii) estates the income of which is subject to U.S. federal income taxation
regardless of its source, (iv) trusts subject to the primary supervision of a
court within the U.S. and the control of a U.S. person as described in Section
7701(a)(30) of the Code, and (v) any other person whose income or gain is
effectively connected with the conduct of a U.S. trade or business.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular Holder in light of the
Holder's circumstances (for example, persons subject to the alternative
minimum tax provisions of the Code). Also, it is not intended to be wholly
applicable to all categories of investors, some of which (such as dealers in
securities, banks, insurance companies, tax-exempt organizations, and persons
holding New Notes as part of a hedging or conversion transaction or straddle
or persons deemed to sell New Notes under the constructive sale provisions of
the Code) may be subject to special rules. The discussion below is premised
upon the assumption that the New Notes and Old Notes are held (or would be
held if acquired) as capital assets within the meaning of Section 1221 of the
Code. This summary does not discuss the tax considerations applicable to
subsequent purchasers. The discussion also does not discuss any aspect of
state, local or foreign law.
EACH HOLDER OR PROSPECTIVE HOLDER OF NEW NOTES IS STRONGLY URGED TO CONSULT
ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR TAX SITUATION INCLUDING THE
TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX LAWS AND POSSIBLE
CHANGES IN THE TAX LAWS.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a Holder should have the same adjusted issue price, adjusted
basis and holding period in the New Notes as it had in the Old Notes
immediately before the exchange.
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THE NEW NOTES
Original Issue Discount
The New Notes will be treated as issued with original issue discount, and
each Holder will be required to include in its gross income original issue
discount income as described below. Except as provided below in the section
entitled "Applicable High-Yield Discount Obligations," a Holder must include
original issue discount (to the extent there is not offsetting acquisition or
bond premium) in income as ordinary interest income as it accrues on the basis
of a constant yield to maturity. Generally, original issue discount must be
included in income in advance of the receipt of cash representing such income.
The stated redemption price at maturity of a New Note will equal the sum of
all payments other than any "qualified stated interest" payments. Qualified
stated interest is stated interest that is unconditionally payable in cash or
in property (other than debt instrument of the issuer) at least annually at a
single fixed rate. Because interest on the New Notes will not be payable prior
to March 15, 2003, none of the payments on the New Notes will constitute
qualified stated interest. Accordingly, all payments on the New Notes will be
treated as part of their stated redemption price at maturity.
Because the Old Notes were issued as part of an investment unit, the issue
price of each investment unit was allocated between the Old Note and the
warrant constituting an investment unit based on their relative fair market
values on the issue date. Although the Company's allocation is not binding on
the IRS, a holder of a unit must use the Company's allocation unless the
holder discloses on its federal income tax return for the year in which the
unit was acquired that it plans to use an allocation that is inconsistent with
the Company's allocation.
A Holder must include in gross income, for all days during its taxable year
in which it holds such New Note, the sum of the "daily portions" of original
issue discount. The "daily portions" are determined by allocating to each day
in an "accrual period" (generally the period between interest payments or
compounding dates) a pro rata portion of the original issue discount that
accrued during such accrual period. The amount of original issue discount that
will accrue during an accrual period is the product of the "adjusted issue
price" of the New Note at the beginning of the accrual period and its yield to
maturity (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the particular accrual period).
The adjusted issue price of a New Note is the sum of the issue price of an Old
Note, plus prior accruals of original issue discount, reduced by the total
payments made with respect to such New Note in all prior periods and on the
first day of the current accrual period. Each payment on a New Note will be
treated as a payment of original issue discount to the extent that original
issue discount has accrued as of the date such payment is due and has not been
allocated to prior payments, and any excess will be treated as a payment of
principal.
There are several circumstances under which the Company could make a payment
on a New Note which would affect the yield to maturity of a New Note,
including the redemption or repurchase of a New Note (as described under
"Description of the Old Notes"). According to Treasury Regulations, the
possibility of a change in the yield will not be treated as affecting the
amount of interest income (including original issue discount) recognized by a
holder (or the timing of such recognition) if the likelihood of the change, as
of the date of the debt obligations are issued, is remote. The Company intends
to report on the basis that the likelihood of any change in the yield on the
New Notes is remote.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record Holders of a New Note, information with respect to
original issue discount accruing during the calendar year. That information
will be based upon the adjusted issue price of the New Note as if the Holder
were the original Holder of the New Note.
Election to Treat All Interest as Original Issue Discount
A Holder may elect to treat all "interest" on any New Note as original issue
discount and calculate the amount includable in gross income under the method
described above. For this purpose, "interest" includes
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stated and unstated interest, original issue discount, acquisition discount,
market discount and de minimis market discount, as adjusted by any acquisition
premium. The election is to be made for the taxable year in which the Holder
acquired the Note and may not be revoked without the consent of the IRS.
Acquisition Premium
To the extent a Holder had acquisition premium with respect to an Old Note,
the Holder generally will have acquisition premium with respect to a New Note.
A Holder will reduce the original issue discount otherwise includable for each
accrual period by an amount equal to the product of (i) the amount of such
original issue discount otherwise includable for such period, and (ii) a
fraction, the numerator of which is the acquisition premium and the
denominator of which is the excess of the amounts payable on the New Note
after the purchase date over the adjusted issue price.
Market Discount
To the extent a Holder had market discount with respect to an Old Note, the
Holder generally will have market discount with respect to a New Note. Any
principal payment or gain realized by a Holder on disposition or retirement of
a New Note will be treated as ordinary income to the extent that there is
accrued market discount on the New Note. Unless a Holder elects to accrue
under a constant-interest method, accrued market discount is the total market
discount multiplied by a fraction, the numerator of which is the number of
days the Holder has held the obligation and the denominator of which is the
number of days from the date the Holder acquired the obligation until its
maturity. A Holder may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a New Note purchased with market discount. Any
such deferred interest expense would not exceed the market discount that
accrues during such taxable year and is, in general, allowed as a deduction
not later than the year in which such market discount is includable in income.
If the Holder elects to include market discount in income currently as it
accrues on all market discount instruments acquired by the Holder in that
taxable year or thereafter, the interest deferral rule described above will
not apply.
Sale, Exchange or Retirement of the New Notes
Upon the sale, exchange or retirement of a New Note, the Holder generally
will recognize gain or loss equal to the difference between the amount
realized on the sale, exchange or retirement (which does not include any
amount attributable to accrued but unpaid interest) and the Holder's adjusted
tax basis in the New Note. A Holder's adjusted tax basis in the New Note will
equal the Holder's cost for the Old Note exchanged therefore increased by any
original issue discount included in income by such Holder with respect to such
New Note and decreased by any payments received thereon other than qualified
stated interest.
Gain or loss realized on the sale, exchange or retirement of a New Note will
be capital, and will be long-term if at the time of sale, exchange or
retirement the New Note has been held for more than one year. The maximum rate
of tax on long-term capital gains on most capital assets held by an individual
for more than 18months is 20%, and gain on most capital assets held by an
individual more than one year and up to 18months is subject to tax at a
maximum rate of 28%. The deductibility of capital losses is subject to
limitations.
Applicable High-Yield Discount Obligations
The New Notes will be subject to the "applicable high yield discount
obligation" provisions of the Code. Because the yield of the New Notes is at
least five percentage points above the applicable federal rate and the New
Notes are issued with "significant original issue discount," otherwise
deductible interest and original issue discount will not be deductible with
respect thereto until such interest is actually paid. In addition, because the
yield of the New Notes is more than six percentage points above the applicable
federal rate, (i) a portion of such interest corresponding to the yield in
excess of six percentage points above the applicable federal rate will not be
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deductible by the Company at any time, and (ii) a corporate Holder may be
entitled to treat the portion of the interest that is not deductible by the
Company as a dividend for purposes of qualifying for the dividends received
deduction provided for by the Code, subject to applicable limitations. In such
event, corporate Holders should consult with their own tax advisors as to the
applicability of the dividends received deduction.
TAX TREATMENT OF THE OWNERSHIP AND DISPOSITION OF NEW NOTES BY NON-U.S.
HOLDERS
The following discussion is a general summary of certain U.S. federal income
and estate tax considerations of the ownership and disposition of New Notes by
Non-U.S. Holders. As used herein, a Non-U.S. Holder means any Holder other
than a U.S. Holder.
Withholding Tax on Payments of Principal and Interest on New Notes
The payment of principal and interest on a New Note to a Non-U.S. Holder
will not be subject to U.S. federal withholding tax pursuant to the "portfolio
interest exception," provided that (i) the Non-U.S. Holder does not actually
or constructively own 10% or more of the total voting power of all voting
stock of the Company and is not a controlled foreign corporation that is
related to the Company within the meaning of the Code and (ii) the beneficial
owner of the New Notes certifies to the Company or its agent, under penalties
of perjury, that it is not a U.S. Holder and provides its name and address on
U.S. Treasury Form W-8 (or a suitable substitute form) or a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the debenture certificates under penalties
of perjury that such a Form W-8 (or suitable substitute form) has been
received from the beneficial owner by it or by a financial institution between
it and the beneficial owner and furnishes the payor with a copy thereof.
Treasury Regulations that will be effective January 1, 2000 (the "Withholding
Regulations") provide alternative methods for satisfying the certification
requirement described in (ii) above. The Withholding Regulations will
generally require, in the case of New Notes held by a foreign partnership,
that the certificate described in (ii) above be provided by the partners
rather that by the foreign partnership, and that the partnership provide
certain information including a U.S. tax identification number.
Gain on Disposition of the Notes
Non-U.S. Holders generally will not be subject to U.S. federal income tax on
gain realized on the sale, exchange or redemption of New Notes, unless in the
case of an individual Non-U.S. Holder such Holder is present in the U.S. for
183 days or more in the year of such sale, exchange or redemption and certain
other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal and interest on a New Note and payments on the proceeds of the sale
of a New Note to certain noncorporate U.S. Holders, and a 31% backup
withholding tax may apply to such payments if the Holder (i) fails to furnish
or certify its correct taxpayer identification number to the payor in the
manner required, (ii) is notified by the IRS that it has failed to report
payments of interest and dividends properly, or (iii) under certain
circumstances, fails to certify that it has not been notified by the IRS that
it is subject to backup withholding for failure to report interest and
dividend payments. Certain Holders (including, among others, all corporations)
are not subject to the backup withholding and reporting requirements.
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to withholding, or that is exempt from U.S.
withholding tax pursuant to a tax treaty, or interest that is exempt from U.S.
tax under the portfolio interest exception. Copies of these information
returns may also be made available under the provisions of a specific treaty
or agreement to the tax authorities of the country in which the Non-U.S.
Holder resides.
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Treasury Regulations provide that backup withholding and additional
information reporting will not apply to payments of principal on the New Notes
by the Company to a Non-U.S. Holder if the Holder certifies as to its Non-U.S.
status under penalties of perjury or otherwise establishes an exemption
(provided that neither the Company nor its Paying Agent has actual knowledge
that the Holder is a U.S. person or that the conditions of any other exception
are not, in fact, satisfied).
The payment of the proceeds from the disposition of New Notes to or through
the U.S. office of any broker, U.S. or foreign, will be subject to information
reporting and possible backup withholding unless the owner certifies as to its
Non-U.S. Holder status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
Holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a New
Note to or through a non-U.S. office of a broker that is either a U.S. person
or a U.S. related person will be subject to information reporting (but
currently not backup withholding) unless the broker has documentary evidence
in the files that the owner is a Non-U.S. Holder and the broker has no
knowledge to the contrary. Backup withholding and information reporting will
not apply to payments made through foreign offices of a broker that is not a
U.S. person or a U.S. related person (absent actual knowledge that the payee
is U.S. person). For purposes of this paragraph, a "U.S. related person" is
(i) a "controlled foreign corporation" for U.S. federal income tax purposes,
(ii) a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of
a U.S. trade or business, or (iii) with respect to payments made after
December 31, 1999, a foreign partnership that, at any time during its taxable
year, is 50% or more (by income or capital interest) owned by U.S. persons or
is engaged in the conduct of a U.S. trade or business. The Withholding
Regulations provide certain presumptions under which a Non-U.S. Holder will be
subject to backup withholding and information reporting unless the Non-U.S.
Holder provides a certification as to its Non-U.S. Holder status.
Any amounts withheld under the backup withholding rules from a payment to a
U.S. or Non-U.S. Holder will be allowed as a refund or a credit against such
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
in connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus
may be used by Participating Broker-Dealers during the period referred to
below in connection with resales of the New Notes received in exchange for Old
Notes if such Old Notes were acquired by such Participating Broker-Dealers for
their own accounts. The Company has agreed that this Prospectus may be used by
a Participating Broker-Dealer in connection with resales of such New Notes for
a period ending 150 days after the effective date of the Registration
Statement (subject to extension under certain limited circumstances described
herein) or, if earlier, when all such New Notes have been disposed of by such
Participating Broker-Dealer. See "The Exchange Offer--Terms of the Exchange
Offer."
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. New Notes received by Participating Broker-Dealers for
their own accounts in connection with the Exchange Offer may be sold from time
to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any Participating Broker-Dealer that resells New Notes that were
received by it for its own account in connection with the Exchange Offer and
any broker or dealer that participates in a distribution of
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such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
INDEPENDENT AUDITORS
The Consolidated Financial Statements of the Company as of December 31, 1997
and for the year then ended included in this Prospectus have been audited by
Ernst & Young LLP, independent auditors, as stated in their report appearing
herein.
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COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Financial Statements
Consolidated Balance Sheet................................................ F-3
Consolidated Statement of Operations...................................... F-4
Consolidated Statement of Stockholders' Equity............................ F-5
Consolidated Statement of Cash Flows...................................... 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.
Ernst & Young LLP
January 16, 1998
F-2
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 4,378
Accounts receivable, net........................................ 25
Unbilled revenue................................................ 4
Inventories..................................................... 43
Prepaid expenses................................................ 52
Other current assets............................................ 317
-------
TOTAL CURRENT ASSETS.......................................... 4,819
PROPERTY AND EQUIPMENT:
Networks and communication equipment............................ 2,185
Computer equipment.............................................. 600
Furniture and fixtures.......................................... 185
Leasehold improvements.......................................... 114
-------
3,084
Less accumulated depreciation and amortization.................. (70)
-------
Net property and equipment........................................ 3,014
OTHER ASSETS:
Restricted cash................................................. 210
Deposits........................................................ 31
-------
TOTAL OTHER ASSETS............................................ 241
-------
TOTAL ASSETS.................................................. $ 8,074
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 651
Unearned revenue................................................ 7
Accrued network costs........................................... 58
Other accrued liabilities....................................... 77
Current portion of capital lease obligations.................... 229
-------
TOTAL CURRENT LIABILITIES..................................... 1,022
Long-term capital lease obligations............................... 554
-------
TOTAL LIABILITIES............................................. 1,576
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $0.001 par value, 250,000
shares authorized, issued and outstanding...................... --
Series B convertible preferred stock, $0.001 par value,
5,666,667 shares authorized, issued and outstanding............ 6
Common stock, $0.001 par value, 25,000,000 shares authorized,
3,787,068 shares issued and outstanding........................ 4
Additional paid-in capital...................................... 8,805
Retained earnings (deficit)..................................... (2,317)
-------
TOTAL STOCKHOLDERS' EQUITY.................................... 6,498
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $ 8,074
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Revenues...................................................... $ 26
Operating expenses:
Network and product costs................................... 54
Sales, marketing, general and administrative................ 2,374
Depreciation and amortization............................... 70
-------
Total operating expenses...................................... 2,498
-------
Loss from operations.......................................... (2,472)
Interest income (expense):
Interest income............................................. 167
Interest expense............................................ (12)
-------
Net interest.................................................. 155
-------
Net loss...................................................... $(2,317)
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE ADDITIONAL RETAINED TOTAL
PREFERRED PREFERRED COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL (DEFICIT) EQUITY
----------- ----------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Initial issuance of com-
mon stock.............. $-- $-- $ 4 $ 46 $ -- $ 50
Repurchase of common
stock.................. -- -- (1) (9) -- (10)
Issuance of common
stock.................. -- -- 1 67 -- 68
Issuance of Series A
Preferred Stock........ -- -- -- 250 -- 250
Issuance of Series B
Preferred Stock (net of
$43 of financing
costs)................. -- 6 -- 8,451 -- 8,457
Net loss................ -- -- -- -- (2,317) (2,317)
---- ---- --- ------ ------- -------
Balance at December 31,
1997................... $-- $ 6 $ 4 $8,805 $(2,317) $ 6,498
==== ==== === ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(2,317)
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization............................. 70
Net changes in current assets and liabilities:
Accounts receivable..................................... (25)
Inventories............................................. (43)
Other current assets.................................... (373)
Accounts payable........................................ 651
Unearned revenue........................................ 7
Other current liabilities............................... 135
-------
Net cash used in operating activities....................... (1,895)
INVESTING ACTIVITIES:
Purchase of restricted investment........................... (210)
Deposits.................................................... (31)
Purchase of property and equipment.......................... (2,253)
-------
Net cash used in investing activities....................... (2,494)
FINANCING ACTIVITIES:
Principal payments under capital lease obligations.......... (48)
Proceeds from common stock issuance, net of repurchase...... 108
Proceeds from Series A preferred stock issuance............. 250
Proceeds from Series B preferred stock issuance............. 8,457
-------
Net cash provided by financing activities................... 8,767
-------
Cash and cash equivalents at end of year.................... $ 4,378
=======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 9
=======
Supplemental schedule of non-cash investing and financing
activities:
Equipment purchased through capital leases................ $ 831
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Covad Communications Company was organized in October 1996. On July 16,
1997, Covad Communications Group, Inc. (the "Company") was incorporated in the
state of Delaware. Simultaneous with the Company's incorporation, an exchange
agreement was executed which effectively made Covad Communications Company a
wholly-owned subsidiary of the Company.
The Company is a packet-based Competitive Local Exchange Carrier ("CLEC")
which provides high-speed data communication services using Digital Subscriber
Line ("DSL") technology. The Company's services enhance remote access from
homes to enterprise Local Area Networks ("LANs") and enable Internet Service
Providers ("ISPs") to offer high speed Internet access to their end-users. The
Company's services are provided over standard copper telephone lines at
considerably faster speeds than available through a standard modem. The
Company markets its services directly to enterprises (corporations, government
entities, and educational institutions) that are increasingly emphasizing
remote LAN access to improve employee productivity and reduce operating costs.
The Company also markets its services indirectly through ISPs that wish to
sell high-speed Internet access to small- and medium-sized businesses and
subsequently consumers, using the Company's DSL lines.
The Company's operations are subject to significant risks and uncertainties
including competitive, financial, developmental, operational, growth and
expansion, technological, regulatory, and other risks associated with an
emerging business.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
all of its wholly-owned subsidiaries. There were no intercompany accounts and
transactions which required elimination.
The accompanying statements of operations, stockholders' equity, and cash
flows includes $50,000 received during 1996 upon issuance of the initial
capital stock of the Company and $2,000 expended in 1996 for general and
administrative expenses.
B. REVENUE RECOGNITION
Revenue related to installation of service and sale of customer premise
equipment is recognized when equipment is delivered and installation is
completed. Revenue from monthly recurring service is recognized in the month
the service is provided. Payments received in advance of providing services
are recorded as unearned revenue until the period such services are provided.
C. CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less from
the date of original issuance are considered to be cash equivalents.
D. RESTRICTED CASH
The Company has $210,000 in commercial deposits held in the Company's name
but restricted as security for certain of the Company's capital lease
arrangements. This amount is reflected in other assets.
F-7
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
E. INVENTORIES
Inventories are stated at the lower of cost or market. Costs are based on
the first-in first-out method.
F. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Leasehold improvements......................... 15 years or life of the lease
Electronic communications equipment............ 5 years
Furniture and fixtures......................... 7 years
Computer equipment............................. 3 years
Office equipment............................... 2 to 10 years
Computer software.............................. 3 to 7 years
</TABLE>
The Company capitalizes internally and externally developed software and
other network costs associated with the design and implementation of the
Company's network. The Company expects to incur significant network costs in
the future.
G. EQUIPMENT UNDER CAPITAL LEASES
The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of
the assets under lease, whichever is less. Assets under capital lease are
amortized over the lease term or useful life of the assets.
H. INCOME TAXES
From January 1, 1997 to June 30, 1997, Covad Communications Company was an S
Corporation under the provisions of the Internal Revenue Code. Effective June
30, 1997, Covad Communications Company terminated its S Corporation status and
became a C Corporation, and on July 16, 1997 Covad Communications Company
became a wholly-owned subsidiary of the Company. Under S Corporation
provisions, income or losses of Covad Communications Company were reported by
the stockholders on their individual federal and state income tax returns, and
Covad Communications Company did not pay income taxes or receive income tax
benefits.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
which provides for the establishment of deferred tax assets and liabilities
for the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. As of December 31, 1997, the Company has
deferred tax assets related to federal and California net operating loss
carryforwards of approximately $700,000 and $120,000, respectively. The net
deferred tax asset has been fully offset by a valuation allowance. The federal
and California net operating loss carryforwards of $2,062,000 expire in 2012
and 2003, respectively. Utilization of the net operating losses is subject to
a substantial annual limitation provided by the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the
expiration of net operating losses before utilization.
I. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
J. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," as
amended by SFAS No. 119, "Disclosures About Derivative Financial Instruments
and Fair Value of Financial Instruments," which are effective for the
Company's December 31, 1997 financial statements, requires disclosure of fair
value information about financial instruments whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available for identical or comparable
financial instruments, fair values are based on estimates using the present
value of estimated cash flows or other valuation techniques. The resulting
fair values can be significantly affected by the assumptions used, including
the discount rate and estimates as to the amounts and timing of future cash
flows.
The following methods and assumptions were used to estimate the fair value
for financial instruments:
Cash and cash equivalents. The carrying amount approximates fair value.
Borrowings. The fair value of borrowings, including capital lease
obligations and other obligations, is estimated by discounting the future cash
flows using estimated borrowing rates at which similar types of borrowing
arrangements with the same remaining maturities could be obtained by the
Company. For borrowings outstanding at December 31, 1997, fair value
approximates recorded
2. BORROWING ARRANGEMENTS
During 1997, the Company entered into capital lease arrangements to finance
the acquisition of certain operating assets, two of which have bargain
purchase options. The principal value of these leases totaled $831,000 and was
equivalent to the fair value of the assets leased.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, CAPITAL LEASES
------------ --------------
<S> <C>
1998......................................................... $ 339,000
1999......................................................... 322,000
2000......................................................... 285,000
2001......................................................... 26,000
2002......................................................... --
Thereafter................................................... --
---------
972,000
Less amount representing interest............................ (189,000)
Less current portion......................................... (229,000)
---------
Total long-term portion...................................... $ 554,000
=========
</TABLE>
Accumulated amortization for equipment under capital leases is reflected in
accumulated depreciation and amortization for property and equipment.
F-9
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. OPERATING LEASES
The Company leases vehicles, equipment, and office space under various
operating leases. Future minimum lease payments at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
1998.............................................................. $ 405,000
1999.............................................................. 264,000
2000.............................................................. 65,000
2001.............................................................. 62,000
2002.............................................................. 65,000
Thereafter........................................................ 364,000
----------
Total........................................................... $1,225,000
==========
</TABLE>
Rental expense on operating leases for the year ended December 31, 1997 was
$131,000.
4. OTHER ASSETS AND OTHER LIABILITIES
On December 30, 1997, the Company entered into a capital lease agreement
(see Note 2) with a principal balance of $316,000. As of December 31, 1997,
this amount had not yet been received into the Company's bank account and is,
therefore, included as part of other current assets on the balance sheet.
5. STOCKHOLDERS' EQUITY
COVAD COMMUNICATIONS COMPANY
In October 1996, Covad Communications Company was granted authority to issue
up to 10,000,000 shares of stock. In May 1997, the shareholders of Covad
Communications Company voted to amend the articles of incorporation granting
authority to issue two classes of stock to be designated "Preferred Stock" and
"Common Stock". The number of shares of Preferred Stock authorized was
7,500,000 shares with no par value. The number of shares of Common Stock
authorized was 12,500,000 shares with no par value.
In July 1997, the Company entered into an Exchange Agreement (the
"Agreement") with the shareholders of Covad Communications Company to convey
to the Company 100% of the issued and outstanding shares of capital stock of
Covad Communications Company for capital stock of the Company.
COVAD COMMUNICATIONS GROUP, INC.
Common Stock:
Upon formation of the Company in July 1997, the number of shares of common
stock ("Common Stock") authorized for issuance was 25,000,000 with a par value
of $.001 per share. As of December 31, 1997, 3,787,068 shares were issued and
outstanding.
Preferred Stock:
Upon formation of the Company in July 1997, the number of shares of
preferred stock authorized for issuance was 5,916,667. Of this amount, 250,000
shares were designated as Series A Preferred Stock ("Series A") and 5,666,667
shares were designated as Series B Preferred Stock ("Series B"), each with a
par value of $.001 per share. As of December 31, 1997, 250,000 and 5,666,667
shares of Series A and Series B, respectively, were issued and outstanding.
F-10
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The holders of Series A and Series B are entitled to receive in any fiscal
year, dividends at the rate of $0.05 per share and $0.12 per share,
respectively, payable in preference and priority to any payment of dividends
on Common Stock. The rights to such dividends are cumulative and accrue to the
holders to the extent they are not declared or paid and are payable only in
the event of a liquidation, dissolution or winding up of the Company, or other
liquidity event (as defined in the Certificate of Incorporation). The
cumulative dividends at December 31, 1997 for Series A and Series B were
$12,500 and $680,000, respectively, none of which has been declared or paid.
Subject to certain adjustments as set forth in the Certificate of
Incorporation, each share of Series A and Series B is convertible into one
share of Common Stock. Each share of Series A and Series B is entitled to the
number of votes equal to the number of shares of Common Stock in which such
shares of Series A and Series B, respectively, could be converted.
In the event of any liquidation or dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A and Series B are
entitled to receive, in addition to the cumulated and unpaid dividends, $1.00
and $1.50 per share, respectively (the "Initial Preference"), until a
"Liquidation Preference Threshold" is met based on a formula as set forth in
the Certificate of Incorporation. After payment of these preferences, any
remaining amounts are distributed to the holders of Series A, Series B, and
Common Stock on a pro rata basis based on the number of shares of Common Stock
held by each holder on an as-converted basis. If the "Liquidation Preference
Threshold" is met, the Initial Preference is eliminated and all amounts are
distributed to the holders of Series A, Series B, and Common Stock on a pro
rata basis based on the number of shares of Common Stock held by each holder
on an as-converted basis.
6. STOCK OPTIONS
In 1997, the Company adopted the Covad Communications Group, Inc. 1997 Stock
Plan (the "Plan"). The Plan provides for the grant of stock purchase rights
and options to purchase shares of Common Stock to employees and consultants
from time to time as determined by the Board of Directors. The options expire
from two to eight years after the date of grant. The Plan has reserved
1,756,750 shares of the Company's Common Stock for sale and issuance under the
Plan at prices to be determined by the Board of Directors.
The following is a summary of the status of stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
EXERCISE NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
PRICE RANGE SHARES LIFE REMAINING EXERCISE PRICE SHARES EXERCISE PRICE
- ----------- --------- -------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.10 751,750 7.3 years $0.10 89,917 $0.10
$0.15 516,500 7.8 years $0.15 500 $0.15
--------- ------
1,268,250 7.5 years $0.12 90,417 $0.10
========= ======
</TABLE>
The following table summarizes stock option activity for the year ending
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OF COMMON OPTION PRICE
STOCK PER SHARE
--------- ------------
<S> <C> <C>
Balance as of December 31, 1996...................... -- N/A
Granted.............................................. 1,281,250 $0.10-$0.15
Exercised............................................ (2,000) $ 0.10
Forfeited............................................ (11,000) $0.10-$0.15
--------- -----------
Balance as of December 31, 1997...................... 1,268,250 $0.10-$0.15
========= ===========
</TABLE>
F-11
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its employee stock options and the
disclosure only provisions of SFAS No. 123, "Accounting and Disclosure of
Stock-Based Compensation," ("SFAS 123"). Under APB 25, if the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation is recognized. No
compensation expense was recorded for the year ended December 31, 1997.
SFAS 123 encourages, but does not require, companies to recognize
compensation expense for stock options based on a fair value method of
accounting using valuation models designed for traded options. Had the Company
applied the provisions of SFAS 123 to the results of operations for the
Company, net earnings would not have been materially different from those
reported.
7. YEAR 2000 COMPLIANT (UNAUDITED)
The Company is engaged in the development of information systems to manage
various aspects of the Company's operations. All of these information systems
will be in compliance with year 2000 requirements.
8. SUBSEQUENT EVENT (UNAUDITED)
Subsequent to December 31, 1997, the Company received net proceeds of
approximately $130 million (before expenses) in connection with the issuance
of 260,000 Units each consisting of 13 1/2% Senior Discount Notes due 2008
(the "Notes") and Warrants to purchase 1,684,588 shares of Common Stock due
March 15, 2008. The Notes will accrete in value through March 15, 2003 (the
"Full Accretion Date") at a rate of 13 1/2% per annum compounded semi-
annually. Cash interest will neither accrue nor be payable on the Notes prior
to March 15, 1998. Thereafter, the Notes will bear interest at the rate of 13
1/2% per annum, payable in cash semi-annually in arrears on March 15 and
September 15, commencing September 15, 2003.
F-12
<PAGE>
APPENDIX A
COVAD COMMUNICATIONS GROUP, INC.
GLOSSARY OF TERMS
Access Line--A circuit that connects a telephone user (customer) to the ILEC
CO.
Analog Modem--A telecommunications device that allows the communication of
digital information over analog telephone lines and through the public
switched telephone network by translating such information in a way that
simulates and uses only the bandwidth of normal voice transmissions.
Asynchronous Transfer Mode (ATM)--A protocol that segments digital
information into 53-byte cells (5-byte header and 48-byte payload) that are
switched throughout a network over virtual circuits. Able to accommodate
multiple types of media (voice, video, data).
Bandwidth--Refers to the maximum amount of data that can be transferred
through a computer's backplane or communication channel in a given time. It is
usually measured in Hertz for analog communications and bits per second for
digital communications.
CO (Central Office)--ILEC facility where subscriber lines are joined to
switching equipment.
CLEC (Competitive Local Exchange Carrier)--Category of telephone service
provider (carrier) that offers services similar to those of the ILEC, as
allowed by recent changes in telecommunications law and regulation. A CLEC may
also provide other types of services such as long distance, Internet access
and entertainment.
CLEC Certification--Granted by a state public service commission or public
utility commission, this certification provides a telecommunications services
provider with the legal standing to offer telecommunications services in
direct competition with the ILEC and other CLECs. Such certifications are
granted on a state-by-state basis.
Communications Act of 1934--The federal legislation governing broadcast and
non-broadcast communications, including both wireless and wired telephone
service, and which established the FCC.
CPE--Customer Premise Equipment.
Digital Service 3 (DS-3)--In the digital hierarchy, this signaling standard
defines a transmission speed of 44.736 Mbps, equivalent to 28 T1 channels;
this term is often used interchangeably with T3.
FCC (Federal Communications Commission)--The U.S. government agency charged
with the oversight of communications originating in the U.S. and crossing
state lines.
Facilities-Based Provider--A telecommunications provider that delivers its
services to the end-user via owned equipment and leased (or owned) transport
in contrast to a reseller of an ILEC's services.
Frame Relay--A high-speed packet-switched data communications protocol.
HFC (Hybrid Fiber Coax)--A combination of fiber optic and coaxial cable,
which has become the primary architecture utilized by cable operators in
recent and ongoing upgrades of their systems. An HFC architecture generally
utilizes fiber optic wire between the headend and the nodes and coaxial wire
from nodes to individual end-users.
ILEC (Incumbent Local Exchange Carrier)--The local exchange carrier that was
the monopoly carrier in a region, prior to the opening of local exchange
services to competition.
ILEC Collocation--A location serving as the interface point for a CLEC
network's interconnection to that of the ILEC. Collocation can be (i)
physical, in which the CLEC places and directly maintains equipment in the
ILEC CO, or (ii) virtual, in which the CLEC leases a facility, similar to that
which it might build, to effect a presence in the ILEC CO.
A-1
<PAGE>
Interconnection (Co-Carrier) Agreement--A contract between an ILEC and a
CLEC for the interconnection of the two networks and CLEC access to ILEC UNEs.
These agreements set out the financial and operational aspects of such
interconnection and access.
ISP (Internet Service Provider)--A vendor that provides subscribers access
to the Internet.
ISDN (Integrated Services Digital Network)--ISDN provides standard
interfaces for digital communications networks and is capable of carrying
data, voice, and video over digital circuits. ISDN protocols are used
worldwide for connections to public ISDN networks or to attach ISDN devices to
ISDN-capable PBX systems (ISPBXs). Developed by the International
Telecommunications Union, ISDN includes two user-to-network interfaces: basic
rate interface (BRI) and primary rate interface (PRI). An ISDN interface
contains one signaling channel (D-channel) and a number of information
channels ("bearer" or B channels). The D-channel is used for call setup,
control, and call clearing on the B-channels. It also transports feature
information while calls are in progress. The B-channels carry the voice, data,
or video information.
IXC (Interexchange Carrier)--Facilities-based interLATA carriers (e.g., AT&T
Corp., MCI Communications Corp., Sprint Corp. and WorldCom, Inc.), who also
provide intraLATA toll service and may operate as CLECs.
Kbps (Kilobits per second)--One thousand bits per second.
LATA (Local Access and Transport Area)--A geographic area inside of which a
local telephone company can offer switched telecommunications services,
including long distance (known as toll). There are 196 LATAs in the U.S.
Mbps (Megabits Per Second)--One million bits per second.
RBOC (Regional Bell Operating Company)--One of the ILECs created by AT&T's
divestiture of its local exchange business. The remaining RBOCs include
BellSouth, Bell Atlantic Corporation, Ameritech Corporation, US West, Inc. and
SBC Communications, Inc.
T1--This is a Bell system term for a digital transmission link with a
capacity of 1.544 Mbps.
UNEs (Unbundled Network Elements)--The various portions of an ILEC's network
that a CLEC can lease for purposes of building a facilities-based competitive
network, including copper lines, CO collocation space, inter-office transport,
operational support systems, local switching and rights of way.
A-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SO-
LICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RE-
LATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OF-
FER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITA-
TION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 14
Use of Proceeds.......................................................... 27
Dividend Policy.......................................................... 27
Capitalization........................................................... 28
Selected Financial Data.................................................. 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Business................................................................. 35
Management............................................................... 50
Certain Relationships and Related Transactions........................... 56
Principal Stockholders................................................... 58
The Exchange Offer....................................................... 60
Description of the Old Notes............................................. 68
Description of the New Notes............................................. 93
Description of Capital Stock............................................. 94
Certain Federal Income Tax Considerations................................ 98
Plan of Distribution..................................................... 102
Legal Matters............................................................ 103
Independent Auditors..................................................... 103
Index to Financial Statements............................................ F-1
Glossary................................................................. A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$260,000,000
PRINCIPAL AMOUNT AT MATURITY
[LOGO]
COVAD COMMUNICATIONS GROUP, INC.
13 1/2% SENIOR DISCOUNT NOTES DUE 2008
---------------
PROSPECTUS
---------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article X of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors, employees and agents of the corporation if such person
acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding the indemnified party had no reason to believe
his conduct was unlawful.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Registrant has entered into indemnification agreements with its
directors and executive officers, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement dated March 6, 1998 among the Registrant and Bear,
Stearns & Co. Inc. and BT Alex Brown Incorporated.
3.1 Amended and Restated Certificate of Incorporation filed with the
Delaware Secretary of State on February 23, 1998.
3.2 Bylaws.
4.1 Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York, including form of Senior Discount Note Due 2008.
4.2 Registration Rights Agreement dated as of March 11, 1998 among the
Registrant and the Initial Purchasers.
4.3 Warrant Agreement dated as of March 11, 1998 between the Registrant
and The Bank of New York.
4.4 Warrant Registration Rights Agreement dated as of March 11, 1998 among
the Registrant and the Initial Purchasers.
4.5 Specimen 13 1/2% Senior Discount Note Due 2008, Series B.
4.6 Amended and Restated Stockholders Rights Agreement dated March 11,
1998 among the Registrant and certain of its stockholders.
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.
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 Ventures Partners 1996 and Intel Corporation.
10.6 Sublease dated August 15, 1997 between Intevac, Inc. and Registrant
for the Registrant's facility located in Santa Clara, California.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------
<C> <S>
24.1 Power of Attorney (included on Page II-3).
25.1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal with respect to Exchange Offer.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement.
</TABLE>
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information to be
set forth therein is not applicable or is shown in the financial statements or
Notes thereto.
ITEM 22. UNDERTAKING
1. The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of section 310 of the Trust Indenture Act ("Act") in accordance
with the rules and regulations prescribed by the SEC under section 305(b)(2)
of the Act.
2. 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.
3. The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
4. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, 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 APRIL 27, 1998.
Covad Communications Group, Inc.
/s/ Timothy Laehy
By:
----------------------------------
Timothy Laehy
Chief Financial Officer,
Treasurer 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 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, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON THE 27TH DAY OF APRIL,
1998 IN THE CAPACITIES INDICATED:
SIGNATURE TITLE
/s/ Charles McMinn Chief Financial Officer, Treasurer and
- ------------------------------------- Vice President, Finance (Principal
(CHARLES MCMINN) Financial and Accounting Officer)
/s/ Timothy Laehy Chief Financial Officer, Treasurer and
- ------------------------------------- Vice President, Finance (Principal
(TIMOTHY LAEHY) Financial and 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)
II-3
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
REGISTRATION STATEMENT ON FORM S-4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement dated March 6, 1998 among the Registrant and Bear,
Stearns & Co. Inc. and BT Alex Brown Incorporated.
3.1 Amended and Restated Certificate of Incorporation filed with the
Delaware Secretary of State on February 23, 1998.
3.2 Bylaws.
4.1 Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York, including form of Senior Discount Note Due 2008.
4.2 Registration Rights Agreement dated as of March 11, 1998 among the
Registrant and the Initial Purchasers.
4.3 Warrant Agreement dated as of March 11, 1998 between the Registrant
and The Bank of New York.
4.4 Warrant Registration Rights Agreement dated as of March 11, 1998 among
the Registrant and the Initial Purchasers.
4.5 Specimen 13 1/2% Senior Discount Note Due 2008, Series B.
4.6 Amended and Restated Stockholders Rights Agreement dated March 11,
1998 among the Registrant and certain of its stockholders.
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.
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 Ventures Partners 1996 and Intel Corporation.
10.6 Sublease dated August 15, 1997 between Intevac, Inc. and Registrant
for the Registrant's facility located in Santa Clara, California.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (included on Page II-3).
25.1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal with respect to Exchange Offer.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement.
</TABLE>
<PAGE>
EXHIBIT 1.1
COVAD COMMUNICATIONS GROUP, INC.
260,000 UNITS CONSISTING OF
$260,000,000 PRINCIPAL AMOUNT AT MATURITY OF 13 1/2% SENIOR DISCOUNT NOTES
DUE 2008
AND
WARRANTS TO PURCHASE 1,684,588 SHARES OF COMMON STOCK
PURCHASE AGREEMENT
MARCH 6, 1998
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
260,000 Units Consisting of
$260,000,000 Principal Amount at Maturity of 13 1/2% Senior Discount Notes
due 2008
and
Warrants to Purchase 1,684,588 Shares of Common Stock
PURCHASE AGREEMENT
March 6, 1998
New York, New York
Bear, Stearns & Co. Inc.
BT Alex. Brown Incorporated
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies & Gentlemen:
Covad Communications Group, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to Bear, Stearns & Co. Inc. and BT Alex.
-------
Brown Incorporated (together, the "Initial Purchasers") an aggregate of 260,000
------------------
units (the "Units") consisting in the aggregate of $260,000,000 aggregate
-----
principal amount at maturity of 13 1/2% Senior Discount Notes due 2008 (the
"Senior Discount Notes") and Warrants (the "Warrants") initially exercisable to
--------------------- --------
purchase 1,684,588 shares of common stock, par value $.001 per share (the
"Common Stock"), of the Company (the "Warrant Shares"), subject to the terms and
------------ --------------
conditions set forth herein. Each Unit will consist of (a) $1,000 principal
amount at maturity of the Senior Discount Notes and (b) one Warrant, initially
exercisable to purchase 6.4792 shares of Common Stock. The Senior Discount
Notes will be issued pursuant to an indenture (the "Indenture"), to be dated the
---------
Closing Date (as defined below), between the Company and The Bank of New York,
as trustee (the "Trustee"). The Warrants will be issued pursuant to a warrant
-------
agreement (the "Warrant Agreement") to be dated the Closing Date, between the
-----------------
Company and The Bank of New York, as warrant agent (the "Warrant Agent"). The
-------------
Senior Discount Notes and the Warrants comprising each Unit will not be
separable until the earlier of (i) the 90 days from the issue date thereof, (ii)
such earlier date as the Initial Purchasers may, in their discretion, deem
appropriate, (iii) in the event a Change of Control (as defined in the
Indenture) occurs, the date the Company mails notice thereof to holders of
Senior Discount Notes, (iv) the date on which the Exchange Offer (as defined
below) is consummated and (v) the date on which the Shelf Registration (as
defined below) is declared effective (such date, the "Separation Date"). The
---------------
Units, the Senior Discount Notes and the Warrants are more fully described in
the Offering Memorandum referred to below.
1. Issuance of Securities. The Company proposes to, upon the terms and
----------------------
subject to the conditions set forth herein, issue and sell to the Initial
Purchasers the Units. The Senior Discount Notes
<PAGE>
forming a part of the Units and the Exchange Notes (as defined below) issuable
in exchange therefore are hereinafter collectively referred to as the Notes. The
Units, the Notes and the Warrants are collectively referred to herein as the
"Securities". Capitalized terms used but not otherwise defined herein shall have
----------
the meanings given to such terms in the Indenture.
Upon original issuance thereof, and until such time as the same is no
longer required under the applicable requirements of the Securities Act of 1933,
as amended (the "Securities Act"), the Units, the Notes, the Warrants and the
--------------
Warrant Shares (and all securities issued in exchange or in substitution
therefor) shall bear the legends required to be set forth in the Indenture.
2. Offering. The Units will be offered and sold to the Initial
--------
Purchasers pursuant to an exemption from the registration requirements under the
Securities Act. The Company has prepared a preliminary offering memorandum,
dated February 23, 1998 (the "Preliminary Offering Memorandum"), and a final
-------------------------------
offering memorandum, dated March 6, 1998 (the "Offering Memorandum"), relating
-------------------
to the Company and the Units.
The Initial Purchasers have advised the Company that the Initial
Purchasers will make offers to resell (the "Exempt Resales") the Units on the
--------------
terms set forth in the Offering Memorandum, as amended or supplemented, solely
to persons whom any of the Initial Purchasers reasonably believe to be
"qualified institutional buyers", as defined in Rule 144A under the Securities
Act ("QIBs"), and to non-U.S. persons outside the United States within the
----
meaning of Regulation S under the Securities Act ("Regulation S Investors").
----------------------
Such QIBs and Regulation S Investors shall be referred to herein as the
"Eligible Purchasers". The Initial Purchasers will offer the Units to such
-------------------
Eligible Purchasers initially at a purchase price equal to 51.962% of the amount
thereof.
Holders (including subsequent transferees) of the Notes will have the
registration rights set forth in the registration rights agreement relating
thereto (the "Registration Rights Agreement"), and holders (including subsequent
-----------------------------
transferees) of the Warrants and Warrant Shares will have the registration
rights set forth in the registration rights agreement relating thereto (the
"Warrant Registration Rights Agreement"), to be dated the Closing Date for so
-------------------------------------
long as such Notes, Warrants or any Warrant Shares constitute "Transfer
Restricted Securities" (as defined in such agreements). Pursuant to the
Registration Rights Agreement, the Company will agree to file with the
Securities and Exchange Commission (the "Commission"), under the circumstances
----------
set forth therein, (i) a registration statement under the Securities Act (the
"Exchange Offer Registration Statement") with respect to an offer to exchange
-------------------------------------
(the "Exchange Offer") the Notes for a new issue of debt securities of the
--------------
Company (the "Exchange Notes") to be offered in exchange for the Notes and (ii)
--------------
under certain circumstances, a shelf registration statement pursuant to Rule 415
under the Securities Act (the "Shelf Registration Statement") relating to the
----------------------------
resale by certain holders of the Notes, and to use its best efforts to cause
such Registration Statements to be declared effective and consummate the
Exchange Offer. This Agreement, the Securities, the Indenture, the Warrant
Agreement, the Registration Rights Agreement and the Warrant Registration Rights
Agreement are hereinafter sometimes referred to collectively as the "Operative
---------
Documents". The Company has also entered into that certain Series C Preferred
- ---------
Stock and Warrant Subscription Agreement dated as of February 20, 1998 (the
"Subscription Agreement"), as modified by that certain side letter dated
February 21, 1998 (collectively, the "Subscription Agreement"), pursuant
-2-
<PAGE>
to which (i) two investors of the Company have agreed to purchase equity
securities of the Company within twelve months after the Closing and (ii)
another investor of the Company has agreed to purchase equity securities of the
Company at the Closing (the "Stock Purchase"). Such investors are herein
collectively referred to as the "Equity Investors".
3. Purchase, Sale and Delivery.
---------------------------
(a) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to its terms and conditions, the
Company agrees to issue and sell to each Initial Purchaser, and each Initial
Purchaser agrees severally and not jointly to purchase from the Company, that
number of Units set forth opposite such Initial Purchasers name on Schedule I
hereto. The purchase price for the Units shall be $501.43 per Unit.
(b) Delivery of, and payment of the purchase price for, the Units
shall be made at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page
Mill Road, Palo Alto, California 94304, or such other location as may be
mutually acceptable. Such delivery and payment shall be made at 10:00 a.m., New
York City time, on March 11, 1998 or at such other time as shall be agreed upon
by the Initial Purchasers and the Company. The time and date of such delivery
and payment are herein called the "Closing Date".
------------
(c) Units sold to Regulation S Investors will initially be
represented by one or more temporary Units in global definitive, fully
registered form without interest coupons (each a "Regulation S Global Unit")
------------------------
registered in the name of Cede & Co., as nominee of the Depository Trust Company
("DTC"), for the accounts of the Euroclear System ("Euroclear") and Cedel Bank,
--- ---------
societe anonyme ("Cedel"), having an aggregate principal amount at maturity
-----
corresponding to the aggregate principal amount at maturity of the Units sold to
Regulation S Investors. Units sold to QIBs will be represented by one or more
permanent global Units in definitive, fully registered form without interest
coupons (each a "Restricted Global Unit", and together with the Regulation S
----------------------
Global Unit, the "Global Units") registered in the name of Cede & Co., as
------------
nominee of DTC, having an aggregate amount corresponding to the aggregate amount
of the Units sold to QIBs. Each Global Unit will be comprised of one or more
global certificates for the Notes (the "Global Notes") and one or more global
------------
certificates for the Warrants (the "Global Warrants" and, together with the
---------------
Global Notes and Global Units, the "Global Securities"). The Global Securities
-----------------
shall be delivered by the Company to the Initial Purchasers (or as the Initial
Purchasers direct), against payment by the Initial Purchasers of the purchase
price therefor, by wire transfer of immediately available funds to an account
specified by the Company or as the Company may direct in writing; provided that
the Company shall give at least two business days' prior written notice to the
Initial Purchasers of the information required to effect such wire transfers.
The Global Units, Global Notes and Global Warrants shall be made available to
the Initial Purchasers for inspection not later than 10:00 a.m., New York City
time, on the business day immediately preceding the Closing Date.
-3-
<PAGE>
4. Agreements of the Company. The Company covenants and agrees with each
-------------------------
of the Initial Purchasers as follows:
(a) To advise the Initial Purchasers promptly and, if requested by
the Initial Purchasers, confirm such advice in writing, (i) of the issuance by
any state securities commission of any stop order suspending the qualification
or exemption from qualification of any Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purpose by any state
securities commission or other regulatory authority and (ii) of the happening of
any event that, in the reasonable opinion of counsel to the Company, makes any
statement of a material fact made in the Preliminary Offering Memorandum or the
Offering Memorandum untrue in any material respect or that requires the making
of any additions to or changes in the Preliminary Offering Memorandum or the
Offering Memorandum in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading in any material respect.
The Company shall use its best efforts to prevent the issuance of any stop order
or order suspending the qualification or exemption of any Securities under any
state securities or Blue Sky laws and, if at any time any state securities
commission or other regulatory authority shall issue an order suspending the
qualification or exemption of any Securities under any state securities or Blue
Sky laws, the Company shall use its best efforts to obtain the withdrawal or
lifting of such order at the earliest possible time.
(b) To furnish the Initial Purchasers and those persons identified by
the Initial Purchasers to the Company, without charge, as many copies of the
Preliminary Offering Memorandum and the Offering Memorandum, and any amendments
or supplements thereto, as the Initial Purchasers may reasonably request. The
Company consents to the use of the Preliminary Offering Memorandum and the
Offering Memorandum, and any amendments and supplements thereto required
pursuant hereto, by the Initial Purchasers in connection with Exempt Resales.
(c) Not to amend or supplement the Preliminary Offering Memorandum or
the Offering Memorandum prior to the Closing Date unless the Initial Purchasers
shall previously have been advised thereof and shall not have objected thereto
within a reasonable time after being furnished a copy of the applicable
amendment or supplement. The Company shall promptly prepare, upon the Initial
Purchasers' request, any amendment or supplement to the Preliminary Offering
Memorandum or the Offering Memorandum that may be necessary or advisable in
connection with Exempt Resales.
(d) If, after the date hereof and prior to consummation of any Exempt
Resale, any event shall occur as a result of which, in the judgment of the
Company or in the reasonable opinion of either counsel to the Company or counsel
to the Initial Purchasers, it becomes necessary or advisable to amend or
supplement the Preliminary Offering Memorandum or Offering Memorandum in order
to make the statements therein, in the light of the circumstances when such
Offering Memorandum is delivered to an Eligible Purchaser which is a prospective
purchaser, not misleading, or if it is necessary or advisable to amend or
supplement the Preliminary Offering Memorandum or Offering Memorandum to comply
with applicable law, (i) to notify the Initial Purchasers of such occurrence and
(ii) forthwith to prepare an appropriate amendment or supplement to such
Offering Memorandum so that the statements therein as so amended or supplemented
will not, in the light of the circumstances when it is so delivered, be
misleading, or so that such Offering Memorandum will comply with applicable law.
-4-
<PAGE>
(e) To cooperate with the Initial Purchasers and counsel to the
Initial Purchasers in connection with the qualification or registration of the
Units under the securities or Blue Sky laws of such jurisdictions as the Initial
Purchasers may reasonably request and to continue such qualification in effect
so long as required for the Exempt Resales; provided, however that the Company
shall not be required in connection therewith to register or qualify as a
foreign corporation where it is not now so qualified or to take any action that
would subject it to service of process in suits or taxation, in each case, other
than as to matters and transactions relating to the Preliminary Offering
Memorandum, the Offering Memorandum or Exempt Resales, in any jurisdiction where
it is not now so subject.
(f) Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement becomes effective or is terminated, to pay all
costs, expenses, fees and taxes incident to the performance of the obligations
of the Company hereunder, including in connection with: (i) the preparation,
printing, filing and distribution of the Preliminary Offering Memorandum and the
Offering Memorandum (including, without limitation, financial statements) and
all amendments and supplements thereto required pursuant hereto, (ii) the
issuance, transfer and delivery by the Company of the Securities to the Initial
Purchasers, (iii) the qualification or registration of the Securities for offer
and sale under the securities or Blue Sky laws of the several states (including,
without limitation, the cost of preparing, printing and mailing a preliminary
and final Blue Sky Memorandum and the reasonable fees and disbursements of
counsel to the Initial Purchasers relating thereto), (iv) furnishing such copies
of the Preliminary Offering Memorandum and the Offering Memorandum, and all
amendments and supplements thereto, as may be requested by the Initial
Purchasers for use in connection with Exempt Resales, (v) the preparation of
certificates for the Securities, (vi) the fees, disbursements and expenses of
the Company's counsel and accountants, (vii) all expenses and listing fees in
connection with the application for quotation of the Securities in the National
Association of Securities Dealers, Inc. ("NASD") Automated Quotation System -
----
PORTAL ("PORTAL"), (viii) all fees and expenses (including fees and expenses of
------
counsel to the Company) of the Company in connection with the approval of the
Securities by DTC for "book-entry" transfer, (ix) the reasonable fees and
expenses of the Trustee and its counsel in connection with the Indenture and the
Notes, (x) the reasonable fees and expenses of the Warrant Agent and its counsel
in connection with the Warrant Agreement and the Warrants, (xi) the performance
by the Company of its other obligations under this Agreement and the other
Operative Documents and (xii) "roadshow" travel and other expenses incurred in
connection with the marketing and sale of the Units, the Notes and the Warrants.
(g) To use the proceeds from the sale of the Units in the manner
described in the Offering Memorandum under the caption "Use of Proceeds".
(h) Not to voluntarily claim, and to resist actively any attempts to
claim, the benefit of any usury laws against the holders of any Securities.
(i) To do and perform all things required to be done and performed
under this Agreement by it prior to or after the Closing Date and to satisfy all
conditions precedent on its part to the delivery of the Units.
-5-
<PAGE>
(j) Not to sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the Securities Act) that
would be integrated with the sale of the Units in a manner that would require
the registration under the Securities Act of the sale to the Initial Purchasers,
the QIBs or the Regulation S Investors of the Units, the Notes or the Warrants
or to take any other action that would result in the Exempt Resales not being
exempt from registration under the Securities Act.
(k) For so long as any of the Securities remain outstanding and
during any period in which the Company is not subject to Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to make
------------
available upon request to any beneficial owner of Units, Notes or Warrants in
connection with any sale thereof and any prospective purchaser of such Units,
Notes or Warrants from such beneficial owner, the information required by Rule
144A(d)(4) under the Securities Act.
(l) To comply with all of its agreements set forth in the
Registration Rights Agreement and the Warrant Registration Rights Agreement and
all agreements set forth in the representation letters of the Company to DTC
relating to the approval of the Securities by DTC for "'book-entry" transfer.
(m) To use its best efforts to effect the designation of the
Securities as eligible for PORTAL and to obtain approval of the Securities by
DTC for "book-entry" transfer.
(n) For so long as any of the Securities remain outstanding, to
deliver without charge to each of the Initial Purchasers, promptly upon request,
copies of (i) all reports or other publicly available information that the
Company shall mail or otherwise make available to its securityholders generally
and (ii) all reports, financial statements and proxy or information statements
filed by the Company with the Commission or any national securities exchange and
other information made publicly available by the Company, including without
limitation, press releases.
(o) Prior to the Closing Date, to furnish to each of the Initial
Purchasers, as soon as they have been prepared in the ordinary course by the
Company, copies of any consolidated financial statements or any unaudited
interim financial statements of the Company for any period subsequent to the
periods covered by the financial statements appearing in the Offering
Memorandum.
(p) Not to take, directly or indirectly, any action designed to, or
that might reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities.
(q) Not to distribute any Preliminary Offering Memorandum, Offering
Memorandum or other offering material in connection with the offering and sale
of the Securities, except as permitted by the Securities Act.
(r) To comply with the agreements in the Indenture, the Warrant
Agreement, the Registration Rights Agreement, the Warrant Registration Rights
Agreement and any other Operative Document
-6-
<PAGE>
(s) To reserve and continue to reserve as long as any Warrants remain
outstanding, a sufficient number of shares of Common Stock for issuance upon
exercise of the Warrants.
(t) To cause each certificate for a Note to bear the legend contained
in the Indenture for the time period and upon the other terms stated in the
Indenture.
(u) To file with the Commission, not later than 15 days after the
Closing Date, five copies of a notice on Form D under the Securities Act (one of
which win be manually signed by a person duly authorized by the Company); to
otherwise comply with the requirements of Rule 503 under the Securities Act; and
to furnish promptly to the Initial Purchasers evidence of each such required
timely filing (including a copy thereof).
5. Representations and Warranties of the Company; Representations,
---------------------------------------------------------------
Warranties and Covenants of the Initial Purchasers
- --------------------------------------------------
(a) The Company represents and warrants to each of the Initial
Purchasers that:
(i) The Preliminary Offering Memorandum and the Offering
Memorandum have been prepared in connection with the Exempt Resales. The
Preliminary Offering Memorandum and the Offering Memorandum do not, and any
supplement or amendment to them will not, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties contained
in this paragraph shall not apply to statements in or omissions from the
Preliminary Offering Memorandum and the Offering Memorandum (or any supplement
or amendment thereto) made in reliance upon and in conformity with information
relating to the Initial Purchasers furnished to the Company in writing by the
Initial Purchasers expressly for use therein. No stop order preventing the use
of the Preliminary Offering Memorandum or the Offering Memorandum, or any
amendment or supplement thereto, or any order asserting that any of the
transactions contemplated by this Agreement are subject to the registration
requirements of the Securities Act, has been issued.
(ii) When the Units, the Notes and the Warrants are issued and
delivered pursuant to this Agreement, no Unit, Note or Warrant will be of the
same class (within the meaning of Rule 144A under the Securities Act) as
securities of the Company that are listed on a national securities exchange
registered under Section 6 of the Exchange Act or that are quoted in a United
States automated inter-dealer quotation system.
(iii) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and has corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Offering Memorandum. Each of the Company and each
subsidiary is duly qualified as a foreign corporation to transact business and
is in good standing in the State of California and each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such jurisdictions
(other than the State of California)
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<PAGE>
where the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries, considered as
one entity (any such change is called a "Material Adverse Change"). The Company
does not own or control, directly or indirectly, any corporation, association or
other entity other than Covad Communications Company, a California corporation,
and DIECA Communications, Inc., a Virginia corporation. The Company has obtained
CLEC regulatory approval in the States of California, Illinois, Massachusetts,
New York, Oregon and Washington.
(iv) All of the outstanding shares of capital stock of the
Company have been duly authorized, validly issued, and are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights. At December 31, 1997, after giving effect to the issuance and sale of
the Units pursuant hereto, the Equity Commitment and the Stock Purchase, and the
application of the net proceeds from the sale of the Units, the Equity
Commitment and the Stock Purchase, (as defined in the Offering Memorandum), the
Company had the pro forma consolidated capitalization as set forth in the
Offering Memorandum under the caption "Capitalization".
(v) All of the outstanding capital stock of each subsidiary of
the Company is owned, directly or indirectly, by the Company, free and clear of
any security interest, claim, lien, limitation on voting rights or encumbrance;
and all such securities have been duly authorized, validly issued, and are fully
paid and nonassessable and were not issued in violation of any preemptive or
similar rights.
(vi) Except as disclosed in the Offering Memorandum, there are
not currently, and will not be as a result of the Offering, any outstanding
subscriptions, rights, warrants, calls, commitments of sale or options to
acquire, or instruments convertible into or exchangeable for, any capital stock
or other equity interest of the Company or any of its subsidiaries.
(vii) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and the other Operative Documents and to consummate the transactions
contemplated hereby and thereby, including, without limitation, the corporate
power and authority to issue, sell and deliver the Securities as provided herein
and therein and the power to effect the Use of Proceeds as described in the
Offering Memorandum.
(viii) This Agreement has been duly and validly authorized,
executed and delivered by the Company and is the legally valid and binding
agreement of the Company, enforceable against it in accordance with its terms,
except insofar as indemnification and contribution provisions may be limited by
applicable law or equitable principles and subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization or similar laws affecting the
rights of creditors generally and subject to general principles of equity.
(ix) The Indenture has been duly and validly authorized by the
Company and, when duly executed and delivered by the Company, will be the
legally valid and binding obligation of
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<PAGE>
the Company, enforceable against the Company in accordance with its terms,
subject to (A) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors generally, (B)
general principles of equity (whether considered in a proceeding in equity or at
law) or (C) applicable public policy considerations. The Offering Memorandum
contains a fair summary of the principal term of the Indenture.
(x) The Subscription Agreement has been duly and validly
authorized by the Company and, when duly executed and delivered by the Company,
will be the legally valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to (A) applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or similar laws
affecting the rights of creditors generally, (B) and subject to general
principles of equity (whether considered in a proceeding in equity or at law) or
(C) applicable public policy considerations. The Offering Memorandum contains a
fair summary of the principal terms of the Subscription Agreement.
(xi) The Units have been duly and validly authorized by the
Company for issuance and sale to the Initial Purchasers pursuant to the terms of
this Agreement.
(xii) The Senior Discount Notes have been duly and validly
authorized by the Company for issuance and sale to the Initial Purchasers by the
Company pursuant to this Agreement and, when issued and authenticated in
accordance with the terms of the Indenture and delivered against payment
therefor in accordance with the terms hereof and thereof, will be the legally
valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Indenture,
subject to (A) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors generally, (B)
general principles of equity (whether considered in a proceeding in equity or at
law) or (C) applicable public policy considerations. The Offering Memorandum
contains a fair summary of the terms of the Senior Discount Notes.
(xiii) The Exchange Notes have been duly and validly authorized
for issuance by the Company and, when issued and authenticated in accordance
with the terms of the Exchange Offer and the Indenture, will be the legally
valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Indenture,
subject to (A) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors generally, (B)
general principles of equity (whether considered in a proceeding in equity or at
law) or (C) applicable public policy considerations. The Offering Memorandum
contains a fair summary of the terms of the Exchange Notes.
(xiv) The Registration Rights Agreement has been duly and
validly authorized by the Company and, when duly executed and delivered by the
Company, win be the legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to (A)
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally, (B) general principles
of equity (whether considered in a proceeding in equity or at law) or (C)
applicable public policy considerations. The Offering Memorandum contains a fair
summary of the principal terms of the Registration Rights Agreement.
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<PAGE>
(xv) The Warrant Agreement has been duly and validly
authorized by the Company, and, when duly executed and delivered by the Company,
will be the legally valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to (A) applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or similar laws
affecting the rights of creditors generally, (B) general principles of equity
(whether considered in a proceeding in equity or at law) or (C) applicable
public policy considerations. The Offering Memorandum contains a fair summary of
the principal terms of the Warrant Agreement.
(xvi) The Warrants have been duly and validly authorized for
issuance and sale to the Initial Purchasers by the Company pursuant to this
Agreement and, when issued and countersigned in accordance with the terms of the
Warrant Agreement and delivered against payment therefor in accordance with the
terms hereof and thereof, will be the legally valid and binding obligations of
the Company, enforceable against the Company in accordance with their terms and
entitled to the benefits of the Warrant Agreement, subject to (A) applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or similar laws
affecting the rights of creditors generally, (B) general principles of equity
(whether considered in a proceeding in equity or at law) or (C) applicable
public policy considerations. The Offering Memorandum contains a fair summary of
the principal terms of the Warrants.
(xvii) The Warrants will be exercisable for Warrant Shares in
accordance with the terms of the Warrant Agreement. The Warrant Shares have been
duly authorized for issuance by the Company and, when issued and paid for upon
exercise of the Warrants in accordance with the terms thereof, will be validly
issued, fully paid and nonassessable, free of any preemptive or similar rights.
The Company has reserved sufficient shares of Common Stock for issuance upon the
exercise of the Warrants.
(xviii) The Warrant Registration Rights Agreement has been duly
and validly authorized by the Company and, when duly executed and delivered by
the Company, will be the legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to (A)
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally, (B) general principles
of equity (whether considered in a proceeding in equity or at law) or (C)
applicable public policy considerations. The Offering Memorandum contains a fair
summary of the principal terms of the Warrant Registration Rights Agreement.
(xix) Neither the Company nor any of its subsidiaries is, or,
after giving effect to the offering of the Securities, will be (A) in violation
of its charter or bylaws, (B) in default in the performance of any bond,
debenture, note, indenture, mortgage, deed of trust or other agreement or
instrument to which it is a party or by which it is bound or to which any of its
properties is subject, or (C) in violation of any local, state or Federal law,
statute, ordinance, rule, regulation, requirement, judgment or court decree
(including, without limitation, the Communications Act and the rules and
regulations of the FCC and environmental laws, statutes, ordinances, rules,
regulations, judgments or court decrees) applicable to the Company, its
subsidiaries or any of their assets or properties (whether owned or leased)
other than, in the case of clauses (B) and (C), any default or violation that
could not reasonably be expected to (x) individually or in the aggregate, result
in a material adverse effect on the
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<PAGE>
properties, business, results of operations, condition (financial or otherwise),
affairs or prospects of the Company and its subsidiaries, taken as a whole, (y)
interfere with or adversely affect the issuance or marketability of the Units
pursuant hereto or (z) in any manner draw into question the validity of this
Agreement or any other Operative Document or the transactions described in the
Offering Memorandum under the caption "Use of Proceeds" (any of the events set
forth in clauses (x), (y) or (z), a "Material Adverse Effect"). There exists no
condition that, with notice, the passage of time or otherwise, would constitute
a default under any such document or instrument, except as disclosed in the
Offering Memorandum, except for any such condition which would not reasonably be
expected to result in a Material Adverse Effect.
(xx) None of (A) the execution, delivery or performance by the
Company of this Agreement and the other Operative Documents, (B) the issuance
and sale of the Securities and (C) consummation by the Company of the
transactions contemplated hereby violate, conflict with or constitute a breach
of any of the terms or provisions of, or a default under (or an event that with
notice or the lapse of time, or both, would constitute a default), or require
consent which has not been obtained under, or result in the imposition of a lien
or encumbrance other than a "Permitted Lien", as defined in the Indenture on any
properties of the Company or any of its subsidiaries, or an acceleration of any
indebtedness of the Company or any of its subsidiaries pursuant to, (i) the
charter or bylaws of the Company or any of its subsidiaries, (ii) any bond,
debenture, note, indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or its subsidiaries or their properties is or may be bound,
(iii) any statute, rule or regulation applicable to the Company or any of its
subsidiaries or any of their assets or properties or (iv) any judgment, order or
decree of any court or governmental agency or authority having jurisdiction over
the Company or any of its subsidiaries or any of their assets or properties,
except in the case of clauses (ii), (iii) and (iv) for such violations,
conflicts, breaches, defaults, consents, impositions of liens or accelerations
that (x) would not singly, or in the aggregate, have a Material Adverse Effect
or (y) which are disclosed in the Offering Memorandum. Other than as described
in the Offering Memorandum, no consent, approval, authorization or order of, or
filing, registration, qualification, license or permit of or with, (A) any court
or governmental agency, body or administrative agency (including, without
limitation, the FCC) or (B) any other person is required for (1) the execution,
delivery and performance by the Company of this Agreement and the other
Operative Documents, (2) the issuance and sale of the Securities and the
transactions contemplated hereby and thereby, except (x) such as have been
obtained and made (or, in the case of the Registration Rights Agreement, will be
obtained and made) under the Securities Act, the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act") and state securities or Blue Sky laws and
-------------------
regulations or such as may be required by the NASD or (y) where the failure to
obtain any such consent, approval, authorization or order of, or filing
registration, qualification, license or permit would not reasonably be expected
to result in a Material Adverse Effect.
(xxi) There are no legal or governmental actions, suits or
proceedings pending or, to Company's knowledge, threatened (i) against or
affecting the Company or any of its subsidiaries, (ii) which has as the subject
thereof any officer or director (in any such capacity) of, or property owned or
leased by, the Company or any of its subsidiaries or (iii) relating to
environmental or discrimination matters, where in any such case (A) there is a
reasonable possibility that such action, suit or proceeding might be determined
adversely to the Company or such subsidiary and (B) any such action, suit or
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<PAGE>
proceeding, if so determined adversely, would reasonably be expected to result
in a Material Adverse Change or adversely affect the consummation of the
transactions contemplated by this Agreement. No material labor dispute with the
employees of the Company or any of its subsidiaries exists or, to the best of
the Company's knowledge, is threatened or imminent.
(xxii) No action has been taken and no statute, rule, regulation
or order has been enacted, adopted or issued by any governmental agency that
prevents the issuance of the Securities or prevents or suspends the use of the
Offering Memorandum; no injunction, restraining order or order of any nature by
a federal or state court of competent jurisdiction has been issued that prevents
the issuance of the Securities, prevents or suspends the sale of the Securities
in any jurisdiction referred to in Section 4(e) hereof or that could adversely
affect the consummation of the transactions contemplated by this Agreement, the
Operative Documents or the Offering Memorandum; and every request of any
securities authority or agency of any jurisdiction for additional information
has been complied with in all material respects.
(xxiii) Except as would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Change, (i) to the best
of the Company's knowledge, neither the Company nor any of its subsidiaries is
in violation of any federal, state, local or foreign law or regulation relating
to pollution or protection of human health or the environment (including,
without limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened releases
of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum and petroleum products (collectively, "Materials of
Environmental Concern"), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern (collectively, "Environmental Laws"), which
violation includes, but is not limited to, noncompliance with any permits or
other governmental authorizations required for the operation of the business of
the Company or its subsidiaries under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, nor has the Company or any
of its subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges that
the Company or any of its subsidiaries is in violation of any Environmental Law;
(ii) there is no claim, action or cause of action filed with a court or
governmental authority, no investigation with respect to which the Company or
any of its subsidiaries has received written notice, and no written notice by
any person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resources damages, property
damages, personal injuries, attorneys' fees or penalties arising out of, based
on or resulting from the presence, or release into the environment, of any
Material of Environmental Concern at any location owned, leased or operated by
the Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any of its subsidiaries or any person or
entity whose liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation of
law; and (iii) to the best of the Company's knowledge, there are no past or
present actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could result
in a violation of any Environmental Law or form the basis of a potential
Environmental Claim against
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<PAGE>
the Company or any of its subsidiaries or against any person or entity whose
liability for any Environmental Claim the Company or any of its subsidiaries has
retained or assumed either contractually or by operation of law.
(xxiv) The Company and each of its subsidiaries has (i) good and
marketable title to all of the properties and assets described in the Offering
Memorandum or the financial statements included in the Offering Memorandum as
owned by it, free and clear of all liens, charges, encumbrances and
restrictions, except such as are described in the Offering Memorandum or as
would not have a Material Adverse Effect, (ii) peaceful and undisturbed
possession to the extent described in the Offering Memorandum under all material
leases to which it is a party as lessee, (iii) all licenses, certificates,
permits, authorizations, approvals, franchises and other rights from, and has
made all declarations and filings with, all federal, state and local authorities
(including, without limitation, the FCC), all self-regulatory authorities and
all courts and other tribunals (each an "Authorization") necessary to engage in
-------------
the business conducted by the Company and its subsidiaries in the manner
described in the Offering Memorandum, except as described in the Offering
Memorandum and except insofar as the failure to obtain any such Authorization
would not reasonably be expected to have a Material Adverse Effect, and no such
Authorization contains a materially burdensome restriction that is not disclosed
in the Offering Memorandum and (iv) not received any notice that any
governmental body or agency is considering limiting, suspending or revoking any
such Authorization. Except where the failure to be in full force and effect
would not have a Material Adverse Effect, an such Authorizations are valid and
in fun force and effect and the Company and each of its subsidiaries is in
compliance in all material respects with the terms and conditions of all such
Authorizations and with the rules and regulations of the regulatory authorities
having jurisdiction with respect thereto. All material leases to which the
Company and each of its subsidiaries is a party are valid and binding and no
default by the Company or any of its subsidiaries has occurred and is continuing
thereunder and, to the best knowledge of the Company, no material defaults by
the landlord are existing under any such lease that could reasonably be expected
to result in a Material Adverse Effect.
(xxv) The Company and its subsidiaries own, possess or have the
right to employ sufficient patents, patent rights, licenses (including all FCC,
state, local or other jurisdictional regulatory licenses), inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, software, systems or
procedures), trademarks, service marks and trade names, inventions, computer
programs, technical data and information (collectively, the "Intellectual
------------
Property Rights") reasonably necessary to conduct their businesses as now
- ---------------
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a Material Adverse Change. The Intellectual Property
Rights presently employed by the Company and its subsidiaries in connection with
the businesses now operated by them or which are proposed to be operated by them
are owned, to the best of the Company's knowledge, free and clear of and without
violating any right, claimed right, charge, encumbrance, pledge, security
interest, restriction or lien of any kind of any other person and neither the
Company nor any of its subsidiaries has received any notice of infringement of
or conflict with asserted rights of others with respect to any of the foregoing
except as would not reasonably be expected to have a Material Adverse Effect.
The use of the Intellectual Property in connection with the business and
operations of the Company and its subsidiaries does not
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<PAGE>
infringe on the rights of any person, except as could not reasonably be expected
to have a Material Adverse Effect.
(xxvi) None of the Company or any of its subsidiaries, or, or
to the best knowledge of the Company, any of their respective officers,
directors, partners, employees, agents or affiliates or any other person acting
on behalf of the Company or any of its subsidiaries has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, official or
employee of any governmental agency (domestic or foreign), instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is or may be in a position
to help or hinder the business of the Company or any of its subsidiaries (or
assist the Company or any of its subsidiaries in connection with any actual or
proposed transaction) which (i) might subject the Company, or any other
individual or entity to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (ii) if not given
in the past, might have had a Material Adverse Effect or (iii) if not continued
in the future, might have a Material Adverse Effect.
(xxvii) All material tax returns required to be filed by the
Company and its subsidiaries in all jurisdictions have been so filed. All taxes,
including withholding taxes, penalties and interest, assessments, fees and other
charges due or claimed to be due from such entities or that are due and payable
have been paid, other than those being contested in good faith and for which
adequate reserves have been provided or those currently payable without penalty
or interest. To the knowledge of the Company, there are no material proposed
additional tax assessments against the Company or any of its subsidiaries or the
assets or property of the Company or any of its subsidiaries. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements included in the Offering Memorandum in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has not been
finally determined.
(xxviii) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act").
----------------------
(xxix) Except as disclosed in the Offering Memorandum, there
are no holders of securities of the Company or any of its subsidiaries who, by
reason of the execution by the Company of this Agreement or any other Operative
Document to which it is a party or the consummation by the Company or any of its
subsidiaries of the transactions contemplated hereby or thereby, have the right
to request or demand that the Company or any of its subsidiaries register under
the Securities Act or analogous foreign laws and regulations securities held by
them, other than such that have been duly waived.
(xxx) The Company and its subsidiaries each maintain a system
of internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as
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necessary to permit preparation of financial statements in conformity in all
material respects with generally accepted accounting principles and to maintain
accountability for assets; and (iii) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(xxxi) Each of the Company and its subsidiaries are insured by
recognized, financially sound institutions with policies in such amounts and
with such deductibles and covering such risks as are customary for similarly
situated businesses including, but not limited to, policies covering real and
personal property owned or leased by the Company and its subsidiaries against
theft, damage, destruction and acts of vandalism. The Company has no reason to
believe that it or any subsidiary win not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain comparable
coverage from similar institutions as may be necessary or appropriate to conduct
its business as now conducted and at a cost that would not result in a Material
Adverse Change.
(xxxii) The Company has not (i) taken, directly or indirectly, any
action designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Units, the Notes or the Warrants or (ii)
since the date of the Preliminary Offering Memorandum (A) sold, bid for,
purchased or paid any person any compensation for soliciting purchases of, the
Units, the Notes or the Warrants or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(xxxiii) No registration under the Securities Act of the Units, the
Notes or the Warrants is required for the sale of the Units to the Initial
Purchasers as contemplated hereby or for the Exempt Resales assuming (i) that
the purchasers who buy the Units in the Exempt Resales are either QIBs or
Regulation S Investors and (ii) the accuracy of the Initial Purchasers'
representations contained herein. No form of general solicitation or general
advertising was used by the Company or any of its representatives (other than
the Initial Purchasers, their employees, agents or any other persons acting on
their behalf, as to which the Company makes no representation or warranty) in
connection with the offer and sale of any of the Securities in connection with
Exempt Resales, including, but not limited to, articles, notices or other
communications published in any newspaper, magazine, or similar medium or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising. No
securities of the same respective classes as the Securities have been issued and
sold by the Company within the six-month period immediately prior to the date
hereof.
(xxxiv) The Company and its subsidiaries and any "employee benefit
plan" (as defined under the Employee Retirement Income Security Act of 1974, as
amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations described in
Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as
amended, and the regulations and published interpretations thereunder (the
"Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under
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<PAGE>
ERISA) has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfunded benefit liabilities" (as defined under ERISA). Neither the
Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(xxxv) Each of the Preliminary Offering Memorandum and the Offering
Memorandum, as of its date, and each amendment or supplement thereto read in
conjunction with the Preliminary Offering Memorandum or the Final Offering
Memorandum, as applicable, as of its date, contains the information specified
in, and meets the requirements of, Rule 144A(d)(4) under the Securities Act.
(xxxvi) Except as otherwise disclosed in the Offering Memorandum,
subsequent to the respective dates as of which information is given in the
Offering Memorandum: (i) there has been no Material Adverse Change; (ii) the
Company and its subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by the
Company or any of its subsidiaries of any class of capital stock; (iv) there has
been no capital expenditure or commitment by the Company or any of its
subsidiaries exceeding $100,000, either individually or in the aggregate except
in the ordinary course of business as generally contemplated by the Offering
Memorandum, (v) there has been no change in accounting methods or practices
(including any change in depreciation or amortization policies or rates) by the
Company or any of its subsidiaries; (vi) there has been no revaluation by the
Company or any of its subsidiaries of any of their assets; (vii) there has been
no increase -in the salary or other compensation payable or to become payable by
the Company or any of its subsidiaries to any of their officers, directors,
employees or advisors, nor any declaration, payment or commitment or obligation
of any kind for the payment by the Company or any of its subsidiaries of a bonus
or other additional salary or compensation to any such person; (viii) there has
been no 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; (ix)
there has been no waiver or release of any material right or claim of the
Company or any subsidiary, including any write-off or other compromise of any
material account receivable of the Company or any subsidiary; and (x) there has
been no 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 Rights to the
Company or any of its subsidiaries.
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(xxxvii) None of the execution, delivery and performance of this
Agreement, the issuance and sale of the Securities, the application of the
proceeds from the issuance and sale of the Securities and the consummation of
the transactions contemplated thereby as set forth in the Offering Memorandum,
will violate Regulations G, T, U or X promulgated by the Board of Governors of
the Federal Reserve System or analogous foreign laws and regulations.
(xxxviii) Ernst & Young LLP, who have expressed their opinion with
respect to the financial statements (which term as used in this Agreement
includes the related notes thereto) and supporting schedules included in the
Offering Memorandum are independent public or certified public accountants
within the meaning of Regulation S-X under the Securities Act and the Exchange
Act.
(xxix) The financial statements, together with the related notes,
included in the Offering Memorandum present fairly in all material respects the
consolidated financial position of the Company and its subsidiaries as of and at
the dates indicated and the results of their operations and cash flows for the
periods specified. Such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. The financial data set forth in the Offering Memorandum
under the captions "Offering Memorandum Summary-Summary Financial Data",
"Selected Financial Data" and "Capitalization" fairly present the information
set forth therein on a basis consistent with that of the audited financial
statements contained in the Offering Memorandum.
(xl) The Company does not intend to, nor does it believe that it
will, incur debts beyond its ability to pay such debts as they mature. The
present fair saleable value of the assets of the Company on a consolidated basis
exceeds the amount that will be required to be paid on or in respect of the
existing debts and other liabilities (including contingent liabilities) of the
Company on a consolidated basis as they become absolute and matured. The assets
of the Company on a consolidated basis do not constitute an unreasonably small
capital to carry out the business of the Company as conducted or as proposed to
be conducted. Upon the issuance of the Units, the present fair saleable value
of the assets of the Company on a consolidated basis will exceed the amount that
will be required to be paid on or in respect of the existing debts and other
liabilities (including contingent liabilities) of the Company on a consolidated
basis as they become absolute and matured. Upon the issuance of the Units, the
assets of the Company on a consolidated basis will, not constitute an
unreasonably small capital to carry out its businesses as now conducted,
including the capital needs of the Company on a consolidated basis.
(xli) Except pursuant to this Agreement, there are no contracts,
agreements or understandings between the Company and any other person that would
give rise to a valid claim against the Company or either of the Initial
Purchasers for a brokerage commission, finder's fee or like payment in
connection with the issuance, purchase and sale of the Securities.
(xlii) There are no business relationships or related-party
transactions involving the Company or any subsidiary or any other person that
would be required to be described in the Offering Memorandum were it to be filed
as a part of a Registration Statement on Form S-1 under the Securities Act,
which have not been described as would have been so required.
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<PAGE>
(xliii) The statements (including the assumptions described therein)
included in the Offering Memorandum under the heading "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" (i) are within the coverage of Rule 175(b) under the
Securities Act to the extent such data constitute forward looking statements as
defined in Rule 175(c) and (ii) were made by the Company with a reasonable basis
and reflect the Company's good faith estimate of the matters described therein.
(xliv) The Company and to the Company's knowledge, its affiliates
and all persons acting on their behalf (other than the Initial Purchasers, their
employees, agents or any other persons acting on their behalf, as to whom the
Company makes no representation) have complied with and will comply with the
offering restrictions requirements of Regulation S in connection with the
offering of the Securities outside the United States and, in connection
therewith, the Offering Memorandum will contain the disclosure required by Rule
902(h).
(xlv) The data set forth on Exhibit C hereto are true and correct
in all material respects on and as of the date hereof, and the Company
authorizes the Initial Purchasers to rely upon the accuracy of such data,
without independent investigation, in determining the allocation of the purchase
price of the Units between the Notes and the Warrants, and the valuation of the
Warrants for the purposes of calculating original issue discount, in each case
as of the date hereof, in connection with the offering of the Units by the
Offering Memorandum. The calculations of "Accreted Value" of the Notes for each
"Semi-Annual Accrual Date" (as such terms are defined in the Offering
Memorandum) are accurate and correct.
(xlvi) Each certificate signed by any officer of the Company and
delivered to the Initial Purchasers or counsel for the Initial Purchasers
pursuant to this Agreement shall be deemed to be a representation and warranty
by the Company to the Initial Purchasers as to the matters covered thereby.
The Company acknowledges that each of the Initial Purchasers and, for
purposes of the opinions to be delivered to the Initial Purchasers pursuant to
Section 8 hereof, counsel to the Company and counsel to the Initial Purchasers,
will rely upon the accuracy and truth of the foregoing representations and
hereby consents to such reliance.
(b) Each of the Initial Purchasers severally and not jointly
represents, warrants and covenants to the Company and agrees that:
(i) Such Initial Purchaser is a QIB, with such knowledge and
experience in financial and business matters as are necessary in order to
evaluate the merits and risks of an investment in the Units.
(ii) Such Initial Purchaser is not acquiring the Units with a
view to any distribution thereof that would violate the Securities Act or the
securities laws of any state of the United States or any other applicable
jurisdiction.
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<PAGE>
(iii) No form of general solicitation or general advertising
has been or will be used by either of the Initial Purchasers or any of their
representatives in connection with the offer and sale of any of the Units,
including, but not limited to, articles, notices or other communications
published in any newspaper, magazine, or similar medium or broadcast over
television or radio, or any seminar or meeting whose attendees have been invited
by any general solicitation or general advertising.
(iv) Each of the Initial Purchasers agrees that (A) that they
will offer to sell the Units only to, and will solicit offers to buy the Units
only from (1) QIBs who in purchasing such Units will be deemed to have
represented and agreed that they are purchasing the Units for their own accounts
or accounts with respect to which they exercise sole investment discretion and
that they or such accounts are QIBs and (2) Regulation S Investors in offers and
sales that occur outside the United States to persons other than U.S. persons
who in purchasing such Units will be deemed to have represented that they are
acquiring the Units in an offshore transaction within the meaning of Regulation
S under the Securities Act and (B) that such QIBs and Regulation S Investors
will acknowledge and agree that such Units will not have been registered under
the Securities Act and may be resold, pledged or otherwise transferred only
(x)(I) to a person who the seller reasonably believes is a QIB in a transaction
meeting the requirements of Rule 144A, (II) in a transaction meeting the
requirements of Rule 144, (III) outside the United States to a person that is
not a U.S. Person (as defined in Rule 902 under the Securities Act) in an
offshore transaction meeting the requirements of Rule 904 under the Securities
Act, (IV) to an institutional "Accredited Investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) that, prior
to such transfer, furnishes to the Trustee and Warrant Agent a signed letter
containing certain representations and agreements relating to the Units, Notes
and Warrants (the form of such letter can be obtained from the Trustee or
Warrant Agent), or (V) in accordance with another exemption from the
registration requirements of the Securities Act (in the case of II, III, IV or
V, based upon an opinion of counsel if the Company or Trustee, or the
"Registrar" or "Transfer Agent" (as such terms are defined in the Indenture) for
the Securities so requests), (y) to the Company or (z) pursuant to an effective
registration statement under the Securities Act and, in each case, in accordance
with any applicable securities laws of any state of the United States and (C)
that the holder and each subsequent holder will be required to notify any
purchaser of the security evidenced thereby of the resale restrictions set forth
in (B) above.
(v) Each of the Initial Purchasers understands that the
Company and, for purposes of the opinions to be delivered to the Initial
Purchasers pursuant to Section 8 hereof, counsel to the Company and counsel to
the Initial Purchasers will rely upon the accuracy and truth of the foregoing
representations and hereby consents to such reliance.
6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless (i) each of the
Initial Purchasers, (ii) each person, if any, who controls either of the Initial
Purchasers within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act and (iii) the respective officers, directors,
partners, employees, representatives and agents of any of the Initial Purchasers
or any controlling person to the fullest extent lawful, from and against any and
all losses, liabilities, claims, damages and expenses whatsoever (including but
not limited to attorneys' fees and any and all expenses
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<PAGE>
whatsoever incurred in investigating, preparing or defending against any
investigation or litigation, commenced or threatened, or any claim whatsoever,
and any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Securities
Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims,
damages or expenses (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Preliminary Offering Memorandum or the Offering Memorandum, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided,
however, that the Company will not be liable in any such case to the extent, but
only to the extent, that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Initial Purchasers expressly for use therein. This indemnity agreement will
be in addition to any liability which the Company may otherwise have, including
under this Agreement.
(b) Each Initial Purchaser, severally and not jointly, agrees to
indemnify and hold harmless the Company and each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act, against any losses, liabilities, claims, damages and
expenses whatsoever (including but not limited to attorneys' fees and any and
all expenses whatsoever incurred in investigating, preparing or defending
against any investigation or litigation, commenced or threatened, or any claim
whatsoever and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Preliminary Offering Memorandum or the Offering
Memorandum, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, in
each case to the extent, but only to the extent, that any such loss, liability,
claim, damage or expense arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of either Initial Purchaser expressly for use therein;
provided, however, that in no case shall either Initial Purchaser be liable or
responsible for any amount in excess of the discounts and commissions received
by such Initial Purchaser, as set forth on the cover page of the Offering
Memorandum. This indemnity will be in addition to any liability which either
Initial Purchaser may otherwise have, including under this Agreement.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 6 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which
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<PAGE>
it may otherwise have). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
(and where the Initial Purchasers are the indemnified parties, Bear, Stearns &
Co. Inc. shall have the right to select such counsel for the Initial
Purchasers), but the fees and expenses of such counsel shall be at the expense
of such indemnified party or parties unless (i) the employment of such counsel
shall have been authorized in writing by the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to take charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying party or parties shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties), in any of which
events such fees and expenses of counsel shall be borne by the indemnifying
parties; provided, however, that the indemnifying party under subsection (a) or
(b) above, shall only be liable for the legal expenses of one counsel (in
addition to any local counsel) for all indemnified parties in each jurisdiction
in which any claim or action is brought. Anything in this subsection to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its prior written consent;
provided, however, that such consent was not unreasonably withheld.
7. Contribution. In order to provide for contribution in circumstances
------------
in which the indemnification provided for in Section 6 is for any reason held to
be unavailable from the Company or is insufficient to hold harmless a party
indemnified thereunder, the Company and the Initial Purchasers shall contribute
to the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company, any contribution received by the Company from persons,
other than the Initial Purchasers, who may also be liable for contribution,
including persons who control the Company within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act) to which the Company
and one or both of the Initial Purchasers may be subject, in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Initial Purchasers from the offering of the Units or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 6, in
such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the Initial
Purchasers 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 benefits received by the Company and the
Initial Purchasers shall be deemed to be in the same proportion as (x) the total
proceeds from the offering of Units (net of discounts but before deducting
expenses) received by the Company and (y) the discounts received by the Initial
Purchasers, respectively, in each case as set forth in the table on the cover
page of the Offering
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<PAGE>
Memorandum. The relative fault of the Company and of the Initial Purchasers
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 the
Initial Purchasers and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Initial Purchasers agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to above. Notwithstanding the provisions
of this Section 7, (i) in no case shall either of the Initial Purchasers be
required to contribute any amount in excess of the amount by which the discount
applicable to the Units purchased by such Initial Purchaser pursuant to this
Agreement exceeds the amount of any damages which such Initial Purchaser has
otherwise been required to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission and (ii) 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. For purposes of this Section 7, (A)
each person, if any, who controls either of the Initial Purchasers within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act
and (B) the respective officers, directors, partners, employees, representatives
and agents of any of the Initial Purchasers or any controlling person shall have
the same rights to contribution as such Initial Purchaser, and each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 7. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such, party
in respect of which a claim for contribution may be made against another party
or parties under this Section 7, notify such party or parties from whom
contribution may be sought, but the failure to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 7 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its prior written consent; provided, however, that such written consent
was not unreasonably withheld.
8. Conditions of Initial Purchasers' Obligations. The several
---------------------------------------------
obligations of the Initial Purchasers to purchase and pay for the Units, if any,
as provided herein, shall be subject to the satisfaction of the following
conditions:
(a) All of the representations and warranties of the Company
contained in this Agreement and in the Subscription Agreement shall be true and
correct on the date hereof and on the Closing Date with the same force and
effect as if made on and as of the date hereof and the Closing Date,
respectively. The Company shall have performed or complied with all of the
agreements herein contained and required to be performed or complied with by it
at or prior to the Closing Date.
(b) The Offering Memorandum shall have been printed and copies
distributed to the Initial Purchasers not later than 10:00 a.m., New York City
time, on the second business day following the date of this Agreement or at such
later date and time as to which the Initial Purchasers may agree, and no stop
order suspending the qualification or exemption from qualification of the Units,
the Notes
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<PAGE>
or the Warrants in any jurisdiction referred to in Section 4(e) shall have been
issued and no proceeding for that purpose shall have been commenced or shall be
pending or threatened.
(c) No action shall have been taken and no statute, rule, regulation
or order shall have been enacted, adopted or issued by any governmental agency
which would, as of the Closing Date, prevent the issuance of the Units, the
Notes or the Warrants; no action, suit or proceeding shall have been commenced
and be pending against or affecting or, to the best knowledge of the Company,
threatened against, the Company before any court or arbitrator or any
governmental body, agency or official that (1) could reasonably be expected to
result in a Material Adverse Effect and (2) has not been disclosed in the
Offering Memorandum; and no stop order shall have been issued preventing the use
of the Offering Memorandum, or any amendment or supplement thereto, or which
could reasonably be expected to have a Material Adverse Effect
(d) Since the dates as of which information is given in the Offering
Memorandum, (i) there shall not have been any material adverse change, or any
development that is reasonably likely to result in a material adverse change, in
the capital stock or the long-term debt, or material increase in the short-term
debt, of the Company or any of its subsidiaries from that set forth in the
Offering Memorandum, (ii) no dividend or distribution of any kind shall have
been declared, paid or made by the Company or any of its subsidiaries on any
class of its capital stock, (iii) neither the Company nor any of its
subsidiaries shall have incurred any liabilities or obligations, direct or
contingent, that are material, individually or in the aggregate, to the Company
and its subsidiaries, taken as a whole, and that are required to be disclosed on
a balance sheet or notes thereto in accordance with generally accepted
accounting principles and are not disclosed on the latest balance sheet or notes
thereto included in the Offering Memorandum. Since the date hereof and since
the dates as of which information is given in the Offering Memorandum, there
shall not have occurred any Material Adverse Effect.
(e) The Initial Purchasers shall have received a certificate, dated
the Closing Date, signed on behalf of the Company by each of the Company's Chief
Executive Officer and Chief Financial Officer in form and substance reasonably
satisfactory to the Initial Purchasers, confirming, as of the Closing Date, the
matters set forth in paragraphs (a), (b), (c) and (d) of this Section 8 and
that, as of the Closing Date, the obligations of the Company to be performed
hereunder on or prior thereto have been duly performed in all material respects.
(f) The Initial Purchasers shall have received on the Closing Date an
opinion, dated the Closing Date, in form and substance satisfactory to the
Initial Purchasers and counsel to the Initial Purchasers, of Wilson Sonsini
Goodrich & Rosati, P.C., counsel for the Company, to the effect set forth in
Exhibit A hereto.
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(g) The Initial Purchasers shall have received on the Closing Date an
opinion, dated the Closing Date, in form and substance satisfactory to the
Initial Purchasers and counsel to the Initial Purchasers, of Dhruv Khanna,
General Counsel of the Company, to the effect set forth in Exhibit B hereto.
---------
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(h) The Initial Purchasers shall have received an opinion, dated the
Closing Date, in form and substance reasonably satisfactory to the Initial
Purchasers, of Latham & Watkins, counsel to the Initial Purchasers, covering
such matters as are customarily covered in such opinions.
(i) At the time this Agreement is executed and at the Closing Date,
the Initial Purchasers shall have received from Ernst & Young LLP, independent
public accountants for the Company, dated as of the date of this Agreement and
as of the Closing Date, customary comfort letters addressed to the Initial
Purchasers and in form and substance satisfactory to the Initial Purchasers and
counsel to the Initial Purchasers with respect to the financial statements and
certain financial information of the Company contained in the Offering
Memorandum.
(j) Latham & Watkins shall have been furnished with such documents,
in addition to those set forth above, as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in this
Section 8 and in order to evidence the accuracy, completeness or satisfaction in
all material respects of any of the representations, warranties or conditions
herein contained.
(k) Prior to the Closing Date, the Company shall have furnished to
the Initial Purchasers such further information, certificates and documents as
the Initial Purchasers may reasonably request.
(l) The Company and the Trustee shall have entered into the Indenture
and the Initial Purchasers shall have received counterparts, conformed as
executed, thereof.
(m) The Company shall have entered into the Warrant Agreement and the
Initial Purchasers shall have received counterparts, conformed as executed,
thereof.
(n) The Company shall have entered into the Warrant Registration
Rights Agreement and the Initial Purchasers shall have received counterparts,
conformed as executed, thereof.
(o) The Company and each of the Equity Investors shall have duly and
validly authorized, executed and delivered the Subscription Agreement, and the
Subscription Agreement will constitute the legally valid and binding obligation
of each of such parties.
(p) The Company shall have furnished to the Initial Purchasers
evidence, in form and substance satisfactory to them, that all amounts
outstanding under the Company's revolving line of credit with Silicon Valley
Bank have been repaid in full and the security interests created in connection
therewith shall have been released.
(q) At the date of this agreement and at the Closing Date, the Chief
Financial Officer of the Company shall have executed and delivered a letter
addressed to the Initial Purchasers with respect to the independent
substantiation of certain numerical and statistical information set forth in the
offering Memorandum (and not covered by the letter delivered pursuant to
paragraph (g) of this Section), which letter shall be in form and scope
satisfactory to the Initial Purchasers.
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(r) The amendment to the Amended and Restated Stockholder Rights
Agreement, as defined in the Offering Memorandum (copies of which have been
previously provided to you), has been duly authorized, executed and delivered by
each of the parties thereto.
(s) The Subscription Agreement shall be a duly enforceable obligation
of each of the Company and each of the Equity investors, and none of the Equity
Investors shall have repudiated any of its obligations thereunder.
(t) The Stock Purchase shall have been consummated.
All opinions, certificates, letters and other documents required by
this Section 8 to be delivered by the Company will be in compliance with the
provisions hereof only if they are reasonably satisfactory in form and substance
to the Initial Purchasers. The Company will furnish the Initial Purchasers with
such conformed copies of such opinions, certificates, letters and other
documents as it shall reasonably request.
9. Initial Purchasers' Information. The Company and the Initial
-------------------------------
Purchasers severally acknowledge that the statements with respect to the
offering of the Units set forth in the last paragraph of the outside of the
front cover page; the stabilization language in the last paragraph on page iv;
and the third paragraph, the fourth sentence of the fourth paragraph and the
fifth paragraph under the caption "Plan of Distribution" in such Offering
Memorandum constitute the only information furnished in writing by the Initial
Purchasers expressly for use in the Offering Memorandum.
10. Survival of Representations and Amendments. All representations and
------------------------------------------
warranties, covenants and agreements of the Initial Purchasers and the Company
contained in this Agreement, including the agreements contained in Sections 4(f)
and 11(d), the indemnity agreements contained in Section 6 and the contribution
agreements contained in Section 7, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Initial
Purchasers or any controlling person thereof or by or on behalf of the Company
or any controlling person thereof, and shall survive delivery of and payment for
the Units to and by the Initial Purchasers. The representations contained in
Section 5 and the agreements contained in Sections 4(f), 6, 7 and 11(d) shall
survive the termination of this Agreement, including any termination pursuant to
Section 11.
11. Effective Date of Agreement; Termination.
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(a) This Agreement shall become effective upon execution and delivery
of a counterpart hereof by each of the parties hereto.
(b) The Initial Purchasers shall have the right to terminate this
Agreement at any time prior to the Closing Date by notice to the Company from
the Initial Purchasers, without liability (other than with respect to Sections 6
and 7) on the Initial Purchasers' part to the Company if, on or prior to such
date, (i) the Company shall have failed, refused or been unable to perform in
any material respect any agreement on its part to be performed hereunder, (ii)
any other condition to the obligations of the Initial Purchasers hereunder as
provided in Section 8 is not fulfilled when and as required in any material
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respect, (iii) in the reasonable judgment of the Initial Purchasers any material
adverse change shall have occurred since the respective dates as of which
information is given in the Offering Memorandum in the condition (financial or
otherwise), business, properties, assets, liabilities, prospects, net worth,
results of operations or cash flows of the Company taken as a whole, other than
as set forth in the Offering Memorandum, or (iv)(A) any domestic or
international event or act or occurrence has materially disrupted, or in the
opinion of the Initial Purchasers will in the immediate future materially
disrupt, the market for the Company's securities or for securities in general;
or (B) trading in securities generally on the New York or American Stock
Exchanges shall have been suspended or materially limited, or minimum or maximum
prices for trading shall have been established, or maximum ranges for prices for
securities shall have been required, on such exchange, or by such exchange or
other regulatory body or governmental authority having jurisdiction; or (C) a
banking moratorium shall have been declared by Federal or state authorities, or
a moratorium in foreign exchange trading by major international banks or persons
shall have been declared; or (D) there is an outbreak or escalation of armed
hostilities involving the United States on or after the date hereof, or if there
has been a declaration by the United States of a national emergency or war, the
effect of which shall be, in the Initial Purchasers' judgment, to make it
inadvisable or impracticable to proceed with the offering or delivery of the
Units on the terms and in the manner contemplated in the Offering Memorandum; or
(E) there shall have been such a material adverse change in general economic,
political or financial conditions or if the effect of international conditions
on the financial markets in the United States shall be such as, in the Initial
Purchasers' judgment, makes it inadvisable or impracticable to proceed with the
delivery of the Units as contemplated hereby.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, telephonic facsimile, or telegraph, confirmed in writing by
letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof, or if the sale of the Units provided for herein is not
consummated because any condition to the obligations of the Initial Purchasers
set forth herein is not satisfied or because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or comply
with any provision hereof, the Company will, subject to demand by the Initial
Purchasers, reimburse the Initial Purchasers for all out-of-pocket expenses
(including the reasonable fees and expenses of Initial Purchasers' counsel),
incurred by the Initial Purchasers in connection herewith.
12. Notice. All communications hereunder, except as may be otherwise
------
specifically provided herein, shall be in writing and, if sent to the Initial
Purchasers shall be mailed, delivered, or telexed, telegraphed or telecopied and
confirmed in writing to Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated, c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167, Attention: Corporate Finance Department, telecopy number: (212) 272-3092,
with a copy, which shall not constitute notice, to Latham & Watkins, Attn:
Gregory K. Miller, 505 Montgomery Street, Suite 1900, San Francisco, CA 94111;
telecopy number: (415) 395-8095; and if sent to the Company, shall be mailed,
delivered or telexed, telegraphed or telecopied and confirmed in writing to
Covad Communications Group, Inc., 3360 Bassett Street, Santa Clara, CA 94054,
Attention: Chief Executive Office, telecopy number: (408) 490-4501, with a copy,
which shall not constitute notice, to Wilson
-26-
<PAGE>
Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California
94304, Attn: Barry Taylor, telecopy number: (650) 493-6811.
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, the Initial Purchasers and the Company and the
controlling persons and agents referred to in Sections 6 and 7, and their
respective successors and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Units from the Initial Purchasers.
14. Construction. This Agreement shall be construed in accordance with
------------
the internal laws of the State of New York without giving any effect to any
provisions thereof relating to conflicts of law. TIME IS OF THE ESSENCE IN THIS
AGREEMENT.
15. Captions. The captions included in this Agreement are included solely
--------
for convenience of reference and are not to be considered a part of this
Agreement.
16. Counterparts. This Agreement may be executed in various counterparts
------------
which together shall constitute one and the same instrument.
[Signature page to follow]
-27-
<PAGE>
If the foregoing correctly sets forth the understanding among the Initial
Purchasers and the Company, please so indicate in the space provided below, for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours.
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Timothy P. Laehy
----------------------------------------------
Name: Timothy P. Laehy
Title: Chief Financial Officer, Treasurer
and Vice-President, Finance
Accepted and agreed to as of
the date first above written:
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
-28-
<PAGE>
Schedule I
Number of
Units to
Initial Purchaser be Purchased
------------
Bear, Sterns & Co. Inc..................................... 156,000
BT Alex. Brown Incorporated................................ 104,000
-------
Total: 260,000
<PAGE>
EXHIBIT A
(See Exhibit 5.1 to the Registration Statement)
<PAGE>
EXHIBIT B
Form of Opinion of Dhruv Khanna, General Counsel of the Company
1. All of the licenses, permits and authorizations required by the FCC
for the provision of telecommunications services by the Company, as such counsel
understands those services to be provided currently based upon the attached
certificate and the Offering Memorandum, have been issued to and are validly
held by the Company. All of the licenses, permits and authorizations required
by any "state commissions" as defined in Section 3 of the Communications Act of
1934, as amended (the "State Telecommunications Agencies") for the provision of
telecommunications services by the Company, as such counsel understands those
services to be provided currently based upon the attached certificate and the
Offering Memorandum, have been issued to and, to the best knowledge of such
counsel, are validly held by the Company, except where the failure to obtain or
hold such license, permit or authority would not have a Material Adverse Effect.
All such licenses, permits and authorizations are in full force and effect.
2. The Company is not the subject of any proceeding (including a rule
making proceeding), pending complaint or investigation, or, to the best of such
counsel's knowledge, any threatened complaint or investigation, before the FCC,
or, to the best of such counsel's knowledge, of any proceeding (including a rule
making proceeding), pending complaint or investigation, or any threatened
complaint or investigation, before the State Telecommunications Agencies based,
in each case, on any alleged violation of any statutes governing the FCC or the
State Telecommunications Agencies and the rules and regulations promulgated
thereunder (the "Telecommunications Laws") by the Company in connection with its
provision of or failure to provide telecommunications services of a character
required to be disclosed in the Offering Memorandum which is not disclosed in
the Offering Memorandum.
3. The statements in the Offering Memorandum under the headings of "Risk
Factors -Availability of Collocation Space; Dependence on ILECs to Provide
Collocation Space, Collocation and Transmission Facilities and to Order and
Provision Copper Lines; Dependence on Interconnection Agreements", "Risk Factors
- - Uncertain Quality and Availability of the ILEC Copper Lines Used by the
Company", "Risk Factors - Government Regulation and Current Industry
Litigation", "Business - Industry Background - Impact of the Telecommunications
Act of 1966" and "Business - Government Regulation" regarding the
Telecommunications Laws of the FCC or the State Telecommunications Agencies
fairly and accurately summarize the matters therein described.
4. The Company has the consents, approvals, authorizations, licenses,
certificates, permits, or orders of the FCC or the State Telecommunications
Agencies, if any is required, for the consummation of the transactions
contemplated in the Offering Memorandum, except where the failure to obtain the
consents, approvals, authorizations, licenses, certificates, permits or orders
would not have a Material Adverse Effect.
5. Neither the execution and delivery of the Operative Documents nor the
sale of the Securities contemplated thereby will conflict with or result in, a
violation of any order or regulation of
<PAGE>
the FCC or the State Telecommunications Agencies applicable to the Company,
except where the conflict with or the violation of which would not have a
Material Adverse Effect.
6. As of the date hereof, the Company has obtained CLEC regulatory
approval in the States of California, Illinois, Massachusetts, New York, Oregon
and Washington.
-2-
<PAGE>
EXHIBIT C
<TABLE>
<S> <C>
Common Stock Outstanding as of 2/15/98 3,788,068
Preferred Stock Outstanding/Subscribed
Series A 250,000
Series B 5,700,001
Series C 2,041,429
Stock Options Outstanding
As of 2/15/98 1,438,350
Grants from 2/16/98 to 3/6/98 93,600
Rounding 2,000
Series C Commitment Warrants 600,000
Subtotal 13,913,448
Warrants sold in the Offering 1,684,588
Total fully diluted outstanding equity 15,598,036
Post-money valuation $90,000,000
Post-money price per share $5.77
Total Number of Units 260,000
Warrants per Unit 6.4792
</TABLE>
<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 9, 1997. The Certificate of Incorporation was amended on
February 11, 1998. The Certificate of Incorporation is hereby amended and
restated pursuant to Section 242 and Section 245 of the Delaware General
Corporation Law. All amendments to the Certificate of Incorporation reflected
herein have been duly authorized and adopted by the Corporation's Board of
Directors and stockholders in accordance with the provisions of Sections 242 and
245 of the Delaware General Corporation Law.
This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the Certificate of Incorporation of the
Corporation. The text of the Certificate of Incorporation is amended hereby to
read as herein set forth in full:
ARTICLE I
The name of the corporation is Covad Communications Group, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, zip code 19801. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purpose to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
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 Thirty Million (30,000,000).
The number of shares of Preferred Stock authorized to be issued
<PAGE>
is Fifteen Million (15,000,000), of which Two Hundred Fifty Thousand (250,000)
shares have been designated as Series A Preferred Stock (the "SERIES A
PREFERRED"), Five Million Seven Hundred Thousand and One (5,700,001) shares have
been designated Series B Preferred Stock (the "SERIES B PREFERRED") and Three
Million Seven Hundred Sixteen Thousand Four Hundred Twenty-Nine (3,716,429)
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 S.00 I
per share.
The remaining shares of Preferred Stock may be issued from time to time in
one or more series. The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of this Article IV, to provide for the
issuance of the shares of Preferred Stock in series and, by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following: (a) The number of shares
constituting that series and the distinctive designation of that series; (b) The
dividend rate on the shares of that series, whether dividends shall be
cumulative, and, if so, from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of that series; (c) Whether
that series shall have voting rights, in addition to the voting rights provided
by law, and, if so, the terms of such voting rights; (d) Whether that series
shall have conversion privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the conversion rate in such
events as the Board of Directors shall determine; (e) Whether or not the shares
of that series shall be redeemable and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates; (f)
Whether that series shall have a sinking fund for the redemption or Purchase of
shares of that series and, if so, the terms and amount of such sinking fund; (g)
The rights of the shares of that series in the event of voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and the relative
rights of priority, if any, of payment of shares of that series; and (h) Any
other relative or participating rights, preferences and limitations of that
series.
The relative designations, rights, preferences and restrictions of the
Preferred Stock are as follows:
1. Dividends.
---------
(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 $0.67 per share,
$0.12 per share and $0.05 per share (adjusted for any subdivisions,
combinations, consolidations or stock distributions or stock dividends with
respect to such shares) 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
-2-
<PAGE>
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 $0.67 per
share, $0.12 per share and $0.05 per share (adjusted for any subdivisions,
combinations, consolidations or stock distributions or stock dividends with
respect to such shares) on the Series C Preferred, the Series B Preferred and
the Series A Preferred, respectively, shall have been paid or declared and set
apart during that fiscal year and any prior year in which dividends accumulated
but remain unpaid, and no dividends shall be paid on any share of Common Stock
unless a dividend is paid with respect to all outstanding shares of Series C
Preferred, Series B Preferred and Series A Preferred, in an amount for each such
share of Series C Preferred, Series B Preferred and Series A Preferred equal to
or greater than the aggregate amount of such dividends for all shares of Common
Stock into which each such share of Series C Preferred, Series B Preferred or
Series A Preferred could then be converted, as the case may be.
2. Liquidation Preference. In the event of any liquidation, dissolution
----------------------
or winding up of the Corporation, either voluntary or involuntary, distributions
to the stockholders of the Corporation shall be made in the following manner:
(a) The holders of the Series C Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common Stock by reason of
their ownership of such stock, the amount equal to the Initial Series C
Preferred Price (as defined in paragraph (b) below) for each share of Series C
Preferred then held by them and, in addition, an amount equal to all cumulated
and unpaid dividends on the Series C Preferred. The holders of the Series B
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock by reason of their ownership of such stock, the
amount equal to the Initial Series B Preferred Price (as 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. 'Me 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
-3-
<PAGE>
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 $8.33 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. 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, or (ii) in the event that the Liquidation Preference Threshold is
not achieved, is $1.50 for each such share. 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,
or (ii) in the event that the Liquidation Preference Threshold is not achieved,
is $1.00 for each such share. 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 $6.00, adjusted for any
subdivisions, combinations, consolidations, stock distributions or dividends.
(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,
-4-
<PAGE>
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.
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,
-5-
<PAGE>
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 $8.33 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 $8.33 per share
of Common Stock. Such initial Conversion Price shall be subject to adjustment
as hereinafter provided.
(b) Right to Convert Series B Preferred. Each share of Series B
-----------------------------------
Preferred shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of the Corporation or any
transfer agent for the Series B Preferred, into such number of fully paid and
nonassessable shares of Common Stock as is determined in the case of the Series
B Preferred by dividing $1.50 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 $1.50 per share
of Common Stock. Such initial Conversion Price shall be subject to adjustment
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
-6-
<PAGE>
dividing $1.00 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 $1.00 per share of Common Stock.
Such initial Conversion Price shall be subject to adjustment 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 $8.33 or
greater (adjusted for any subdivisions, combinations, consolidations or stock
distributions or dividends with respect to such shares) 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 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
-7-
<PAGE>
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 wan-ants to subscribe for,
purchase or otherwise acquire either Common Stock or Convertible Securities.
(ii) "ORIGINAL ISSUE DATE" for the Series A Preferred, Series B
Preferred and Series C Preferred shall mean the date on which a share of Series
A Preferred, Series B Preferred or Series C Preferred, as the case may be, was
first issued.
(iii) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness,
shares (other than the Series A Preferred, Series B Preferred or Series C
Preferred and Common Stock) or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
(iv) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares
(including reissued shares) of Common Stock issued (or, pursuant to paragraph
5(c), deemed to be issued) by the Corporation after the Original Issue Date,
other than:
(A) shares of Common Stock issued upon conversion of the Series A
Preferred, Series B Preferred and Series C Preferred authorized herein;
-8-
<PAGE>
(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.
(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
-9-
<PAGE>
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 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;
-10-
<PAGE>
(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 maimer 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 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.
-11-
<PAGE>
(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;
(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 IO% of the aggregate consideration received by
the Corporation for such issue, as determined in clause (i) above,
-12-
<PAGE>
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, 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, 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.
-13-
<PAGE>
(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 readjust ment is based. The Corporation shall,
upon the written request at any time of any holder of Series A Preferred, Series
B Preferred or Series C Preferred, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Price at the time in effect, and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of Series A Preferred, Series B Preferred
or Series C Preferred, as the case may be.
(l) Miscellaneous.
-------------
(i) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the case may
be.
(ii) The holders of at least 50% of the outstanding Preferred
Stock shall have the right to challenge any determination by the Board of fair
value pursuant to this Section 5, in which case such determination of fair value
shall be made by an independent appraiser selected jointly by the Board and the
challenging parties, the cost of such appraisal to be borne equally by the
Corporation and the challenging parties.
-14-
<PAGE>
(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
(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 at
the address for each such holder as shown on the books of this Corporation.
-15-
<PAGE>
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;
(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;
-16-
<PAGE>
(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, wan-ants 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.
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.
-17-
<PAGE>
ARTICLE X
1. To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
2. The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil administrative or investigative, by reason of the fact
that he or she, or his or her testator or intestate is or was a director or
officer of the Corporation or any predecessor of the Corporation or serves or
served at any other enterprise as a director, officer or employee at the request
of the Corporation or any predecessor to the Corporation.
3. Neither any amendment nor repeal of this Article, nor the adoption of
any provision of this Corporation's Certificate of Incorporation inconsistent
with this Article, shall el' i 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 Charles McMinn, the President and Chief Executive Officer of the
Corporation, and attested by Dhruv Khanna, the Secretary of the Corporation.
The signatures below shall constitute the affirmation and acknowledgment under
penalties of perjury, that the facts herein stated are true.
Dated: February 20, 1998
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Charles J. McMinn
---------------------
Charles J. McMinn
President and Chief Executive Officer
ATTEST:
/s/ Dhruv Khanna
- ----------------
Dhruv Khanna
Secretary
-19-
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
COVAD COMMUNICATIONS GROUP, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
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<S> <C>
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
4.3 MEETINGS AND ACTION OF COMMITTEES.............................10
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
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
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XI CUSTODIAN........................................................................19
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES......................................19
11.2 DUTIES OF CUSTODIAN..............................................................19
</TABLE>
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<PAGE>
BYLAWS
------
OF
--
COVAD COMMUNICATIONS COMPANY
----------------------------
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
-5-
<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
effective, 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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<PAGE>
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
-12-
<PAGE>
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.
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<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.
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<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
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<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
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<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.
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<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 Company and that the foregoing
Bylaws, comprising twenty (20) pages, were adopted as the Bylaws of the
corporation on July 14th, 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
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<PAGE>
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
COVAD COMMUNICATIONS GROUP, INC.
The undersigned, being the Secretary of Covad Communications 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>
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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<PAGE>
<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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<PAGE>
<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>
-6-
<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.
-7-
<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
-8-
<PAGE>
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
-9-
<PAGE>
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
-10-
<PAGE>
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
-11-
<PAGE>
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)
-12-
<PAGE>
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
-13-
<PAGE>
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.
-14-
<PAGE>
"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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<PAGE>
"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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<PAGE>
"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.
-84-
<PAGE>
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]
-85-
<PAGE>
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
-86-
<PAGE>
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
-6-
<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
-7-
<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;
-12-
<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
-14-
<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
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<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)
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<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.
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<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
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<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>
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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>
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<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).
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<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.
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<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
-4-
<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.
---------------------------------------------------------------
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<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
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<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
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<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.
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<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
-22-
<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
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 1. Definitions.................................................... 1
Section 2. Registration Rights............................................ 5
2.1 (a) Demand Registration After Public Equity Offering....... 5
(b) Effective Registration................................. 6
(c) Restrictions on Sale by Holders........................ 6
(d) Underwritten Registrations............................. 7
(e) Expenses............................................... 7
(f) Priority in Demand Registration........................ 7
2.2 (a) Piggy-Back Registration................................ 8
(b) Priority in Piggy-Back Registration.................... 9
2.3 Limitations, Conditions and Qualifications to Obligations
Under Registration Covenants................................... 10
2.4 Restrictions on Sale by the Company and Others................. 11
2.5 Rule 144 and Rule 144A......................................... 12
Section 3. "Market Stand-Off" Agreement................................... 12
Section 4. Registration Procedures........................................ 13
Section 5. Indemnification and Contribution............................... 18
Section 6. Miscellaneous.................................................. 21
(a) No Inconsistent Agreements............................. 21
(b) Amendments and Waivers................................. 21
(c) Notices................................................ 22
(d) Successors and Assigns................................. 22
(e) Counterparts........................................... 22
(f) Headings............................................... 22
(g) Governing Law; Jurisdiction............................ 22
(h) Severability........................................... 23
(i) Entire Agreement....................................... 23
(j) Attorneys' Fees........................................ 23
(k) Securities Held by the Company or Its Affiliates....... 23
(l) Remedies............................................... 23
</TABLE>
-i-
<PAGE>
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.
<PAGE>
"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).
2
<PAGE>
"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,
3
<PAGE>
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.
4
<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.
------------------------------------------------
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.
5
<PAGE>
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.
6
<PAGE>
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
--------
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
-----
included in such registration by the Holders of Registrable Securities pursuant
to this Agreement, (ii) second, provided that no securities sought to be
------
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
-----
Holders or the other parties to the Stockholder Rights Agreement have been
excluded from such registration, the securities of other Persons entitled to
7
<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
------
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
-----------------------
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
8
<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)
-----
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
-----
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
-----
of such Person referred to in the immediately preceding clause (i) or of the
9
<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
10
<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
11
<PAGE>
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)
12
<PAGE>
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
13
<PAGE>
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
14
<PAGE>
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.
15
<PAGE>
(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
16
<PAGE>
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
17
<PAGE>
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
18
<PAGE>
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
19
<PAGE>
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
-11-
<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:
-15-
<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.
-16-
<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.
-18-
<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.
-19-
<PAGE>
(ii) As soon as practicable after the end of the first, second
and third quarterly accounting periods in each fiscal year of the Company and in
any event within 45 days thereafter, an unaudited consolidated balance sheet and
an unaudited statement of cash flows of the Company and its subsidiaries, if
any, as of the end of each such quarterly period, and unaudited consolidated
statements of income of the Company and its subsidiaries for such period and for
the current fiscal year to date, in each case with comparable prior periods,
prepared in accordance with generally accepted accounting principles
consistently applied, all in reasonable detail, including any material
discrepancies between the results reported and the Company's budgeted
projections for the period, as well as other financial or business events of
material importance, and certified, subject to changes resulting from year-end
audit adjustments, by the principal financial or accounting officer of the
Company.
(iii) As soon as practicable after the end each month in each
fiscal year of the Company, and in any event within 30 days thereafter, a
consolidated balance sheet of the Company and its subsidiaries, if any, as of
the end of each such month, and consolidated statements of income and cash flows
and notes thereto (including notes with respect to each department or operating
entity) and its subsidiaries for such period and for the current fiscal year to
date, prepared in accordance with generally accepted accounting principles
consistently applied, subject to changes resulting from year-end audit
adjustments, all in reasonable detail and certified by the principal financial
or accounting officer of the Company.
(iv) Annually (but in any event at least 30 days prior to the
commencement of each fiscal year of the Company) the yearly budget and operating
plan of the Company, in such manner and form as approved by the Board of
Directors of the Company, which plan shall include projected statements of
income and cash flow for such fiscal year and a projected balance sheet as of
the end of such fiscal year. Any material changes in such plan shall be
delivered to the Investors as promptly as practicable after such changes have
been approved by the Board of Directors of the Company.
(v) Access to the Company's and its subsidiaries' books,
records and facilities during normal business hours, and reasonable access to
the Company's officers to discuss the Company's and its subsidiaries' accounts,
finances and affairs.
The provisions of this Section 17(a) shall not be in limitation of any
rights that the Stockholders may have with respect to the books and records of
the Company and its subsidiaries, or to inspect their properties or discuss
their affairs, finances and accounts; and, in the event that the Company is
unable to comply with the provisions of Section 17(a), the Board of Directors of
the Company shall, by resolution duly adopted, authorize and cause a firm of
independent public accountants of nationally recognized standing that is among
the six largest accounting firms in the United States to prepare promptly and
furnish such information to the eligible Stockholders at the Company's expense.
From the date the Company becomes subject to the reporting requirements of
the Exchange Act, and in lieu of the information required pursuant to this
Section 17(a), Company may furnish to the Investors copies of its annual reports
on Form 10-K, its quarterly reports on Form 10-Q, any current reports on Form 8-
K and such other information or interim reports as it provides to all
stockholders.
-20-
<PAGE>
(b) Transfers of Rights. The rights granted to the Investors under
-------------------
Section 17(a) hereof may be transferred or assigned by an Investor to any
transferee or assignee of any Shares to whom registration rights may be assigned
provided that the Company is given written notice at the time of or within a
reasonable time after such transfer or assignment, stating the name and address
of the transferee or assignee and identifying the securities with respect to
which such rights are being transferred or assigned.
18. Board Representation and Voting of Shares.
-----------------------------------------
(a) In any and all elections of directors of the Company (whether at
a meeting or by written consent in lieu of a meeting), each Stockholder shall
vote or cause to be voted all Preferred Stock or Common Stock (for purposes of
this Section 18, the "Voting Stock") owned by such Stockholder, or over which
such Stockholder has voting control, and otherwise use such Stockholder's
respective best efforts, so as to fix the number of directors constituting the
Board of Directors of the Company at seven (7) and to elect as members of said
Board (i) three persons designated by the Investors, of which two persons shall
be designees of Warburg and one person shall be a designee of Crosspoint;
provided, however, that so long as Crosspoint's aggregate investment in the
Company is less than $5,000,000, if Crosspoint fails to invest on a pro rata
basis with Warburg in a subsequent equity financing of the Company, the
Crosspoint designee shall resign and his or her vacancy shall be filled by, and
the third such person shall be, a person mutually designated by Warburg and the
Company; (ii) two persons who are senior officers of the Company, one of whom
shall be the Chief Executive Officer of the Company; and (iii) one person
mutually designated by Warburg and the Company. The directors initially
designated by the Investors are Joseph Landy, Henry Kressel and Rich Shapero,
the directors initially designated by the Company are Charles McMinn and Daniel
Lynch and the director initially designated by Warburg and the Company is Frank
Marshall.
(b) The Company shall provide the Stockholders with prior written
notice of any intended mailing of notice to stockholders for a meeting at which
directors are to be elected and the Investors shall notify the Company in
writing, prior to such mailing, of the persons designated by the investors as
nominees for election as directors. If the Investors shall fail to give notice
to the Company as provided above, it shall be deemed that the designees of the
Investors then serving as directors shall be their designees for reelection.
(c) The Stockholders shall not vote to remove any director designated
pursuant to this Agreement, except for bad faith or wilful misconduct.
(d) In the event of any vacancy in the Board, such vacancy shall be
filled by a person designated as provided in Section 18(a) above.
(e) In the event any shares of Preferred Stock, Common Stock or other
voting securities are issued by the Company to any Stockholder at any time
during the term of this Agreement, either directly or upon the exercise or
exchange of securities of the Company exercisable for or exchangeable into
shares Preferred Stock, Common Stock or voting securities, such additional
shares
-21-
<PAGE>
of Preferred Stock, Common Stock or voting securities, as the case may be, shall
be voted, or consent in respect thereof shall be given, in accordance with the
provisions of this Agreement.
(f) The voting agreements contained in this Section 18 shall
terminate in its entirety July 16, 2007. Notwithstanding the foregoing, the
provisions of this Agreement shall no longer be applicable in respect of any
Stockholder at such time as such Stockholder shall cease to own any Voting Stock
of the Company.
(g) The voting agreements contained in this Section 18 are coupled
with an interest and may not be revoked, except by written consent of all of the
Stockholders.
(h) Each and every transferee or assignee of the Voting Stock from
any Stockholder shall be bound by and subject to all the terms and conditions of
this Section 18. So long as the provisions of this Section 18 are in effect, the
Company shall require, as a condition precedent to the transfer of any Voting
Stock covered by this Section 18, that the transferee agrees in writing to be
bound by, and subject to, the terms and conditions of this Section 18 as
provided in this Section 18 and to ensure that Stockholder's transferees of the
Voting Stock shall be likewise bound.
(i) Each of the parties acknowledge that all other parties hereto
will be irreparably damaged in the event that the provisions of this Section 18
are not specifically enforced. Accordingly, should any dispute arise pursuant to
this Section 18, the parties agree that a decree of specific performance shall
be an appropriate remedy. Such remedy shall be cumulative and shall be in
addition to any other remedies which any party may have at law or in equity.
19. Visitation. The Company shall permit each Investor (or a
----------
representative thereof), so long as such Investor owns no less than five percent
(5%) of the total number of shares of Preferred Stock outstanding, during such
periods as no designee of such Investor is a member of the Company's Board of
Directors, to attend all meetings of the Board of Directors and committees
thereof and will provide to such Investor copies of written materials provided
to all members of the Board of Directors at the same time and in the same manner
that such materials are provided to the members of the Board of Directors.
20. Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of Delaware, without giving effect to the conflicts of
laws principles thereof.
21. Entire Agreement. This Agreement and the other documents delivered
----------------
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.
22. Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto.
-22-
<PAGE>
23. Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service or
five days after deposit with the United States mail, by First Class mail,
postage prepaid, addressed (a) if to a Stockholder, at the Stockholder's address
as set forth on Exhibit A hereto, or (b) if to any other holder of any
---------
securities, at such address as such holder shall have furnished the other
parties hereto in writing, or, until any such holder so furnishes an address to
the Company, then to and at the address of the last holder of such Shares who
has so furnished an address to the Company, or (c) if to the Company, to Covad
Communications Group, Inc., 3560 Bassett Street, Santa Clara, CA 95054, and
addressed to the attention of the President, or at such other address as the
Company shall have furnished to the Stockholders.
24. Amendments or Waivers. This Agreement may not be amended, waived,
---------------------
discharged or terminated other than by written instrument signed by the Company
and (a) holders of more than a majority of the outstanding Registrable
Securities (on an as-converted to Common Stock basis).
25. Waiver of Conflict. Each party to this Agreement that has been or
------------------
continues to be represented by Wilson Sonsini Goodrich & Rosati P.C., counsel to
the Company, hereby acknowledges that Rule 3-310 of the Rules of Professional
Conduct promulgated by the State Bar of California requires an attorney to avoid
representations in which the attorney has or had a relationship with another
party interested in the representation without the informed written consent of
all parties affected. By executing this Agreement, each such party gives his or
its informed written consent to the representation of the Company by Wilson
Sonsini Goodrich & Rosati P.C. in connection with this Agreement and the
transactions contemplated hereby.
26. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by fewer than all of parties hereto,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
27. Confidentiality. Each party hereto agrees that, except with the prior
---------------
written permission of the other parties, it shall at all times keep confidential
and not divulge, furnish or make accessible to anyone any confidential
information, knowledge or data concerning or relating to the business or
financial affairs of the other parties to which such party has been or shall
become privy by reason of this Agreement. The parties hereto further agree that
there shall be no press release or other public statement issued by either party
relating to this Agreement or the transactions contemplated hereby, unless the
parties otherwise agree in writing.
-23-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Timothy Laehy
-------------------------------
Name: Timothy Laehy
-------------------------------
Title: Chief Financial Officer
-------------------------------
WARBURG, PINCUS VENTURES, L.P.
By: Warburg, Pincus & Co., its General Partner
By: /s/ Stephen Distler
----------------------------
Partner
CROSSPOINT VENTURE PARTNERS 1996
By: /s/ Rich Shapero
--------------------------------
Name: Rich Shapero
--------------------------------
Title: General Partner
-------------------------------
INTEL CORPORATION
By: /s/ Arvind Sodhani
-----------------------------------
Name: Arvind Sodhani
--------------------------------
Title: Treasurer
-------------------------------
[Stockholder Rights Agreement Signature Page]
-24-
<PAGE>
/s/ Charles J. McMinn
_______________________________________
Charles J. McMinn
/s/ Dhruv Khanna
_______________________________________
Dhruv Khanna
/s/ Charles Haas
_______________________________________
Charles J. Haas
/s/ Duncan M. Davidson
---------------------------------------
Duncan M. Davidson
/s/ Daniel Lynch
_______________________________________
Daniel Lynch
/s/ Rex Cardinale
_______________________________________
Rex Cardinale
/s/ Frank Marshall
_______________________________________
Frank Marshall
/s/ Timothy Laehy
_______________________________________
Timothy P. Laehy
[Stockholder Rights Agreement Signature Page]
-25-
<PAGE>
EXHIBIT A
SCHEDULE OF STOCKHOLDERS
<TABLE>
<CAPTION>
HOLDERS OF COMMON STOCK NUMBER OF SHARES
- ----------------------- ----------------
<S> <C>
Charles McMinn 1,000,000
24627 Olive Tree Lane
Los Altos Hills, CA 94024
Dhruv Khanna 1,000,000
742 Alester Ave.
Palo Alto, CA 94303
Charles J. Haas 1,000,000
10533 Esquire Place
Cupertino, CA 95014
Duncan Davidson 196,568
415 Camberly Way
Redwood City, CA 94061
Daniel Lynch 48,000
25660 La Lanne Court
Los Altos Hills, CA 94022
Rex Cardinale 375,000
Frank Marshall 48,000
20100 Hill Avenue
Saratoga, CA 95070
Timothy P. Laehy 115,000
HOLDERS OF SERIES A PREFERRED STOCK NUMBER OF SHARES
- ------------------------------------- ----------------
Charles McMinn 50,000
24627 Olive Tree Lane
Los Altos Hills, CA 94024
Dhruv Khanna 50,000
742 Alester Ave.
Palo Alto, CA 94303
Charles J. Haas 50,000
10533 Esquire Place
Cupertino, CA 95014
Daniel Lynch 100,000
25660 La Lanne Court
Los Altos Hills, CA 94022
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HOLDERS OF SERIES B PREFERRED STOCK NUMBER OF SHARES
- ----------------------------------- ----------------
<S> <C>
Warburg, Pincus Ventures, L.P. 4,000,000
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue
New York, NY 10017-3147
Crosspoint Venture Partners 1996 1,000,000
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062
Intel Corporation 666,667
2200 Mission College Boulevard
Santa Clara, CA 95052-8199
Frank Marshall 33,334
20100 Hill Avenue
Saratoga, CA 95070
HOLDERS OF SERIES C PREFERRED STOCK NUMBER OF SHARES
- ----------------------------------- ----------------
Intel Corporation 120,048
2200 Mission College Boulevard
Santa Clara, CA 95052-8199
</TABLE>
-2-
<PAGE>
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 11, 1998
Bear, Stearns & Co. Inc.
BT Alex. Brown Incorporated
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
RE: ISSUANCE AND SALE OF 260,000 UNITS, CONSISTING IN THE AGGREGATE OF
$260,000,000 PRINCIPAL AMOUNT AT MATURITY OF 13 1/2% SENIOR DISCOUNT
NOTES DUE 2008 AND WARRANTS, INITIALLY EXERCISABLE TO PURCHASE
1,684,588 SHARES OF COMMON STOCK OF COVAD COMMUNICATIONS GROUP, INC.
--------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Covad Communications Group, Inc., a Delaware
corporation (the "Company"), in connection with the negotiation, execution and
delivery of the Purchase Agreement, dated March 6, 1998 (the "Purchase
Agreement"), among each of you and the Company, pursuant to which the Company
has agreed, subject to the terms and conditions set forth therein, to issue and
sell to you, and you have severally agreed, subject to the terms and conditions
set forth therein, to purchase from the Company, 260,000 units (the "Units")
consisting in the aggregate of $260,000,000 in principal amount at maturity of
13 1/2% Senior Discount Notes due 2008 (the "Notes") to be issued pursuant to
the provisions of an Indenture dated as of March 15, 1998 (the "Indenture") by
and between the Company and The Bank of New York, as trustee (the "Trustee"),
and warrants (the "Warrants"), initially exercisable to purchase 1,684,588
shares of Common Stock of the Company, at an exercise price of $0.01 per share,
to be issued pursuant to a Warrant Agreement dated as of March 15, 1998 (the
"Warrant Agreement"), by and between the Company and The Bank of New York, as
warrant agent (the "Warrant Agent"). This opinion is rendered to you pursuant to
Section 8(f) of the Purchase Agreement.
Terms defined in the Purchase Agreement (whether directly or indirectly by
reference) and used herein without other definition shall have the respective
meanings herein assigned to such terms in the Purchase Agreement. The Purchase
Agreement, Indenture, Warrant Agreement, Registration Rights Agreement, Warrant
Registration Rights Agreement and Subscription Agreement may hereinafter be
collectively referred to as the "Transaction Documents."
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 2
To render the opinions hereinafter set forth, we have examined originals or
copies of the following:
(a) the Preliminary Offering Memorandum and the Final Offering Memorandum;
(b) the Purchase Agreement;
(c) the Indenture;
(d) a specimen certificate of a Note;
(e) the Registration Rights Agreement;
(f) the Warrant Agreement;
(g) a specimen certificate of a Warrant;
(h) the Warrant Registration Rights Agreement;
(i) the Subscription Agreement;
(j) resolutions of the Board of Directors of the Company (the "Board")
adopted on January 21, 1998 and by telephonic conferences on February
19, 1998, and on February 2, 1998, and of the Pricing Committee
appointed by the Board adopted by telephonic conference on March 6,
1998, authorizing and approving the transactions which are the subject
of this opinion;
(k) the Amended and Restated Certificate of Incorporation and bylaws of
the Company, each as amended and in the form certified to us as in
effect on the date hereof;
(l) the Amended and Restated Stockholder Rights Agreement dated as of
March 11, 1998 by and among the Company and the "Stockholders"
identified on Exhibit A thereto (the "Stockholders Rights Agreement");
(m) the instruments and agreements to which the Company is a party (except
those with respect to which you have received on the date hereof the
opinion of Dhruv Khanna, General Counsel to the Company), which have
either been (1) described in the Offering
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 3
Memorandum or (2) identified to us by the Company, or otherwise known
to us, as its material agreements (the "Reviewed Agreements") and, in
either case, listed on Annex 1 to Exhibit A hereto;
------- ---------
(n) the Authentication and Delivery Order, dated the date hereof, of the
Company delivered to the Trustee pursuant to the Indenture, directing
the Trustee to authenticate and deliver the appropriate Notes,
including the acknowledgment by the Trustee of receipt thereof;
(o) the Execution and Delivery Order, dated the date hereof, of the
Company delivered to the Warrant Agent pursuant to the Warrant
Agreement, directing the Warrant Agent to countersign and deliver the
appropriate Warrants, including the acknowledgment by the Warrant
Agent of receipt thereof;
(p) a certificate of legal existence, good standing and tax status of the
Company, dated as of a recent date, issued by the Secretary of State
of the State of Delaware;
(q) a facsimile confirming an oral report from the Office of the Secretary
of State of the State of Delaware dated March 11, 1998 as to the legal
existence and good standing of the Company;
(r) a certificate of legal existence and good standing of Covad
Communications Company, a California corporation and a Subsidiary of
the Company ("Covad California"), dated as of a recent date, issued by
the Secretary of State of the State of California;
(s) a certificate of tax status of Covad California, dated as of a recent
date, issued by the Franchise Tax Board of the State of California;
(t) a facsimile confirming an oral report from the Office of the Secretary
of State of the State of California dated March 11, 1998, as to the
legal existence and good standing of Covad California;
(u) a certificate of legal existence and good standing of DIECA
Communications Inc., a Virginia corporation and a Subsidiary of the
Company ("Covad Virginia"), dated as of a recent date, issued by the
Secretary of State of the Commonwealth of Virginia;
(v) a facsimile confirming an oral report from the Office of the Secretary
of State of the Commonwealth of Virginia dated March 11, 1998, as to
the legal existence and good standing of Covad Virginia;
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 4
(w) a certificate of authorization to do business as a foreign corporation
and good standing of the Company, dated as of a recent date, issued by
the Office of the Secretary of State of the State of California;
(x) a certificate of tax status of the Company, dated as of a recent date,
issued by the Franchise Tax Board of the State of California;
(y) a facsimile confirming an oral report from the Office of the Secretary
of State of the State of California dated March 11, 1998, as to the
authorization to do business as a foreign corporation and good
standing of the Company;
(z) the certificate of the Secretary of the Company, dated the date
hereof, delivered to the Initial Purchasers;
(aa) a cross-receipt, dated the date hereof, evidencing receipt by the
Initial Purchasers of the Units and receipt by the Company of payment
therefor;
(bb) the certificate of the Chief Executive Officer and Chief Financial
Officer, respectively, of the Company, dated the date hereof,
delivered to the Initial Purchasers pursuant to Section 8(e) of the
Purchase Agreement;
(cc) the certificate of the Trustee, dated the date hereof, regarding,
among other things, the appointment and authorization to act as
trustee for the Notes and the due execution and delivery of the
Indenture;
(dd) the certificate of the Warrant Agent, dated the date hereof,
regarding, among other things, the appointment and authorization to
act as warrant agent for the Warrants and the due execution and
delivery of the Warrant Agreement;
(ee) the certificate, dated the date hereof and attached hereto as Exhibit
-------
A, of the Chief Executive Officer and Chief Financial Officer,
-
respectively, of the Company regarding certain facts necessary to
support the opinions set forth herein (on which we have relied only
with respect to factual matters only and not legal conclusions); and
(ff) such other instruments, corporate records, certificates, and other
documents as we have deemed necessary to establish a basis for the
opinions hereinafter expressed.
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 5
In addition, we have attended or discussed with officers of the Company the
respective proceedings at the January 21, 1998 meeting and the February 19, 1998
and February 2, 1998 telephonic conferences of the Board, and the March 6, 1998
telephonic conference of the Pricing Committee thereof, at which the general and
pricing terms, respectively, of the transactions which are the subject of this
opinion were considered and approved, and certain officers of the Company were
authorized by the Board to proceed with such transactions.
With your permission we have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures; (b) the conformity to
the originals of all documents submitted to us as copies; (c) the truth,
accuracy and completeness of the information, factual matters, representations
and warranties contained in the records, documents, instruments and certificates
we have reviewed as of their stated dates and as of the date hereof; (d) except
as specifically covered in the opinions set forth below, the due authorization,
execution and delivery on behalf of the respective parties thereto of documents
referred to herein and the legal, valid and binding effect thereof on such
parties; and (e) the absence of any evidence extrinsic to the provisions of the
written agreements between the parties that the parties intended a meaning
contrary to that expressed by those provisions. With respect to our opinions
set forth in paragraphs 6 and 8 below, in passing on the form of such documents
we have necessarily assumed the correctness and completeness of the statements
made therein.
Whenever a statement herein is qualified by the phrases "known to us" or
"to our knowledge," it is intended to indicate that, during the course of our
representation of the Company, no information that would give the attorneys
actually involved in this transaction current actual knowledge of the inaccuracy
of such statement has come to the attention of those attorneys presently in this
firm who have rendered legal services in connection with the representation
described in the first paragraph of this opinion letter. However, we have not
undertaken any independent investigation or review to determine the accuracy of
any such statement, and any limited inquiry undertaken by us during the
preparation of this opinion letter should not be regarded as such an
investigation or review; no inference as to our knowledge of any matters bearing
on the accuracy of any such statement should be drawn from the fact of our
representation of the Company or its affiliates. Furthermore, this opinion
letter does not purport to encompass information which may have been
communicated to any attorney in our firm serving as a director of the Company,
solely by reason of his or her serving in such capacity.
On the basis of the foregoing and in reliance thereon and having regard for
legal considerations which we deem relevant, and subject to the limitations and
qualifications set forth herein, we advise you that in our opinion:
1. The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has the
corporate power and authority to own its
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 6
property and to conduct its business as described in the Offering Memorandum.
The Company is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a Material
Adverse Effect on the Company on a consolidated basis.
2. Each of Covad California and Covad Virginia is a corporation duly
incorporated and validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, has all requisite corporate power and
authority to carry on its business as it is currently being conducted and as
described in the Offering Memorandum and to own, lease and operate its
properties. Each of Covad California and Covad Virginia is duly qualified and
in good standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a Material Adverse Effect
on the Company on a consolidated basis.
3. The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Purchase Agreement and
the other Transaction Documents and to consummate the transactions contemplated
thereby, including, without limitation, the corporate power and authority to
issue, sell and deliver the Securities and the Warrant Shares.
4. Each of the Transaction Documents has been duly and validly
authorized, executed and delivered by the Company and assuming due execution by
the other parties thereto, is the legally valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
that we express no opinion as to the validity or enforceability of rights of
indemnity or contribution, or both and except as such enforceability may be
limited by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally, (ii) general
principles of equity (whether considered in a proceeding in equity or at law),
or (iii) applicable public policy considerations.
5. The Subscription Agreement has been duly and validly authorized,
executed and delivered by the Equity Investors and is the legally valid and
binding obligation of the Equity Investors, enforceable against each of such
parties in accordance with its terms, except that we express no opinion as to
the validity or enforceability of right of indemnity or contribution, or both
and except as such enforceability may be limited by (i) bankruptcy, insolvency,
fraudulent conveyance, reorganization or similar laws affecting the rights of
creditors generally, (ii) general principles of equity (whether considered in a
proceeding in equity or at law), or (iii) applicable public policy
considerations.
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 7
6. The Notes are in the form contemplated by the Indenture, have been
duly authorized and executed by the Company and, when authenticated in
accordance with the terms of the Indenture and delivered to and paid for in
accordance with the terms of the Purchase Agreement, will be (a) valid and
binding obligations of the Company enforceable in accordance with their terms,
except that we express no opinion as to the validity or enforceability of rights
of indemnity or contribution, or both, and except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors generally, (ii)
principles of equity (whether enforcement is considered in a proceeding at law
or in equity) or (iii) applicable public policy considerations and (b) entitled
to the benefits of the Indenture and the Registration Rights Agreement.
7. The Exchange Notes have been duly and validly authorized for issuance
by the Company and, when issued and authenticated in accordance with the terms
of the Indenture and delivered against payment therefor in accordance with the
terms of the Purchase Agreement and the Indenture, will be legally, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Indenture,
except that we express no opinion as to the validity or enforceability or rights
of indemnity or contribution, or both, except as such enforceability may be
limited by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally, (ii) general
principles of equity (whether considered in a proceeding in equity or at law),
or (iii) applicable public policy considerations.
8. The Warrants are in the form contemplated by the Warrant Agreement,
have been duly authorized and executed by the Company, and when countersigned by
the Warrant Agent as provided in the Warrant Agreement, and delivered to and
paid for by the Initial Purchasers in accordance with the terms of the Purchase
Agreement, will be (a) valid and binding obligations of the Company enforceable
in accordance with their terms, except that we express no opinion as to the
validity or enforceability of rights of indemnity or contribution, or both, and
except as the enforceability thereof may be limited by (i) bankruptcy,
insolvency, fraudulent conveyance, reorganization or similar laws affecting the
rights of creditors generally, (ii) principles of equity (whether enforcement
is considered in a proceeding at law or in equity) or (iii) applicable public
policy considerations and (b) entitled to the benefits of the Warrant Agreement
and the Warrant Registration Rights Agreement.
9. The Warrants will be exercisable into Warrant Shares in accordance
with the terms of the Warrant Agreement. The Warrant Shares have been duly
authorized and reserved for issuance by the Company and, when issued and
delivered upon exercise of the Warrants in accordance with the terms of the
Warrants, will be validly issued, fully paid and non-assessable and will not be
subject to any preemptive or similar rights under any of the Transaction
Documents or, to our knowledge, be subject to any preemptive or similar rights
under any Reviewed Agreement. The Company has reserved sufficient shares of
Common Stock for issuance upon exercise of the Warrants.
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 8
10. The Offering Memorandum contains a fair summary of the principal terms
of each of the Securities and the Transaction Documents.
11. All of the outstanding shares of capital stock of the Company have
been, to our knowledge, duly authorized and validly issued, are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights. The authorized, issued and outstanding capital stock of the Company is
as set forth in the Offering Memorandum in the column entitled "Actual" under
the caption "Capitalization."
12. To our knowledge, there are not currently, and will not be following
the offering of the Securities, any outstanding subscriptions, rights, warrants,
calls, commitments of sale or options to acquire, or instruments convertible
into or exchangeable for, any capital stock or other equity interests of the
Company, except as described in the Offering Memorandum.
13. The execution and delivery by the Company of, and the performance by
the Company of its obligations under, the Transaction Documents and the issuance
and sale of the Securities will not contravene any provision of (a) applicable
law, (b) the Amended and Restated Certificate of Incorporation or bylaws of the
Company, (c) any Reviewed Agreement binding upon the Company that is material to
the Company on a consolidated basis, or (d) to our knowledge, any order,
judgment, or decree of any governmental body, agency or court having
jurisdiction over the Company. No consent, approval, authorization or order of
or qualification with any governmental body or agency is required for the
performance by the Company of its obligations under the Transaction Documents,
except such as may be required by the Securities or Blue Sky laws of the various
states in connection with the offer and sale of the Securities by the Initial
Purchasers.
14. The statements in the Offering Memorandum under the captions "Risk
Factors - Holding Company Structure; Restrictions on Access to Subsidiary Cash
Flow," "Risk Factors - Fraudulent Conveyance Risks," "Risk Factors - Original
Issue Discount," "Business - Government Regulation," "Business - Intellectual
Property," "Business - Legal Proceedings," "Management - Limitation on Liability
and Indemnification Matters," "Description of Units," "Description of Notes,"
"Description of Warrants," "Description of Capital Stock," "Certain Federal
Income Tax Considerations" and "Notice to Investors" in each case, insofar as
such statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information required with
respect to such legal matters, documents and proceedings and fairly summarize
the matters referred to therein in all material respects.
15. To our knowledge, there is no legal or governmental proceeding pending
or threatened to which the Company or any of its Subsidiaries is a party or to
which any of the properties of the
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 9
Company or any of its Subsidiaries is subject other than proceedings fairly
summarized in all material respects in the Offering Memorandum and proceedings
which we believe are not likely to have a material adverse effect on the Company
and its Subsidiaries, taken as a whole, or on the power or ability of the
Company to perform its obligations under the Transaction Documents or to
consummate the offering contemplated by the Offering Memorandum.
16. The Company is not and, after giving effect to the offering and sale
of the Units and the application of the proceeds thereof as described in the
Offering Memorandum, will not be an "investment company" as such term is defined
in the Investment Company Act of 1940, as amended.
17. While we have not undertaken any independent check or verification of
the information contained in the Offering Memorandum, we have participated in
the drafting and preparation of the Offering Memorandum and in the course of
such participation, nothing has come to our attention that leads us to believe
that, except for financial statements and financial data as to which we express
no belief, the Offering Memorandum contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
18. No (a) registration under the Securities Act of the Units is required
for the sale of the Units to the Initial Purchasers as contemplated by the
Purchase Agreement or for the Exempt Resales, it being understood that no
opinion is expressed as to any subsequent resale of any Security, nor (b)
qualification of the Indenture under the Trust Indenture Act of 1939 is required
in connection with the offer and sale of the Securities contemplated by the
Purchase Agreement, it being understood that no opinion is expressed as to any
subsequent resale of any Security, assuming, for the purposes of both clauses
(a) and (b), that (A) the purchasers who buy such Securities in the initial
resale thereof are Eligible Purchasers, (B) the accuracy of the Initial
Purchasers' and the Company's representations contained in the Purchase
Agreement regarding the absence of general solicitation in connection with the
sale of Units to the Initial Purchasers and the Exempt Resales and (C) the
accuracy of the representations made by each Regulation S Investor, who in
purchasing Units will be deemed to have represented that it is acquiring the
Units in an offshore transaction within the meaning of Regulation S under the
Securities Act.
19. The descriptions in the Offering Memorandum of the Securities and the
Transaction Documents fairly summarize the respective principal terms thereof.
20. Except as set forth in the Purchase Agreement, the Registration Rights
Agreement or the Warrant Registration Rights Agreement, to our knowledge, there
are no holders of securities of the Company who, by reason of the execution by
the Company of any Transaction Document or the
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 10
consummation by the Company of the transactions contemplated thereby, have the
right to request or demand that the Company register securities held by them
under the Securities Act.
The foregoing opinions are subject to the following exceptions,
qualifications, limitations and assumptions:
A. We are admitted to practice in the State of California, and the
opinions expressed herein are limited in all respects to existing laws
of the State of California, the statutes comprising the General
Corporation Law of the State of Delaware, applicable federal laws and
to the limited extent described below, the laws of the State of New
York. Furthermore, we have made no inquiry into, and express no
opinion with respect to, any federal or state statute, rule or
regulation relating to any patent, copyright, trademark or trade name
matter, as to the statutes, regulations, treaties or common laws of
any other nation, state or jurisdiction, or the effect on the
transactions contemplated in any Transaction Document or the
Securities of non-compliance under any such statutes, regulations,
treaties or common laws. We observe that the Transaction Documents
purport to be governed by the laws of the State of New York. We have
therefore made such investigation of the laws of the State of New York
as we have deemed necessary to render this opinion. With respect to
the opinion set forth in paragraph 1 above, we have relied solely on
an examination of the certificates respectively described in clauses
(p)-(x) above, without an investigation as to the standards for
conduct of business as a foreign corporation, good standing or any
other matter pertinent thereto in any jurisdiction other than the
State of California and the State of Delaware. Further, we have not
acted as regulatory counsel to the Company, and express no opinion as
to any regulatory matter pertinent to the Company or the opinions
rendered herein. We understand that you will rely on the opinion of
Dhruv Khanna, General Counsel to the Company, dated the date hereof,
with respect to such matters.
B. We wish to point out that provisions of any Transaction Document that
purport to permit any party to take action or make determinations or
benefit from indemnities and similar undertakings may be subject to a
requirement that such action be taken or such deter minations be made,
or that any action or inaction by any party that may give rise to
request for payments under such an undertaking be taken or not taken,
as the case may be, on a reasonable basis and in good faith.
C. We note that the enforceability of provisions in the Transaction
Documents to the effect that terms may not be waived or modified
except in writing may be limited under certain circumstances.
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 11
D. We express no opinion as to (i) the effect of the laws of any
jurisdiction in which any holder of the Securities or the Trustee is
located (other than California) that limits the interest, fees or
other charges it may impose and (ii) Sections 4.18 or 10.12 of the
Indenture.
E. With respect to our opinions in paragraphs 4 (to the extent it
pertains to the Indenture), 6 and 7, we have assumed that each Initial
Purchaser is an "exempt person" within the meaning of Article I,
Section 15 of the California Constitution.
F. We note that we have not represented the Equity Investors in this
transaction. For the purpose of our opinion in paragraph 5, we have
therefore assumed that each of the Equity Investors is duly organized
and validly existing and in good standing under the laws of its
jurisdiction of incorporation, (ii) has all requisite power and
authority to carry on its business as currently conducted, to own,
lease and operate its properties and to enter into the Subscription
Agreement, consummate the transactions contemplated thereon and
perform its obligations thereunder, (iii) is duly qualified to do
business and in good standing in each jurisdiction wherein the nature
of its business or its ownership or leasing of property requires such
qualification, to the extent germane to the transactions contemplated
by the Subscription Agreement, (iv) has duly and validly authorized,
executed and delivered the Subscription Agreement and (v) is not
restricted, whether by its charter, bylaws, partnership,
organizational or other comparable documents, agreements with any
third parties, orders, judgments or decrees entered with respect to it
by any governmental body, regulations applicable to it by reason of
the nature of its business, laws unique to its jurisdiction of
organization or otherwise, except for such restrictions as arise under
laws of the kind customarily applicable to transactions such as those
contemplated by the Subscription Agreement, from performing its
obligations under the Subscription Agreement.
G. For the purposes of the opinions in paragraph 13(a) and the last
sentence of paragraph 13 above, we have reviewed only those laws
which, in our experience, are customarily applicable to transactions
of this kind.
H. In rendering the opinion set forth in paragraph 13(d) above with
respect to violation of orders, judgments or decrees, as to the
existence and extent of such orders, judgments or decrees, we have
relied solely upon (i) inquiries of certain officers of the Company,
(ii) a certificate from an officer of the Company and (iii) our review
of the Reviewed Agreements.
<PAGE>
Bear, Stearns & Co., Inc.
BT Alex. Brown Incorporated
March 11, 1998
Page 12
I. In rendering the opinion set forth in paragraph 8 above with respect
to preemptive or similar rights, we have relied solely upon (i)
representations that we have obtained from officers of the Company
with respect to the nonexistence of any such rights, (ii) our review
of the Company's Amended and Restated Certificate of Incorporation, as
amended, and bylaws, as amended, and (iii) our review of the
Transaction Documents.
This opinion letter is solely for your benefit in connection with the
issuance and sale by the Company of the Units pursuant to the Purchase Agreement
and may not be relied upon or used by, circulated, quoted or referred to, nor
may copies hereof be delivered to, any other person or for any other purpose
without our prior written approval. We would expect any person to whose receipt
of a copy hereof we consented to be bound by this paragraph. We disclaim any
obligation to update this opinion letter to disclose to you facts, events or
changes of law occurring, arising or coming to our attention after the date
hereof.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati, P.C.
<PAGE>
EXHIBIT A
------- -
COVAD COMMUNICATIONS GROUP, INC.
CERTIFICATE AND DECLARATION
March 11, 1998
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
RE: ISSUANCE AND SALE OF 260,000 UNITS CONSISTING IN THE AGGREGATE OF
$260,000,000 PRINCIPAL AMOUNT AT MATURITY OF 13 1/2% SENIOR DISCOUNT
NOTES DUE 2008 AND 260,000 WARRANTS, INITIALLY EXERCISABLE TO PURCHASE
1,684,588 SHARE OF COMMON STOCK OF COVAD COMMUNICATIONS GROUP, INC.
------------------------------------------------------------------
Ladies and Gentlemen:
Reference is made to the Purchase Agreement dated March 6, 1998 (the
"Purchase Agreement") by and among Covad Communications Group, Inc., a Delaware
corporation (the "Company"), and Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated, as initial purchasers (collectively, the "Initial Purchasers").
We understand that you are required to render a legal opinion (the "WSGR Legal
Opinion") to the Initial Purchasers pursuant to Section 8(f) of the Purchase
Agreement. Terms defined in the WSGR Legal Opinion (whether directly or
indirectly by reference) and used herein without other definition shall have the
respective meanings herein assigned to such terms in the WSGR Legal Opinion.
With the understanding that you will rely on this Certificate and Declaration
(this "Certificate") as to the statements of fact contained herein in delivering
the WSGR Legal Opinion, the undersigned certify and declare to Wilson Sonsini
Goodrich & Rosati, P.C. ("WSGR"), on behalf of the Company, that:
1. Due Organization, Good Standing, etc. The Company has made all
-------------------------------------
filings, paid all fees and taken all other actions requested by the appropriate
offices, to maintain its corporate existence and good standing under the laws of
the States of Delaware and California. The Company's Amended and Restated
Certificate of Incorporation is as described in and incorporated as an exhibit
to the Certificate of Secretary of even date herewith delivered to the Initial
Purchasers, and neither the Board of Directors of the Company (the "Board of
Directors") nor the stockholders have taken any action to modify, rescind or
revoke such Amended and Restated Certificate of Incorporation. No corporate
action has been taken or is pending or contemplated with respect to dissolution
or liquidation of the Company.
2. Authorization of Transactions. The execution, delivery and
-----------------------------
performance of each of the Transaction Documents (including the issuance of the
Securities and the performance of the obligations of the Company thereunder) has
been duly authorized by the Board of Directors at its meeting held on January
21, 1998, by telephonic conferences on February 2, 1998 and February 9, 1998,
and by
<PAGE>
telephonic conference of the Pricing Committee of the Board of Directors on
March 6, 1998 and no further action by the Board of Directors, or any committee
thereof, has been taken to modify, rescind or revoke such authorization.
3. Authorization of Securities. The Warrant Shares issuable upon
---------------------------
exercise of the Warrants have been duly authorized and reserved for issuance by
the Company and, when issued and delivered upon exercise of the Warrants in
accordance with their terms, will be validly issued, fully paid and non-
assessable, and no further action by the Board of Directors, or any committee
thereof, has been taken to modify, rescind or revoke such authorization. There
are no outstanding preemptive rights, rights of first refusal or similar rights
which have not been waived with respect to any issuance of securities by the
Company, including the Securities or the Warrant Shares issuable upon exercise
of the Warrants, except as provided in the Amended and Restated Certificate of
Incorporation of the Company and the Amended and Restated Stockholder Rights
Agreement among the Company and certain of its stockholders, as amended.
4. Capitalization. The Company has authorized and issued outstanding
--------------
capital stock as set forth in the column entitled "Actual" under the caption
"Capitalization" in each Offering Memorandum (except for issuance, if any,
subsequent to the date of the Final Offering Memorandum pursuant to
reservations, agreements, employee benefit plans and otherwise, as referred to
in each Offering Memorandum), and the Company has obtained all stockholder and
Board of Directors approvals required to authorize the issuance of such
outstanding shares of Common Stock. The outstanding capital stock conforms to
the description thereof contained in each Offering Memorandum. The Company has
received the full consideration for payment of all issued and outstanding shares
of capital stock, as specified in the Board of Director's resolutions
authorizing such issuances.
5. Legal and Governmental Proceedings. Except as disclosed in each
----------------------------------
Offering Memorandum, there are no material legal or governmental proceedings
pending or threatened against the Company or to which any of its property may be
bound or subject which would have a Material Adverse Effect on the consolidated
financial position of stockholders' equity or results of operations of the
Company or impair the Company's ability to perform its obligations under the
Purchase Agreement or the other Transaction Documents or to consummate the
transactions contemplated by such agreements and instruments.
6. Accuracy of Summaries. The statements in each Offering Memorandum
---------------------
under the captions "Risk Factors -- Holding Company Structure; Restrictions on
Access to Subsidiary Cash Flow," "Risk Factors -- Fraudulent Conveyance Risks,"
"Risk Factors -- Original Issue Discount," "Business -- Government Regulation,"
"Business -- Intellectual Property," "Business -- Legal Proceedings, "Management
- -- Limitation on Liability and Indemnification Matters," "Description of Units,"
"Description of Notes," "Description of Warrants," "Description of Capital
Stock," "Certain Federal Income Tax Considerations" and "Notice to Investors",
insofar as such statements constitute a summary of facts available to the
Company or the content of the documents referred to therein, are accurate
summaries fairly representing the matters described therein. The Company
confirms to WSGR the accuracy and completeness of the representations and
warranties of the Company contained in
-2-
<PAGE>
Section 5 of the Purchase Agreement. As of the date hereof, neither the
Preliminary Offering Memorandum nor the Final Offering Memorandum contains any
untrue statement of a material fact or omits to state a material fact pertaining
to the Company, its operations, business, prospects or financial or other
condition, which is necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
Company acknowledges and confirms that WSGR is entitled to rely on such
representations and warranties as a premise for the WSGR Legal Opinion.
7. No Violation. The Company is not presently (i) in violation of (a)
------------
its Amended and Restated Certificate of Incorporation or bylaws or any other
organizational documents; (b) any statute, ordinance, law, administrative or
governmental rule or regulation or filing or judgment, injunction, order or
decree of any court or governmental agency or body applicable to the Company or
any of its properties or assets, except where any such violations could not,
singly or in the aggregate with all other such violations, reasonably be
expected to have a Material Adverse Effect or (ii) in breach of or in default in
the performance of (including any event which, with notice or lapse of time or
both, would constitute a breach of or a default in the performance of) any
obligation, agreement or condition contained in any bond, debenture, note or any
other evidence of indebtedness, material agreement, indenture, material lease or
other material instrument to which the Company is a party or by which any of the
Company or any of their respective properties may be bound, except (a) as may be
disclosed in each Offering Memorandum or (b) to the extent that any such breach
or default could not, singly or in the aggregate with all other such breaches
and defaults, reasonably be expected to have a Material Adverse Effect.
8. No Conflicts. The issuance and sale of the Securities by the Company
------------
pursuant to the Purchase Agreement, the Indenture and the Warrant Agreement and
the execution and delivery by the Company of, and the performance by the Company
of its obligations under, the Transaction Documents will not result in a breach
or violation of any of the terms or provisions, or constitute a default under,
any of the instruments and agreements listed on Annex 1 hereto, nor will such
action result in any violation or provision of the Company's Amended and
Restated Certificate of Incorporation, bylaws, or any corresponding documents of
the Company's Subsidiaries.
9. Investment Company Act. Neither the Company nor any of its
----------------------
Subsidiaries is engaged, or proposes to engage, in the business of extending
credit for the purpose of purchasing or carrying margin stock (as hereinafter
defined) and no part of the proceeds of the issuance and sale of the Securities
will be used to extend credit to others for the purpose of purchasing or
carrying margin stock. As used herein, "margin stock" means (a) any equity
security registered or having unlisted trading privileges on a national
securities exchange, (b) any stock traded in the over-the-counter market and
designated as a margin security by the Board of Governors of the Federal Reserve
System, (c) any security designated as qualified for trading in the National
Market System of the National Association of Securities Dealers, Inc., (d) any
debt security convertible into the foregoing securities or carrying a warrant or
right to subscribe to or purchase the foregoing securities, (e) any warrant or
right to subscribe to or purchase the foregoing securities, or (f) any security
issued by an investment company within the contemplation of the Investment
Company Act of 1940, as amended.
-3-
<PAGE>
The undersigned have taken all reasonably necessary steps to verify the
information set forth in this Certificate. The undersigned have examined such
corporate records, and have made such inquiries of other officers and executives
of the Company as the undersigned have deemed reasonable and necessary in order
to ensure the accuracy of the representations set forth herein. Neither of the
undersigned is aware of any fact or circumstances which would render any
conclusion reached in the WSGR Legal Opinion misleading.
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Timothy P. Laehy
------------------------------------------
Timothy P. Laehy
Chief Financial Officer, Treasurer and
Vice President, Finance
By: /s/ Dhruv Khanna
------------------------------------------
Dhruv Khanna
Secretary
-4-
<PAGE>
ANNEX 1
-------
AGREEMENTS AND INSTRUMENTS
--------------------------
. Amended and Restated Stockholder Rights Agreement dated as of March 11,
1998
. Diamond Lane Master Purchase Agreement dated December 4, 1997
. Quick Start Loan and Security Agreement dated January 5, 1998 between the
Company and Silicon Valley Bank
. Internet Service Provider ("ISP") Customer Agreements:
(1) ISP Contract between the Company and Idiom Internet Services dated
December 19, 1997
(2) ISP Contract between the Company and DSL Networks, Inc. dated December
31, 1997
(3) ISP Contract between the Company and Whole Earth Networks dated
December 12, 1997
(4) ISP Contract between the Company and Slip Net dated December 30, 1997
(5) ISP Contract between the Company and LanMinds dated December 21, 1998
(6) ISP Contract between the Company and DNAI
(7) ISP Contract between the Company and Bay Junction dated January 21,
1998
(8) ISP Contract between the Company and Concentric Network dated December
18, 1997
. Enterprise Customer Agreements:
(1) Memorandum of Understanding between Hewlett-Packard Technology
Intrastructure Services and Covad Communications dated November 24,
1997
(2) Agreement for Evaluation of Supplier's Product between Covad
Communications Company and Intel Corporation dated December 3, 1997
<PAGE>
(3) Oracle Pilot Proposal and Menorandum of Understanding for Covad
Communications Services dated August 25, 1997
(4) Corporate Customer Pilot Agreement between Covad Communications
Company and Sagent Technology dated February 3, 1998
(5) Pilot Agreement for Covad Communications Services between Covad
Communications Company and Stanford University dated May 29, 1997
. 1997 Stock Plan
-2-
<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
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<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.
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<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
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<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.
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<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: __________________
__________________
__________________
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<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 10.4
COVAD COMMUNICATIONS GROUP, INC.
1997 STOCK PLAN
(AMENDED JANUARY, 1998)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Covad Communications Group, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting or advisory services to such
entity.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
-2-
<PAGE>
(r) "Option Agreement" means a written or electronic agreement
----------------
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 1997 Stock Plan.
----
(x) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(y) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(z) "Service Provider" means an Employee, Director or Consultant.
----------------
(aa) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(bb) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 1,756,750 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued
-3-
<PAGE>
under the Plan, upon exercise of either an Option or Stock Purchase Right, shall
not be returned to the Plan and shall not become available for future
distribution under the Plan, except that if Shares of Restricted Stock are
repurchased by the Company at their original purchase price, such Shares shall
become available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Administrator. The Plan shall be administered by the Board or a
-------------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
-4-
<PAGE>
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by Optionees to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
-5-
<PAGE>
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5)
-6-
<PAGE>
consideration received by the Company under a cashless exercise program
implemented by the Company in connection with the Plan, or (6) any combination
of the foregoing methods of payment. In making its determination as to the type
of consideration to accept, the Administrator shall consider if acceptance of
such consideration may be reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after
-7-
<PAGE>
termination, the Optionee does not exercise his or her Option within the time
specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified
time in the Option Agreement, the Option shall remain exercisable for twelve
(12) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (of at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. The Options
--------------------------------------------------------
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to
-8-
<PAGE>
purchase, the price to be paid, and the time within which such person must
accept such offer. The terms of the offer shall comply in all respects with
Section 260.140.42 of Title 10 of the California Code of Regulations. The offer
shall be accepted by execution of a Restricted Stock purchase agreement in the
form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five (5) years from the date of
purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason
-9-
<PAGE>
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
-10-
<PAGE>
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Service Provider to whom an
Option or Stock Purchase Right is so granted within a reasonable time after the
date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
-11-
<PAGE>
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
-12-
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: Incentive Stock Option
---
____ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
<PAGE>
12.5% of the Shares subject to the Option shall vest six months on the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to Optionee's continuing to be a Service
Provider on such dates.
Termination Period:
------------------
This Option shall be exercisable for thirty days after Optionee ceases to
be a Service Provider. Upon Optionee's death or Disability, this Option may be
exercised for one year after Optionee ceases to be a Service Provider. In no
event may Optionee exercise this Option after the Term/Expiration Date as
provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the Exercise Notice@)
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax
-2-
<PAGE>
purposes the Shares shall be considered transferred to the Optionee on the date
on which the Option is exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
B.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be by
-----------------
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
7. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
-3-
<PAGE>
8. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Tax Consequences. Set forth below is a brief summary as of the date of
----------------
this Option of some of the federal tax consequences of exercise of this Option
and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A
TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) Exercise of Nonstatutory Stock Option. There may be a regular
-------------------------------------
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(c) Disposition of Shares. In the case of an NSO, if Shares are held
---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and of at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
(d) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in
-4-
<PAGE>
writing of such disposition. Optionee agrees that Optionee may be subject to
income tax withholding by the Company on the compensation income recognized by
the Optionee.
10. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
12. Vesting Acceleration on Change of Control.
-----------------------------------------
(a) Vesting Acceleration. In the event of a "Change of Control,"
--------------------
all of the Optionee's rights to purchase stock under this Agreement with the
Company shall be automatically vested in their entirety on an accelerated basis
and be fully exercisable:
(A) as of the date immediately preceding such "Change of Control" in
the event this stock option agreement is or will be terminated or
canceled (except by mutual consent) or any successor to the Company
fails to assume and agree to perform such stock option agreement as
provided in Section 2(13) hereof at or prior to such time as any such
person becomes a successor to the Company; or
-5-
<PAGE>
(B) as of the date immediately preceding such "Change of Control" in
the event the Optionee does not or will not receive upon exercise of
the Optionee's stock purchase rights under such stock option agreement
the same identical securities and/or other consideration as is
received by all other shareholders in any merger, consolidation, sale,
exchange or similar transaction occurring upon or after such "Change
of Control"; or
(C) as of the date immediately preceding any "Involuntary Termination"
of the Optionee occurring upon or after any such "Change of Control";
or
(D) as of the date one (1) year following the first such "Change of
Control," provided that the Optionee shall have remained an employee
of the Company continuously throughout such one-year period, other
than a termination as a result of death or disability;
whichever shall first occur (all quoted terms as defined below).
(b) Change of Control. "Change of Control" means the occurrence
-----------------
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A change in the composition of the Board of Directors
of the Company occurring within a two-year period as a result of which fewer
than a majority of the directors are "Incumbent Directors." "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of the date hereof, or (B) are elected, or nominated for election, to the Board
of Directors with the affirmative votes (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for election as a director without objection to such nomination) of at
least a majority of the Incumbent Directors at the time of such election or
nomination; or
(iii) The consummation of (A) a merger or consolidation of
the Company with any other entity, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or the entity
that controls the Company or such surviving entity) at least fifty percent (50%)
of the total voting power represented by the voting securities of the Company or
such surviving entity or the entity that controls the Company or such surviving
entity outstanding immediately
-6-
<PAGE>
after such merger or consolidation, or (B) the sale or disposition by the
Company of all or substantially all the Company's assets; or
(iv) The shareholders approve a plan of complete liquidation
of the Company.
(c) Involuntary Termination. "Involuntary Termination" shall
-----------------------
mean without the Optionee's written consent: (i) a termination by the Company of
the Optionee's employment with the Company other than for Cause; (ii) a material
reduction of or variation in the Optionee's duties, authority or
responsibilities, relative to the Optionee's duties, authority or
responsibilities as in effect immediately prior to such reduction or variation;
(iii) a reduction by the Company in the base salary of the Optionee as in effect
immediately prior to such reduction; (iv) a material reduction by the Company in
the kind or level of employee benefits, including bonuses, to which the Optionee
was entitled immediately prior to such reduction, with the result that the
Optionee's overall benefits package is materially reduced; (v) the relocation of
the Optionee to a facility or a location more than thirty (30) miles from the
Optionee's then present location; (vi) the failure of the Company to obtain the
assumption of this Agreement by any successor as required in Section 2(13) or
(vii) any act or set of facts that would under applicable law constitute a
constructive termination of Optionee.
(d) Cause. "Cause" shall mean (i) any willful act of personal
-----
dishonesty, fraud or misrepresentation taken by the Optionee in connection with
his or her responsibilities as an employee which was intended to result in
substantial gain or personal enrichment of the Optionee at the expense of the
Company and was materially and demonstrably injurious to the Company; (ii) the
Optionee's conviction of a felony on account of any act which was materially and
demonstrably injurious to the Company; or (iii) the Optionee's willful and
continued failure to substantially perform his or her principal duties and
obligations of employment including under any written agreements (other than any
such failure resulting from incapacity due to physical or mental illness), which
failure is not remedied in a reasonable period of time after receipt of written
notice from the Company. For the purposes of this Section 12(d), no act or
failure to act shall be considered "willful" unless done or omitted to be done
in bad faith and without reasonable belief that the act or omission was in or
not opposed to the best interests of the Company. Any act or failure to act
based upon authority given pursuant to a resolution duly adopted by the Board of
Directors of the Company or based upon the advice of counsel for the Company
shall be conclusively presumed to be done or omitted to be done in good faith
and in the best interests of the Company.
(e) Voluntary Resignation; Termination For Cause. If the
--------------------------------------------
Optionee terminates employment as a result of an Involuntary Termination, the
Optionee shall be entitled to receive accelerated vesting under Section 12(a)
hereof. If the Optionee's continuous status as an employee of the Company
terminates by reason of the Optionee's voluntary resignation (and not
Involuntary Termination) or if the Optionee's continuous status as an employee
of the Company is
-7-
<PAGE>
terminated for Cause, in either case prior to such time as accelerated vesting
occurs as provided in Section 12(a) hereof, then the Optionee shall not be
entitled to receive accelerated vesting under Section 12(a) hereof.
13. Successors.
----------
Any successor to the Company (whether direct or indirect and
whether by purchase, merger or consolidation) shall assume the obligations under
this Agreement and agree expressly to perform the obligations under this
Agreement in the same manner and to the same extent as the Company would be
required to perform such obligations in the absence of a succession.
The terms of this Agreement and all rights of the Optionee
hereunder shall inure to the benefit of, and be enforceable by, the Optionee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
-8-
<PAGE>
OPTIONEE: COVAD COMMUNICATIONS GROUP, INC.
_______________________________ ________________________________
Signature By
_______________________________ ________________________________
Print Name Title
_______________________________
_______________________________
Residence Address
-9-
<PAGE>
EXHIBIT A
---------
1997 STOCK PLAN
EXERCISE NOTICE
Covad Communications Group, Inc.
3560 Bassett St.
Santa Clara, CA 95054
Attention: Secretary
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Covad Communications
Group, Inc. (the "Company") under and pursuant to the 1997 Stock Plan (the
"Plan") and the Stock Option Agreement dated ________, 19____ (the "Option
Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
--------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE>
Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares upon the first sale of Common Stock of the
Company to the general
-2-
<PAGE>
public pursuant to a registration statement filed with and declared effective by
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
6. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN
THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF
THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL
HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE
EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF
THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL
OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF
FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of
-3-
<PAGE>
this Agreement or (ii) to treat as owner of such Shares or to accord the right
to vote or pay dividends to any purchaser or other transferee to whom such
Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights under
----------------------
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
10. Governing Law; Severability. This Agreement is governed by the
---------------------------
internal substantive laws but not the choice of law rules, of California.
-4-
<PAGE>
11. Entire Agreement. The Plan and Option Agreement are incorporated
----------------
herein by reference. This Agreement, the Plan, the Option Agreement and the
Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
Submitted by: Accepted by:
OPTIONEE: COVAD COMMUNICATIONS GROUP, INC.
_____________________________ ________________________________
Signature By
_____________________________ ________________________________
Print Name Its
Address: Address:
- ------- -------
_____________________________ 3560 Bassett St.
_____________________________ Santa Clara, CA 95054
________________________________
Date Received
-5-
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: COVAD COMMUNICATIONS GROUP, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted
<PAGE>
securities" acquired, directly or indirectly from the issuer thereof, in a non-
public offering subject to the satisfaction of certain conditions. Rule 701
provides that if the issuer qualifies under Rule 701 at the time of the grant of
the Option to the Optionee, the exercise will be exempt from registration under
the Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
ninety (90) days thereafter (or such longer period as any market stand-off
agreement may require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including: (1) the resale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934); and, in the case of
an affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.
Signature of Optionee:
_____________________________________
Date:__________________________, 19__
-2-
<PAGE>
EXHIBIT 10.5
COVAD COMMUNICATIONS GROUP, INC.
SERIES C PREFERRED STOCK AND WARRANT
SUBSCRIPTION AGREEMENT
(HIGH YIELD OFFERING)
DATED AS OF FEBRUARY 20, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
SECTION 1 Authorization and Sale of Preferred Stock and Issuance of Warrants.............. 1
1.1 Authorization.................................................................. 1
1.2 Sale of Shares of Series C Preferred to Intel.................................. 1
1.3 Company Right to Sell to Warburg and Crosspoint................................ 2
1.4 Issuance of Warrants in Consideration of Commitment............................ 3
1.5 Amendment and Restatement of the Stockholder Rights Agreement.................. 3
SECTION 2 Closing Dates; Delivery......................................................... 3
2.1 Closing Dates.................................................................. 3
2.2 Delivery....................................................................... 4
SECTION 3 Representations and Warranties of the Company................................... 4
3.1 Organization of the Company.................................................... 4
3.2 Company Capital Structure...................................................... 5
3.3 Subsidiaries................................................................... 6
3.4 Authority...................................................................... 6
3.5 No Conflict.................................................................... 6
3.6 Consents....................................................................... 7
3.7 Company Financial Statements................................................... 7
3.8 No Undisclosed Liabilities..................................................... 7
3.9 No Changes..................................................................... 7
3.10 Tax Matters.................................................................... 9
3.11 Restrictions on Business Activities............................................10
3.12 Title of Properties; Absence of Liens and Encumbrances.........................10
3.13 Intellectual Property..........................................................10
3.14 Agreements, Contracts and Commitments..........................................11
3.15 Interested Party Transactions..................................................12
3.16 Governmental Authorization.....................................................13
3.17 Litigation.....................................................................13
3.18 Employees; Employee Compensation...............................................13
3.19 Minute Books...................................................................14
3.20 Environmental Matters..........................................................14
3.21 Brokers' and Finders' Fees; Third Party Expenses...............................15
3.22 Registration Rights............................................................15
3.23 No Interference or Conflict....................................................15
3.24 Insurance......................................................................15
3.25 Regulatory Matters.............................................................15
3.26 Complete Copies of Materials...................................................16
3.27 Representations Complete.......................................................16
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 4 Representations and Warranties of the Purchasers.......................... 17
4.1 Investment Representations and Covenants of the Purchasers............... 17
4.2 No Public Market......................................................... 18
4.3 Domicile................................................................. 18
4.4 Authority................................................................ 18
SECTION 5 Conditions to Closing of Purchasers....................................... 19
5.1 Conditions to Closing of Intel........................................... 19
5.2 Conditions to Closing of Warburg and Crosspoint.......................... 19
SECTION 6 Conditions to Closing of Company.......................................... 20
SECTION 7 Miscellaneous............................................................. 20
7.1 Governing Law............................................................ 20
7.2 Survival................................................................. 20
7.3 Successors and Assigns................................................... 21
7.4 Entire Agreement; Amendment.............................................. 21
7.5 Notices, etc............................................................. 21
7.6 Delays or Omissions...................................................... 21
7.7 California Corporate Securities Law...................................... 21
7.8 Expenses................................................................. 22
7.9 Counterparts............................................................. 22
7.10 Severability............................................................. 22
7.11 Gender................................................................... 22
7.12 Confidentiality.......................................................... 22
7.13 Enforceability; Specific Performance; Damages............................ 22
7.14 Jurisdiction and Venue................................................... 22
7.15 Termination.............................................................. 23
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
EXHIBITS
A. Schedule of Purchasers
B. Amended and Restated Certificate of Incorporation
C. Form of Series C Warrant
D. Form of Common Warrant
E. Amended and Restated Stockholder Rights Agreement
F. Exceptions to Representations and Warranties
G. Form of Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
iii
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
This Agreement is made as of February 20, 1998 among Covad Communications
Group, Inc., a Delaware corporation (the "COMPANY"), with its principal office
at 3560 Bassett Street, Santa Clara, California 95054, and Warburg, Pincus
Ventures, L.P. ("WARBURG"), Crosspoint Venture Partners 1996 ("CROSSPOINT") and
Intel Corporation ("INTEL") (individually, a "PURCHASER" and collectively, the
"PURCHASERS").
WHEREAS, the Company intends to make a private offering of units consisting
of senior notes due 2005 and warrants to purchase Common Stock with aggregate
gross proceeds of at least $100,000,000 (the "HIGH YIELD OFFERING"); and
WHEREAS, as a condition to the High Yield Offering the placement agents,
Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated (collectively the
"INITIAL PURCHASERS") have required that the Company obtain from Warburg and
Crosspoint a binding commitment for an investment in Series C Preferred Stock of
the Company in the aggregate amount of $16,000,000 to be made within one year
after the closing of the High Yield Offering; and
WHEREAS, the Company desires to sell, and Intel desires to purchase, an
aggregate of $1 million of shares of Series C Preferred Stock concurrently with
the closing of the High Yield Offering; and
WHEREAS, the Company and the Purchasers wish to set forth the terms and
conditions upon which the Company will sell, and the Purchasers will purchase,
shares of Series C Preferred Stock.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1
Authorization and Sale of Preferred Stock and Issuance of Warrants
------------------------------------------------------------------
1.1 Authorization. The Company has authorized the sale and issuance of
-------------
3,716,429 shares of its Series C Preferred Stock ("SERIES C PREFERRED"),
including 1,675,000 shares issuable upon exercise of the Series C Warrants (as
defined in Section 1.3 below), having the rights, restrictions, privileges and
preferences as set forth in the Company's Amended and Restated Certificate of
Incorporation attached to this Agreement as Exhibit B (the "AMENDED CERTIFICATE
---------
OF INCORPORATION").
1.2 Sale of Shares of Series C Preferred to Intel. Subject to the terms
---------------------------------------------
and conditions hereof, the Company will issue and sell to Intel, and Intel will
buy from the Company, the number of shares (the
<PAGE>
"SHARES") of Series C Preferred and Series C Warrants (as defined below)
specified opposite Intel's name on the Schedule of Purchasers attached hereto as
Exhibit A, for the aggregate purchase price specified opposite its name on the
- ---------
Schedule of Purchasers; provided, that the purchase and sale of such Series C
Warrants to Intel shall be conditioned upon, and the delivery of such Series C
Warrants to Intel shall be made concurrently with, the Second Closing (as
defined below). It is understood that no additional consideration shall be due
with respect to the delivery of the Series C Warrants to Intel at such Second
Closing. The Company's agreement with Intel is separate from its agreements with
the other Purchasers hereunder, and the sale of the Series C Preferred and the
Series C Warrants to Intel is separate from the Company's sale of Series C
Preferred and Series C Warrants to the other Purchasers hereunder.
1.3 Company Right to Sell to Warburg and Crosspoint.
-----------------------------------------------
(a) Subject to the terms and conditions hereof, the Company shall have
the unequivocal right to sell to Warburg and Crosspoint, and Warburg and
Crosspoint shall have the unequivocal obligation to purchase, severally and not
jointly, the number of Shares and the number of warrants to purchase Series C
Preferred (the "SERIES C WARRANTS") specified opposite their respective names on
the Schedule of Purchasers, for the aggregate purchase price specified opposite
their respective names on the Schedule of Purchasers, at any time from and after
the closing of the High Yield Offering to that date which is one year from the
date of the closing of the High Yield Offering (the "FINAL CLOSING DATE"). The
Company may exercise its right at any time by delivering a written notice to
each of Warburg and Crosspoint stating that the Company has exercised its right
to sell the Shares and the Series C Warrants to Warburg and Crosspoint and
setting forth the closing date as provided in Section 2.1 (the "EXERCISE
NOTICE"). The Company's determination to exercise the foregoing right shall be
made in the sole discretion of the independent members of the Board of Directors
of the Company (excluding the directors affiliated with Warburg and Crosspoint)
(the "INDEPENDENT DIRECTORS"). In the event that the Company has not delivered
the Exercise Notice or completed a Replacement Financing (as defined in Section
1.3(b) below) before the Final Closing Date, then the Company shall sell, and
Warburg and Crosspoint shall purchase, the Shares and the Series C Warrants on
the Final Closing Date. The aggregate number of Series C Warrants shall be
1,675,000. The Series C Warrants shall be in the form of Exhibit C.
---------
(b) The Company may in its discretion elect not to exercise its right
to sell Series C Preferred and Series C Warrants to Warburg and Crosspoint and
may complete an alternative equity financing in the aggregate amount of $16
million or greater of Common Stock or Preferred Stock in lieu thereof (the
"REPLACEMENT FINANCING"); provided that (i) if the terms of such Replacement
Financing are at the same or a higher price per share (i.e., valuation) and are
pari passu or more favorable to the Company than the terms of the Series C
Preferred set forth in the Amended Certificate of Incorporation, the
determination as to whether to complete such Replacement Financing shall be in
the sole discretion of the Independent Directors; and (ii) if the terms of such
Replacement Financing are at a lower price per share (i.e., valuation) and are
less favorable to the Company than such Series C Preferred, the determination as
to whether to complete such Replacement Financing shall be made by the unanimous
approval of the whole Board of Directors. Each of Warburg and Crosspoint agrees
that if the Company elects an alternative equity financing pursuant to the
foregoing sentence, it will vote its shares of
-2-
<PAGE>
Series B Preferred Stock as necessary to enable the Company to complete such
financing, provided such action shall not amend the terms of the Series B
Preferred Stock.
1.4 Issuance of Warrants in Consideration of Commitment. In consideration
---------------------------------------------------
of the commitment of each of the Purchasers to purchase Series C Preferred and
Series C Warrants pursuant to this Agreement, the Company shall deliver to the
Purchasers concurrently with the execution of this Agreement warrants to
purchase an aggregate of 600,000 shares of Common Stock, $.001 par value, at a
purchase price of $.01 per share. The warrants shall be in the form of Exhibit
-------
D to this Agreement (the "COMMON WARRANTS") and the number of Common Warrants
- -
delivered to each Purchaser shall be as set forth opposite such Purchaser's name
on the Schedule of Purchasers.
1.5 Amendment and Restatement of the Stockholder Rights Agreement.
-------------------------------------------------------------
Concurrently with the execution and delivery of this Agreement and the issuance
of the Common Warrants, the Company and each of the Purchasers shall execute and
deliver the Amended and Restated Stockholder Rights Agreement in the form
attached hereto as Exhibit E (the "AMENDED AND RESTATED STOCKHOLDER RIGHTS
---------
AGREEMENT").
SECTION 2
Closing Dates; Delivery
-----------------------
2.1 Closing Dates.
-------------
(a) First Closing Date. The closing of the purchase and sale of the
------------------
Series C Preferred to Intel hereunder (the "FIRST CLOSING") shall be held
concurrently with the closing of the High Yield Offering on the date of the
closing of the High Yield Offering (provided that such closing date occurs on or
before April 30, 1998) or on such later date as the Company and Intel may
mutually agree (the "FIRST CLOSING DATE"). The place of the First Closing
(including the place of delivery to Intel by the Company of the certificates
evidencing all shares of Series C Preferred being purchased by Intel and the
place of payment to the Company by Intel of the purchase price therefor) shall
be the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California 94304-1050, or such other place as Intel and the Company may
mutually agree.
(b) Second Closing Date. The closing of the purchase and sale of the
-------------------
Series C Preferred and Series C Warrants hereunder to Warburg and Crosspoint and
the closing of the sale of the Series C Warrants to Intel (the "SECOND CLOSING")
shall be held at 1:00 p.m., California Time, on the fifteenth (15th) day after
delivery of the Exercise Notice (or if such date is not a business day then on
the next business day thereafter) or on such later date as the Company and the
Purchasers may mutually agree to, but in any event no later than the Final
Closing Date (the date of such Closing being referred to as the "SECOND CLOSING
DATE"). The place of the Second Closing (including the place of delivery to
Warburg and Crosspoint by the Company of the certificates evidencing all shares
of Series C Preferred and Series C Warrants being purchased by them and the
place of payment to the Company by Warburg
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<PAGE>
and Crosspoint of the purchase price therefor and the place of delivery to Intel
by the Company of the Series C Warrants being purchased by Intel) shall be the
offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304-1050, or such other place as such Purchasers and the Company
may mutually agree.
2.2 Delivery.
--------
(a) First Closing. At the First Closing, the Company will deliver to
-------------
Intel a certificate or certificates representing the number of Shares designated
on the Schedule of Purchasers to be purchased by Intel, against payment of the
purchase price therefor, by check or wire transfer, in the amount specified on
the Schedule of Purchasers.
(b) Second Closing. At the Second Closing, the Company will deliver
--------------
to each of Warburg and Crosspoint a certificate or certificates representing the
number of Shares and a Series C Warrant evidencing the number of Series C
Warrants designated on the Schedule of Purchasers to be purchased by such
Purchaser, against payment of the purchase price therefor, by check or wire
transfer, in the amount specified on the Schedule of Purchasers. At the Second
Closing, the Company will also deliver to Intel a Series C Warrant evidencing
the number of Series C Warrants designated on the Schedule of Purchasers
purchased by Intel.
SECTION 3
Representations and Warranties of the Company
---------------------------------------------
The Company hereby represents and warrants, subject to such exceptions as
are specifically disclosed in the disclosure letter (referencing the appropriate
section and paragraph numbers) supplied by the Company and attached hereto as
Exhibit F (the "DISCLOSURE LETTER") and dated as of the date hereof, as follows:
- ---------
3.1 Organization of the Company. Each of the Company and its wholly-owned
---------------------------
subsidiaries Covad Communications Company, a California corporation, and DIECA
Communications, Inc., a Virginia corporation (collectively, the "SUBSIDIARIES")
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Each of the Company and each of
the Subsidiaries has the corporate power to own its properties and to carry on
its business as now being conducted and as proposed to be conducted and is duly
qualified to do business and in good standing as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, assets (including intangible assets), financial
condition, results of operations or prospects of the Company and the
Subsidiaries, taken as a whole (hereinafter referred to as a "MATERIAL ADVERSE
EFFECT"). The Company has delivered a true and correct copy of its Certificate
of Incorporation and Bylaws, each as amended to date, to the Purchasers.
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<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,
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phantom stock, profit participation, or other similar rights with respect to the
Company. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting stock of the Company.
3.3 Subsidiaries. The Company does not have, and never has had, any
------------
subsidiaries or affiliated companies other than the Subsidiaries and does not
otherwise own, and has not otherwise owned, any shares in the capital of or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture, limited liability company or other
business entity. The Company owns all outstanding shares of stock of the
Subsidiaries, free and clear of all liens, pledges, charges, claims, restriction
on transfer, mortgages, security interests or other encumbrances of any sort
(collectively, "LIENS"). All outstanding shares of the Subsidiaries are owned
by the Company and are duly authorized, validly issued, fully paid and
nonassessable. There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which any Subsidiary is a party
or by which it is bound obligating such Subsidiary to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of any Subsidiary or obligating any
Subsidiary to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement.
3.4 Authority. The Company has all requisite power and authority to enter
---------
into this Agreement, the Series C Warrants, the Common Warrants, and each of the
Related Agreements to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement,
the Series C Warrants, the Common Warrants and the Related Agreements and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Company, and no
further action is required on the part of the Company or any of their respective
officers, directors, or stockholders to authorize the Agreement, the Series C
Warrants, the Common Warrants, the Related Agreements and the transactions
contemplated hereby and thereby. This Agreement, the Series C Warrants, the
Common Warrants and the Related Agreements have been duly executed and delivered
by the Company and, assuming the due authorization, execution and delivery by
the other parties hereto and thereto, constitute the valid and binding
obligation of the Company, enforceable in accordance with their respective
terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies. The "RELATED
AGREEMENTS" shall mean all such ancillary agreements required in this Agreement
to be executed and delivered in connection with the transactions contemplated
hereby, including the Amended and Restated Stockholder Rights Agreement.
3.5 No Conflict. The execution and delivery of this Agreement, the Series
-----------
C Warrants, the Common Warrants and the Related Agreements by the Company do
not, and the consummation of the transactions contemplated hereby and thereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "CONFLICT") (i) any provision of
the Certificate or Articles of Incorporation and Bylaws of the Company or any
Subsidiary, (ii) any mortgage, indenture, lease, contract or other agreement
-6-
<PAGE>
or instrument, permit, concession, franchise or license to which the Company or
any Subsidiary or any of their respective properties or assets are subject, or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or the Subsidiaries or their respective properties or
assets.
3.6 Consents. No consent, waiver, approval, order or authorization of, or
--------
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("GOVERNMENTAL ENTITY") or any
third party, including a party to any agreement with the Company or any
Subsidiary (so as not to trigger any Conflict), is required by or with respect
to the Company or any Subsidiary in connection with the execution and delivery
of this Agreement, the Series C Warrants, the Common Warrants and the Related
Agreements or the consummation of the transactions contemplated hereby and
thereby, except for such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
securities laws, which will be timely filed within the applicable periods
therefor. The Company has not offered shares of its Series C Preferred or any
substantially similar securities of the Company for sale to, or solicited any
offers to buy from, or otherwise approached or negotiated in respect thereof
with, any person other than the Purchasers, and the Company will not take any
action that will cause the issuance and delivery of the shares of its Series C
Preferred and Common Stock as contemplated hereby to constitute a violation of
the Securities Act or the California Corporate Securities Law of 1968, as
amended.
3.7 Company Financial Statements. Section 3.7 of the Disclosure Letter
----------------------------
sets forth the Company's balance sheets as of December 31, 1997, (the "CURRENT
BALANCE SHEET") and the related audited statements of income and cash flow for
the twelve-month period ended December 31, 1997, (collectively the "COMPANY
FINANCIALS"). The Company Financials are correct in all material respects and
have been prepared in accordance with U.S. generally accepted accounting
principles consistent with the reporting practices and principles ("GAAP"),
applied on a basis consistent throughout the periods indicated and consistent
with each other. The Company Financials present fairly the financial condition,
operating results and cash flows of the Company as of the dates and during the
periods indicated therein.
3.8 No Undisclosed Liabilities. Except as set forth in Section 3.8 of the
--------------------------
Disclosure Letter, the Company does not have any liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with GAAP),
which individually or in the aggregate (i) has not been reflected in the Current
Balance Sheet, or (ii) has not arisen in the ordinary course of business
consistent with past practices since December 31, 1997.
3.9 No Changes. Except as set forth in Section 3.9 of the Disclosure
----------
Letter or as contemplated by this Agreement, since December 31, 1997, there has
not been, occurred or arisen any:
(a) transaction by the Company or any Subsidiary except in the
ordinary course of business as conducted on that date and consistent with past
practices;
-7-
<PAGE>
(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company or the Articles of Incorporation or Bylaws of any
Subsidiary;
(c) capital expenditure or commitment by the Company or the
Subsidiaries, either individually or in the aggregate, exceeding $50,000.
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company or the Subsidiaries (whether or not covered by
insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company or the
Subsidiaries;
(g) revaluation by the Company or the Subsidiaries of any of their
respective assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company Capital Stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
Common Stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company or the Subsidiaries to any of their respective officers,
directors, employees or advisors, or the declaration, payment or commitment or
obligation of any kind for the payment, by the Company or the Subsidiaries of a
bonus or other additional salary or compensation to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"COMPANY AGREEMENT") or any extension or modification the terms of any Company
Agreement which (i) involves the payment by the Company or the Subsidiaries of
greater than $50,000 per annum or which extends for more than one (1) year, (ii)
involves any payment or obligation to any affiliate of the Company, or (iii)
involves the sale of any material assets of the Company or the Subsidiaries;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company or the Subsidiaries, or any creation of any security
interest in such assets or properties except in the ordinary course of business
as conducted on that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company or any Subsidiary is a party or by which it is
bound;
(m) loan by the Company or any Subsidiary to any person or entity,
incurring by the Company or any Subsidiary of any indebtedness, guaranteeing by
the Company or any Subsidiary of any indebtedness, issuance or sale of any debt
securities of the Company or any Subsidiary or guaranteeing
-8-
<PAGE>
of any debt securities of others, except for advances to employees for travel
and business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company or any
Subsidiary, including any write-off or other compromise of any account
receivable of the Company or such Subsidiary;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against the Company or the Subsidiaries or their
respective affairs;
(p) notice of any claim of ownership by a third party of any
Intellectual Property (as defined in Section 3.13 below) of the Company or the
Subsidiaries or of infringement by the Company or any Subsidiary of any third
party's Intellectual Property rights;
(q) issuance or sale, or contract to issue or sell, by the Company or
any Subsidiary of any of its shares of capital stock, or securities
exchangeable, convertible or exercisable therefor, or of any other of its
securities except pursuant to the Company's incentive stock plans;
(r) change in pricing or royalties set or charged by the Company or
any Subsidiary to their respective customers or licensees or in pricing or
royalties set or charged by persons who have licensed Intellectual Property (as
defined in Section 3.13 below) to the Company or the Subsidiaries;
(s) any event or condition of any character that has had a Material
Adverse Effect on the Company or the Subsidiaries; or
(t) negotiation or agreement by the Company or any Subsidiary or any
officer or employees thereof to do any of the things described in the preceding
clauses (a) through (s) (other than negotiations with the Purchasers and their
representatives regarding the transactions contemplated by this Agreement).
3.10 Tax Matters. Each of the Company and the Subsidiaries has timely
-----------
filed all tax returns and reports (federal, state and local) as required by law.
These returns and reports are true and correct in all material respects. The
Company and the Subsidiary have paid all taxes and other assessments due, except
those contested by them in good faith and which are described in Section 3.10 of
the Disclosure Letter. The provision for taxes of the Company or the
Subsidiaries as shown in the Financial Statements is adequate for taxes due or
accrued as of the date thereof. Neither the Company nor any Subsidiary has
elected pursuant to the Internal Revenue Code of 1986, as amended ("CODE"), to
be treated as an S corporation or a collapsible corporation pursuant to Section
1362(a) or Section 341(f) of the Code, nor have they made any other elections
pursuant to the Code (other than elections that relate solely to methods of
accounting, depreciation, or amortization) that would have a material effect on
the business, properties, prospects, or financial condition of the Company and
the Subsidiaries, taken as a whole. Neither the Company nor the Subsidiaries has
ever had any tax deficiency proposed or assessed against it, nor have they
executed any waiver of any statute of limitations on the assessment or
collection of any
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<PAGE>
tax or governmental charge. None of the Company's or the Subsidiaries' federal
income tax returns and none of their state income or franchise tax or sales or
use tax returns have ever been audited by governmental authorities. Since the
date of the Financial Statements, the Company has made adequate provisions on
its books of account for all taxes, assessments, and governmental charges with
respect to its business, properties, and operations for such period. The Company
and the Subsidiaries have withheld or collected from each payment made to each
of its employees, the amount of all taxes, including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes required to be withheld or collected therefrom, and
have paid the same to the proper tax receiving officers or authorized
depositaries. Neither the Company nor any Subsidiary is a real property holding
corporation within the meaning of Section 897(c)(2) of the Code and any
regulations promulgated thereunder.
3.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompetition or otherwise), commitment, judgment, injunction, order or decree
to which the Company or any Subsidiary is a party or otherwise binding upon the
Company or any Subsidiary that has or may have the effect of prohibiting or
impairing any business practice of the Company or the Subsidiaries, any
acquisition of property (tangible or intangible) by the Company or the
Subsidiaries or the conduct of business by the Company or the Subsidiaries.
Without limiting the foregoing, neither the Company nor any Subsidiary has
entered into any agreement under which the Company or such Subsidiary is
restricted from manufacturing or selling any product or providing services to
customers or potential customers or any class of customers, in any geographic
area, during any period of time or in any segment of the market.
3.12 Title of Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) Neither the Company nor any Subsidiary owns any real property, nor
has either the Company or any Subsidiary ever owned any real property. Section
3.12(a) of the Disclosure Letter sets forth a list of all real property
currently leased by the Company or the Subsidiaries, the name of the lessor, the
date of the lease and each amendment thereto and, with respect to any current
lease, the aggregate annual rental and/or other fees payable under any such
lease. All such current leases are in full force and effect, are valid and
effective in accordance with their respective terms, and there is not, under any
of such leases, any existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a default).
(b) The Company and the Subsidiaries have good and valid title to, or,
in the case of leased properties and assets, valid leasehold interests in, all
of their respective tangible properties and assets, real, personal and mixed,
used or held for use in their respective businesses, free and clear of any
Liens, except as reflected in the Current Balance Sheet and except for liens for
taxes not yet due and payable and such imperfections of title and encumbrances,
if any, which are not material in character, amount or extent, and which do not
detract from the value, or interfere with the present use, of the property
subject thereto or affected thereby.
3.13 Intellectual Property. To the knowledge of the Company, the Company
---------------------
or the Subsidiaries own and possess or are licensed under all patents, patent
applications, licenses, trademarks,
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trade secrets, trade names, brand names, inventions and copyrights or other
proprietary rights ("INTELLECTUAL PROPERTY") employed in the operation of their
respective businesses as now conducted, and as currently planned to be
conducted, and to the knowledge of the Company, with no infringement of or
conflict with the rights of others respecting any of the same. Section 3.13 of
the Disclosure Letter sets forth all of the patents applied for by the Company
as of the date hereof. Neither the Company nor any Subsidiary has received any
communications alleging that the Company or any Subsidiary has violated any of
the Intellectual Property of any other person or entity, nor is the Company
aware of any basis for the foregoing. Reasonable security measures have been
taken by the Company and the Subsidiaries to protect the secrecy,
confidentiality and value of the Company's and the Subsidiaries' trade secrets,
including their respective know-how, technology, concepts and other technical
data for the development, processing, manufacture and sale of its products. Each
employee of and consultant to the Company or the Subsidiaries has executed an
invention assignment and confidentiality agreement substantially in the form
provided to the Purchasers.
3.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth on Section 3.14(a) of the Disclosure Letter or
the Financial Statements, neither the Company nor any Subsidiary has or is bound
by:
(i) any contract, license or agreement to which the Company or
any Subsidiary is a party (A) with respect to Intellectual Property of the
Company licensed or transferred to any third party or (B) pursuant to which a
third party has licensed or transferred any Intellectual Property to the Company
or any Subsidiary, with a potential value or cost in excess of $50,000;
(ii) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization;
(iii) any agreement or plan, including, without limitation,
any stock option plan, stock appreciation rights plan or stock purchase plan,
any of the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement;
(iv) any fidelity or surety bond or completion bond;
(v) any lease of personal property with fixed annual rental
payments in excess of $50,000;
(vi) any contract, license or agreement between the Company
or any Subsidiary and any third party wherein or whereby the Company or such
Subsidiary has agreed to, or assumed, any obligation or duty to warrant,
indemnify, hold harmless or otherwise assume or incur any
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<PAGE>
obligation or liability with respect to the infringement or misappropriation by
the Company or such Subsidiary or such third party of the Intellectual Property
of any third party;
(vii) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company or any Subsidiary to engage in any
line of business or to compete with any person;
(viii) any agreement, contract or commitment relating to
capital expenditures and involving future payments in excess of $50,000;
(ix) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's or the Subsidiaries' businesses;
(x) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit;
(xi) any purchase order or contract for the purchase of
materials involving $50,000 or more;
(xii) any construction contracts;
(xiii) any distribution, joint marketing or development
agreement; or
(xiv) any other agreement, contract or commitment that
involves $50,000 or more or is not cancelable without penalty within thirty (30)
days.
(b) Each of the Company and each of the Subsidiaries is in compliance
with and has not breached, violated or defaulted under, or received notice that
it has breached, violated or defaulted under, any of the terms or conditions of
any agreement, contract, license or commitment to which it is a party or by
which it is bound (any such agreement, contract, license or commitment, a
"CONTRACT"), and neither the Company nor any Subsidiary is aware of any event
that would constitute such a breach, violation or default with the lapse of
time, giving of notice or both. Each Contract is in full force and effect and,
except as otherwise disclosed in Section 3.14(b) of the Disclosure Letter, to
the knowledge of the Company, all other parties to each Contract are in
compliance with, and have not breached any term of, such Contract. The Company
and the Subsidiaries have obtained, or will obtain prior to the Closing Date,
all necessary consents, waivers and approvals of parties to any Contract as are
required to remain in effect without modification after the Closing.
3.15 Interested Party Transactions. To the knowledge of the Company, no
-----------------------------
officer, director or stockholder of the Company or the Subsidiary (nor any
ancestor, sibling, descendant or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) any interest in any
entity that furnished or sold, or
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<PAGE>
furnishes or sells, services or products that the Company or any Subsidiary
furnishes or sells, or proposes to furnish or sell, or (ii) any interest in any
entity that purchases from or sells or furnishes to the Company or such
Subsidiary any goods or services or (iii) a beneficial interest in any Contract;
provided, however, that ownership of no more than one percent (1%) of the
outstanding voting stock of a publicly traded corporation and no more than five
percent (5%) of the outstanding equity of any other entity shall not be deemed
an "INTEREST IN ANY ENTITY" for purposes of this Section 3.15.
3.16 Governmental Authorization. The Company or one of the Subsidiaries
--------------------------
holds all consents, licenses, permits, grants or other authorizations by a
governmental entity (i) pursuant to which the Company or such Subsidiary
currently operates or holds any interest in any of its properties or (ii) which
is required for the operation of their business or the holding of any such
interest except where the failure to hold such consent, license, permit, grant
or other authorization would not have a Material Adverse Effect on the Company
and its Subsidiaries taken as a whole (herein collectively called "COMPANY
AUTHORIZATIONS"). The Company Authorizations are in full force and effect and
constitute all Company Authorizations required to permit the Company and its
Subsidiaries to operate or conduct their business or hold any interest in their
properties or assets, except where the failure to have such Company
Authorizations would not have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
3.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the knowledge of the Company, threatened against the Company or
any Subsidiary, their respective properties or any of their respective officers
or directors, nor, to the knowledge of the Company, is there any reasonable
basis therefor. There is no investigation pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary, their respective
properties or any of their respective officers or directors (nor, to the
knowledge of the Company, is there any reasonable basis therefor) by or before
any governmental entity. No governmental entity has at any time challenged or
questioned the legal right of the Company or any Subsidiary to conduct their
respective operations as presently or previously conducted.
3.18 Employees; Employee Compensation. To the Company's knowledge, there
--------------------------------
is no strike, labor dispute or union organization activities pending or
threatened between it and its employees. None of the Company's or the
Subsidiaries' employees belongs to any union or collective bargaining unit. To
the Company's knowledge, the Company and the Subsidiaries have complied in all
material respects with all applicable state and federal equal opportunity and
other laws related to employment. To the Company's knowledge, no employee of
the Company or any Subsidiary is or will be in violation of any judgment,
decree, or order, or any term of any employment contract, patent disclosure
agreement, or other contract or agreement relating to the relationship of any
such employee with the Company or such Subsidiary, or any other party because of
the nature of the business conducted or presently proposed to be conducted by
the Company or the Subsidiaries or to the use by the employee of his or her best
efforts with respect to such business. Neither the Company nor any Subsidiary
is a party to or bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement, or other employee compensation agreement. The Company is
not aware that any officer or key employee, or that any group of key employees,
intends to terminate
-13-
<PAGE>
their employment with the Company or a Subsidiary, nor do the Company or any
Subsidiary have a present intention to terminate the employment of any of the
foregoing. Subject to general principles related to wrongful termination of
employees, the employment of each officer and employee of the Company or the
Subsidiaries is terminable at the will of the Company or any such Subsidiary.
3.19 Minute Books. The minute books of the Company and the Subsidiaries
------------
made available to counsel for Purchasers are the only minutes of the Company and
the Subsidiaries and contain a reasonably accurate summary of all meetings of
the Board of Directors (or committees thereof) of the Company and the
Subsidiaries and their respective stockholders or actions by written consent
since the incorporation of the Company and the Subsidiaries.
3.20 Environmental Matters.
---------------------
(a) Hazardous Material. Neither the Company nor any Subsidiary has:
(i) operated any underground storage tanks at any property that the Company or
such Subsidiary has at any time owned, operated, occupied or leased; or (ii)
illegally released any substance that has been designated by any Governmental
Entity or by applicable federal, state or local law to be radioactive, toxic,
hazardous or otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, and urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and Recovery
Act of 1976, as amended, and the regulations promulgated pursuant to said laws
(a "HAZARDOUS MATERIAL"), but excluding office and janitorial supplies properly
and safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company or any Subsidiary or, to the Company's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that the Company or any Subsidiary has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Neither the Company nor any
Subsidiary has transported, stored, used, manufactured, disposed of, released or
exposed its employees or others to Hazardous Materials in violation of any law
in effect on or before the date hereof, nor has the Company or any Subsidiary
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (any or all of the foregoing being collectively referred to
as "HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, regulation,
treaty or statute promulgated by any Governmental Entity in effect prior to or
as of the date hereof to prohibit, regulate or control Hazardous Materials or
any Hazardous Material Activity.
(c) Permits. The Company or a Subsidiary currently holds all
environmental approvals, permits, licenses, clearances and consents (the
"ENVIRONMENTAL PERMITS") necessary for the conduct of the Company's or the
Subsidiaries' Hazardous Materials Activities and other businesses of the Company
and the Subsidiaries as such activities and businesses are currently being
conducted except where the failure to hold such Environmental Permits would not
have a Material Adverse Effect on the Company and the Subsidiaries taken as a
whole.
-14-
<PAGE>
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company or the Subsidiaries.
The Company is not aware of any fact or circumstance which could involve the
Company or any Subsidiary in any environmental litigation or impose upon the
Company or such Subsidiary any environmental liability.
3.21 Brokers' and Finders' Fees; Third Party Expenses. Neither the Company
------------------------------------------------
nor any Subsidiary has incurred, nor will incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with the Agreement or any transaction contemplated hereby.
3.22 Registration Rights. Other than as granted pursuant to the
-------------------
Stockholder Rights Agreement, the Company has not granted or agreed to grant any
rights to register, as that term is defined in the Stockholder Rights Agreement,
including piggyback registration rights, to any person or entity.
3.23 No Interference or Conflict. To the knowledge of the Company, no
---------------------------
shareholder, officer, employee or consultant of the Company or any Subsidiary is
obligated under any contract or agreement or subject to any judgment, decree or
order of any court or administrative agency, that would interfere with such
person's efforts to promote the interests of the Company or the Subsidiaries or
that would interfere with the Company's or the Subsidiaries' business. Neither
the execution nor delivery of this Agreement, nor the carrying on of the
Company's or the Subsidiaries' business as presently conducted or proposed to be
conducted nor any activity of such officers, directors, employees or consultants
in connection with the carrying on of the Company's or the Subsidiaries'
business as presently conducted or proposed to be conducted, will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract or
agreement under which any of such officers, directors, employees or consultants
are currently bound.
3.24 Insurance. Section 3.24 of the Disclosure Letter lists all insurance
---------
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company and the
Subsidiaries. There is no claim by the Company or the Subsidiary pending under
any of such policies or bonds as to which coverage has been questioned, denied
or disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid, and the Company and
its Affiliates are otherwise in compliance with the terms of such policies and
bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company has no knowledge of any threatened termination of, or
premium increase with respect to, any of such policies.
3.25 Regulatory Matters.
------------------
(a) (i) The execution and delivery of this Agreement by the Company,
the performance of the Company's obligations hereunder, and the consummation of
the transactions contemplated hereby and thereby, do not violate (1) the
Communications Act of 1934 (the
-15-
<PAGE>
"COMMUNICATIONS ACT") or interpreted as of this date, (2) the Telecommunications
Act of 1996 (the "TELECOM ACT OF 1996") or interpreted as of this date, (3) any
rules or regulations of the Federal Communications Commission (the "FCC")
applicable to the Company or the Subsidiary or interpreted as of this date, or
(4) any rules or regulations of the California Public Utilities Commission, New
York Public Service Commission, Massachusetts Department of Public Utilities,
Washington Utilities and Transportation Commission, Illinois Commerce Commission
or the Oregon Public Utilities Commission (the "STATE COMMISSIONS") or
interpreted as of this date, and (ii) no authorization of or filing with the FCC
or any of the State Commissions is necessary for the execution and delivery of
this Agreement by the Company and consummation of the transactions contemplated
hereby in accordance with the terms hereof;
(b) (i) The Company and each Subsidiary in all material respects (1)
have made all reports and filings, and paid all fees, required by the FCC and
any of the State Commissions; and (2) have all certificates, orders, permits,
licenses, authorizations, consents and approvals of and from, and have made all
filings and registrations with, the FCC and any of the State Commissions
necessary to own, lease, license and use their properties and assets and to
conduct their businesses as presently conducted and as proposed to be conducted;
and (ii) neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificates,
orders, permits, licenses, authorizations, consents or approvals, or the
qualification or rejection of any such filing or registration, the effect of
which would have a Material Adverse Effect on the Company and the Subsidiaries
taken as a whole;
(c) To the Company's knowledge, neither the Company nor any Subsidiary
is in violation of, or in default under, the Communications Act, as amended by
the Telecom Act of 1996, the rules or regulations of the FCC, or the rules or
regulations of any of the State Commissions, the effect of which, singly or in
the aggregate, would have a Material Adverse Effect on Company and the
Subsidiaries taken as a whole; and
(d) (i) no decree or order of the FCC or any of the State Commissions
is outstanding against the Company or the Subsidiary and (ii) to the Company's
knowledge, no formal litigation, proceeding, inquiry or investigation has been
commenced or threatened, and no formal notice of violation or order to show
cause has been issued, against the Company or the Subsidiary before the FCC or
any of the State Commissions.
3.26 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by the Purchasers or their counsel.
3.27 Representations Complete. None of the representations or warranties
------------------------
made by the Company (as modified by the Disclosure Letter), nor any statement
made in any schedule or certificate furnished by the Company pursuant to this
Agreement, contains any untrue statement of a material fact, or omits to state
any material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
-16-
<PAGE>
SECTION 4
Representations and Warranties of the Purchasers
------------------------------------------------
Each Purchaser, severally but not jointly, hereby represents and warrants
to the Company with respect to its purchase of the Shares, the Series C Warrants
and the Common Warrants, as follows:
4.1 Investment Representations and Covenants of the Purchasers.
----------------------------------------------------------
(a) This Agreement is made by the Company with each Purchaser in
reliance upon such Purchaser's representations and covenants made in this
Section 4, which by its execution of this Agreement each Purchaser hereby
confirms. Such Purchaser represents that the Shares, the Common Warrants and
the Series C Warrants to be received will be acquired for investment for its own
account, not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, and that it has no present intention of
selling, granting any participation in or otherwise distributing the same.
(b) Such Purchaser understands and acknowledges that the offering of
the Shares, the Common Warrants and the Series C Warrants pursuant to this
Agreement will not, and any issuance of Common Stock on conversion or exercise
thereof may not, be registered under the Securities Act on the ground that the
sale provided for in this Agreement and the issuance of securities hereunder is
exempt pursuant to Section 4(2) of the Securities Act, and that the Company's
reliance on such exemption is predicated on the Purchasers' representations set
forth herein.
(c) Such Purchaser represents that it is experienced in evaluating
companies such as the Company, is able to fend for itself in transactions such
as the one contemplated by this Agreement, has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of its prospective investment in the Company.
(d) Such Purchaser acknowledges and understands that the Shares, the
Common Warrants and the Series C Warrants, and any Common Stock acquired upon
the conversion or exercise thereof, must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available, and that, except as otherwise provided in the Related
Agreements, the Company is under no obligation to register either the Shares,
the Common Warrants and the Series C Warrants or Common Stock issuable upon
conversion or exercise thereof.
(e) Such Purchaser acknowledges that it has received and reviewed a
copy of Rule 144 promulgated under the Securities Act, which permits limited
public resales of securities acquired in a non-public offering, subject to the
satisfaction of certain conditions. Such Purchaser understands that before the
Shares, or any Common Stock issued upon conversion thereof, may be sold under
Rule 144, the following conditions must be fulfilled, except as otherwise
described below: (i) certain public information about the Company must be
available; (ii) the sale must occur at least one year after the later of the
date the Shares were sold by the Company or the date they were sold by an
-17-
<PAGE>
affiliate of the Company; (iii) the sale must be made in a broker's transaction;
and (iv) the number of Shares sold must not exceed certain volume limitations.
If, however, the sale occurs at least two years after the Shares were sold by
the Company or an affiliate of the Company, and if the Purchaser is not an
affiliate of the Company, the foregoing conditions will not apply. The
Purchaser understands that the time period for resale of Shares or Common Stock
issued upon exercise of the Common Warrants or the Series C Warrants does not
begin until the Warrants are exercised unless the net exercise provisions of the
Warrants are used. Such Purchaser understands that the current information
referred to above is not now available and the Company has no present plans to
make such information available.
(f) Such Purchaser acknowledges that in the event the applicable
requirements of Rule 144 are not met, registration under the Securities Act or
compliance with another exemption from registration will be required for any
disposition of its stock. Such Purchaser understands that although Rule 144 is
not exclusive, the Securities and Exchange Commission has expressed its opinion
that persons proposing to sell restricted securities received in a private
offering other than in a registered offering or pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales and that such persons and the brokers who
participate in the transactions do so at their own risk.
(g) Such Purchaser covenants that, in the absence of an effective
registration statement covering the stock in question, it will sell, transfer or
otherwise dispose of the Shares, the Common Warrants, the Common Warrants and
any Common Stock issued on conversion or exercise thereof only in a manner
consistent with its representations and covenants set forth in this Section. In
connection therewith such Purchaser acknowledges that the Company shall make a
notation on its stock books regarding the restrictions on transfer set forth in
this Section and shall transfer shares and warrants on the books of the Company
only to the extent not inconsistent therewith.
(h) Such Purchaser represents that it is an "ACCREDITED INVESTOR" as
such term is defined in Rule 501 under the Securities Act.
4.2 No Public Market. Such Purchaser understands that no public market
----------------
now exists for any of the securities issued by the Company.
4.3 Domicile. Warburg, Pincus Ventures, L.P. is domiciled in the state of
--------
New York. The remainder of the Purchasers are domiciled in the state of
California.
4.4 Authority. Each Purchaser has all requisite power and authority to
---------
enter into this Agreement, the Series C Warrants, the Common Warrants, and each
of the Related Agreements to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement, the Series C Warrants (in the case of Warburg and Crosspoint),
the Common Warrants and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate or partnership action on the part of the Purchaser, and no
further action is required on the part of the Purchaser, or any of Purchaser's
respective officers, directors, stockholders, limited partners or general
partners, to authorize the Agreement, the
-18-
<PAGE>
Series C Warrants, the Common Warrants, the Related Agreements and the
transactions contemplated hereby and thereby. This Agreement and the Related
Agreements have been duly executed and delivered by the Purchaser and, assuming
the due authorization, execution and delivery by the Company, constitute the
valid and binding obligation of the Purchaser, enforceable in accordance with
their respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and to rules of law governing
specific performance, injunctive relief or other equitable remedies.
SECTION 5
Conditions to Closing of Purchasers
-----------------------------------
5.1 Conditions to Closing of Intel. Intel's obligations to purchase the
------------------------------
Shares at the First Closing and, if applicable, the Series C Warrants at the
Second Closing are, at the option of Intel, subject to the fulfillment on or
prior to the First Closing Date of the following conditions:
(a) Opinion of Company's Counsel. Intel shall have received from
----------------------------
counsel to the Company an opinion addressed to it in a form customary for
preferred equity venture financings, dated the First Closing Date, in the form
of Exhibit G-1.
-----------
(b) Blue Sky. The Company shall have obtained all necessary Blue Sky
--------
law permits and qualifications, or secured an exemption therefrom, required by
any state for the offer and sale of the Shares and the Common Stock issuable
upon conversion of the Shares.
(c) Certificate of Incorporation. The Amended Certificate of
----------------------------
Incorporation shall have been filed with the Secretary of State of the State of
Delaware prior to the First Closing.
(d) Stock Certificates. The Company shall have delivered to Intel a
------------------
certificate for the number of shares of Series C Preferred set forth opposite
its name on the Schedule of Purchasers.
(e) High Yield Offering. The Company shall have completed the High
-------------------
Yield Offering on or before April 30, 1998 on terms approved by the Board of
Directors of the Company with aggregate gross proceeds of at least $100,000,000.
(f) Equity Commitment. This Agreement shall not have been terminated
-----------------
by either the Company, Warburg or Crosspoint and the obligations of the Company,
Warburg and Crosspoint hereunder shall continue to be in full force and effect.
5.2 Conditions to Closing of Warburg and Crosspoint. Warburg's and
-----------------------------------------------
Crosspoint's respective obligations to purchase the Shares and the Series C
Warrants at the Second Closing are, at the option of each such Purchaser,
subject to the fulfillment on or prior to the Second Closing Date of the
following conditions:
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<PAGE>
(a) Opinion of Company's Counsel. Such Purchasers shall have received
----------------------------
from counsel to the Company, an opinion addressed to them, dated the Second
Closing Date, in the form of Exhibit G-2.
-----------
(b) Blue Sky. The Company shall have obtained all necessary Blue Sky
--------
law permits and qualifications, or secured an exemption therefrom, required by
any state for the offer and sale of the Shares and the Series C Warrants and the
Common Stock issuable upon conversion of the Shares and the Series C Warrants.
(c) Certificate of Incorporation. The Amended Certificate of
----------------------------
Incorporation shall have been filed with the Secretary of State of the State of
Delaware prior to the Closing.
(d) Stock Certificates and Series C Warrants. The Company shall have
----------------------------------------
delivered to such Purchaser a certificate for the number of shares of Series C
Preferred and a Series C Warrant for the number of Series C Warrants set forth
opposite such Purchaser's name on the Schedule of Purchasers.
(e) High Yield Offering. The Company shall have completed the High
-------------------
Yield Offering on or before April 30, 1998 on terms approved by the Board of
Directors of the Company with aggregate gross proceeds of at least $100,000,000.
SECTION 6
Conditions to Closing of Company
--------------------------------
There shall be no conditions to the Company's obligation to sell and issue
the Series C Preferred to Intel at the First Closing and the Series C Warrants
to Intel at the Second Closing, and there shall be no conditions to the
Company's obligation to sell and issue the Series C Preferred and the Series C
Warrants to Warburg and Crosspoint at the Second Closing if the Company has
delivered the Exercise Notice.
SECTION 7
Miscellaneous
-------------
7.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of California as applied to contracts entered into solely
between residents of and to be performed entirely in such state.
7.2 Survival. The representations, warranties, covenants and agreements
--------
made herein shall survive any investigation made by any Purchaser and the
closing of the transactions contemplated hereby. Each Purchaser hereby agrees
and acknowledges that the representations and warranties of the
-20-
<PAGE>
Company shall only be made as of the date of the Agreement and shall not be made
as of any subsequent date, including but not limited to as of any closing.
7.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto,
provided, however, that the obligations of a Purchaser to purchase Shares and
Series C Warrants shall not be assignable.
7.4 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
7.5 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service or
five days after deposit with the United States mail, by registered or certified
mail, postage prepaid, addressed (a) if to a Purchaser, at such Purchaser's
address set forth in Exhibit A, or at such other address as such Purchaser shall
---------
have furnished to the Company in writing, or (b) if to any other holder of any
Shares or Series C Warrants, at such address as such holder shall have furnished
the Company in writing, or, until any such holder so furnishes an address to the
Company, then to and at the address of the last holder of such Shares or Series
C Warrants who has so furnished an address to the Company, or (c) if to the
Company to its address set forth on the cover page of this Agreement and
addressed to the attention of the Corporate Secretary, or at such other address
as the Company shall have furnished to the Purchasers.
7.6 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any holder of any Shares or Series C Warrants, upon
any breach or default of the Company under this Agreement, shall impair any such
right, power or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiescence therein, or of or in any
similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any holder of any breach or default under
this Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
7.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH
-----------------------------------
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL UNLESS AN
-21-
<PAGE>
EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO
THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
OR SUCH EXEMPTION BEING AVAILABLE.
7.8 Expenses. The Company and the Purchasers shall each bear their own
--------
expenses and legal fees with respect to this Agreement and the transactions
contemplated hereby; provided the Company will pay at the execution of this
Agreement the reasonable legal fees and expenses of the Purchasers, including
the reasonable legal fees and expenses of counsel to Intel (up to a maximum of
$20,000).
7.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Purchasers,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
7.10 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
7.11 Gender. The use of the neuter gender herein shall be deemed to
------
include the masculine and the feminine gender, if the context so requires.
7.12 Confidentiality. Each party hereto agrees that, except with the prior
---------------
written permission of the other parties, it shall at all times keep confidential
and not divulge, furnish or make accessible to anyone any confidential
information, knowledge or data concerning or relating to the business or
financial affairs of the other parties to which such party has been or shall
become privy by reason of this Agreement.
7.13 Enforceability; Specific Performance; Damages. Each of the Purchasers
---------------------------------------------
acknowledges that (i) the commitment of the Purchaser to purchase Series C
Preferred and, in the case of Warburg and Crosspoint, Series C Warrants
contained in this Agreement is required for the Company to complete the High
Yield Offering; (ii) the Company has relied on such commitment in completing the
High Yield Offering; and (iii) a breach of any commitment or any other provision
of this Agreement will result in irreparable harm and damages to the Company
which cannot be adequately compensated by a monetary award. Accordingly, it is
expressly agreed that in addition to all other remedies available at law or in
equity, including a remedy for damages, the Company shall be entitled to the
immediate remedy of such other form of injunctive or equitable relief as may be
used by any court of competent jurisdiction to specifically enforce the
provisions hereof.
7.14 Jurisdiction and Venue. Each party agrees that the Federal courts for
----------------------
the Northern District of California [San Jose] shall have the exclusive
jurisdiction and venue for any disputes under this Agreement including the
Company's rights under Section 7.13. Each Purchaser hereby consents to the
personal jurisdiction in such Northern District of California [San Jose]. Each
Purchaser agrees
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<PAGE>
that a judgment in such courts shall be enforceable in any other jurisdiction
where Purchaser may reside or be located.
7.15 Termination. This Agreement may not be terminated by any Purchaser or
-----------
the Company, except that the Company or any Purchaser may terminate this
------ ----
Agreement upon written notice of such party to all other parties (i) at any time
after April 30, 1998, if the High Yield Offering has not been completed by such
date or (ii) solely with respect to the obligations of the Company and Warburg
and Crosspoint with respect to their respective obligations under Section 1.3
hereof, at any time after the closing of the High Yield Offering if the Company
has completed a Replacement Financing.
-23-
<PAGE>
The foregoing Series C Preferred Stock and Warrant Subscription Agreement
is hereby executed as of the date first above written.
"COMPANY" COVAD COMMUNICATIONS GROUP, INC.
a Delaware corporation
By: /s/ Charles J. McMinn
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
PURCHASERS: WARBURG, PINCUS VENTURES, L.P.
By: Warburg Pincus & Co., its General
Partner
By: /s/ Henry Kressel
------------------------------
Partner
CROSSPOINT VENTURE PARTNERS 1996
By: /s/ Rich Shapero
------------------------------------
Name: Rich Shapero
---------------------------------
Title: General Partner
--------------------------------
INTEL CORPORATION
By: /s/ Arvind Sodhani
------------------------------------
Name: Arvind Sodhani
---------------------------------
Title: Treasurer
--------------------------------
-24-
<PAGE>
EXHIBIT A
---------
Schedule of Purchasers
----------------------
High Yield Commitment
<TABLE>
<CAPTION>
Number of Number of
Number of Shares of Series C
Common Stock Series C Preferred Aggregate
Name and Address Warrants Preferred Stock Warrants Purchase Price
- ------------------------------------- ------------ --------------- ---------- --------------
<S> <C> <C> <C> <C>
Warburg, Pincus Ventures, L.P. 451,773 1,537,105 1,261,200 $12,804,084.65
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue
New York, NY 10017-3147
Crosspoint Venture Partners 1996. 112,943 384,276 315,300 $ 3,201,019.08
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062
Intel Corporation 35,284 120,048 98,500 $ 999,999.84
2200 Mission College Boulevard
Mail Stop SC4-210
Santa Clara, CA 95052-8199
Attn: Treasurer
600,000 2,041,429 1,675,000 $17,005,103.57
</TABLE>
-25-
<PAGE>
EXHIBIT B
---------
Amended and Restated Certificate of Incorporation
(See Exhibit 3.1 to the Registration Statement)
<PAGE>
EXHIBIT C
Warrant No. PC-____
THIS WARRANT AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY SET FORTH HEREIN AND IN THE
STOCKHOLDER RIGHTS AGREEMENT, A COPY OF WHICH IS AVAILABLE FROM THE
SECRETARY OF THE COMPANY.
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGIS REGISTRATION IS NOT REQUIRED
UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION.
THE SALE OF THESE SECURITIES HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS SUCH SALE OR
TRANSFER IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
WARRANT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED
UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE
COMPANY AND LEGAL COUNSEL FOR THE COMPANY.
Void after _________, 200__
COVAD COMMUNICATIONS GROUP, INC.
WARRANT TO PURCHASE UP TO ____ SHARES OF SERIES C PREFERRED STOCK
__________
THIS CERTIFIES THAT, for value received, ____ is entitled at any time prior
to expiration of this Warrant to subscribe for and purchase up to ____ shares of
the fully paid and nonassessable Series C Preferred Stock of Covad
Communications Group, Inc., a Delaware corporation (hereinafter called the
"COMPANY"), at the price of $8.33 per share (such price and such other price as
shall result, from time to time, from the adjustments specified in paragraph 4
hereof is herein
<PAGE>
referred to as the "WARRANT PRICE"), subject to the provisions and upon the
terms and conditions hereinafter set forth. As used herein, the terms "SERIES C
PREFERRED" and "SHARES" shall mean the Company's presently authorized Series C
Preferred Stock, and any stock into or for which such Series C Preferred Stock
may hereafter be converted or exchanged, and the term "DATE OF GRANT" shall mean
____________, 199__.
1. TERM.
This Warrant is exercisable, in whole or in part, at any time and from
time to time from the Date of Grant through __________, 200__.
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT.
(a) Subject to paragraph 1 hereof, the purchase right represented by
this Warrant may be exercised by the Holder hereof, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
EXHIBIT A duly executed) at the principal office of the Company and (i) by the
payment to the Company, by check, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased,
or (ii) on or after the date on which the Company's Common Stock becomes
publicly traded or in conjunction with a Merger or Consolidation, by surrender
of the right to receive upon exercise hereof a number of Shares equal to the
value (as determined below) of the Shares with respect to which this Warrant is
being exercised, in which case the number of shares to be issued to the Holder
upon such exercise shall be computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common to be issued to the Holder.
Y = the number of shares of Common with respect to which this Warrant
is being exercised.
A = the fair market value of one share of Common.
B = Warrant Price.
As used herein, "MERGER OR CONSOLIDATION" shall mean the merger or
consolidation of the corporation into or with another corporation in which this
corporation shall not survive and the stockholders of this corporation shall own
less than 50% of the voting securities of the surviving corporation or the sale,
transfer or lease (but not including a transfer or lease by pledge or mortgage
to a bona fide lender) of all or substantially all of the assets of the
corporation.
(b) As used herein, "FAIR MARKET VALUE OF ONE SHARE OF COMMON" shall
mean, as of any date, the value of Common Stock determined as follows:
-2-
<PAGE>
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, "fair market
value of one share of Common" shall be the closing sales price for such stock
(or the closing bid, if no sales were reported) as quoted on such exchange or
system for the last market trading day prior to the time of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, "fair market value of one
share of Common" shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable; or
(iii) In conjunction with a Merger or Consolidation, then the
"fair market value of one share of Common" shall be the value received by the
holders of the Company's Common Stock pursuant to such transaction for each
share of Common Stock, and such purchase shall be effective upon the closing of
such transaction, subject to the due, proper and prior surrender of this
Warrant; provided, however, that should such Merger or Consolidation or such
offering not be consummated, the Company shall refund to the holder the Warrant
Price and the Holder may exercise the purchase right represented by this
Warrant, in whole or in part, at any time and from time to time during the
remainder of its term.
(iv) In conjunction with the initial underwritten public offering of
the Company's Common Stock pursuant to a registration statement filed under the
Securities Act of 1933, the "fair market value of one share of Common" shall be
the price at which registered shares are sold to the public in such offering,
and such purchase shall be effective upon the date of such offering, subject to
the due, proper and prior surrender of this Warrant and the closing of the
offering.
(c) In the event of any exercise of the purchase right represented by
this Warrant, certificates for the shares of stock so purchased shall be
delivered to the holder hereof within thirty days of the effective date of such
purchase and, unless this Warrant has been fully exercised or expired, a new
Warrant representing the portion of the Shares, if any, with respect to which
this Warrant shall not then have been exercised shall also be issued to the
holder hereof within such thirty day period. Upon the effective date of such
purchase, the Holder shall be deemed to be the holder of record of the Shares,
notwithstanding that Certificates representing the Shares shall not then be
actually delivered to such Holder or that such Shares are not then set forth on
the stock transfer books of the Company.
3. STOCK FULLY PAID; RESERVATION OF SHARES.
All Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the
-3-
<PAGE>
purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its Series C Preferred to provide for
the exercise of the rights represented by this Warrant and of shares of Common
Stock issuable from time to time upon conversion of such Series C Preferred
Stock.
4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Warrant Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
(a) Reclassification or Merger. In case of any reclassification or
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corporation
(other than a merger with another corporation in which the Company is a
continuing corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company, the
Company shall, as condition precedent to such transaction, execute a new Warrant
or cause such successor or purchasing corporation, as the case may be, to
execute a new Warrant, providing that the holder of this Warrant shall have the
right to exercise such new Warrant and upon such exercise to receive, in lieu of
each share of Series C Preferred theretofore issuable upon exercise of this
Warrant, the kind and amount of shares of stock, other securities, money and
property receivable upon such reclassification, change or merger by a holder of
one share of Series C Preferred. Such new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph 4. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Series C Preferred, the Warrant Price shall be proportionately decreased in
the case of a subdivision or increased in the case of a combination.
(c) Stock Dividends. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend with respect to Series C
Preferred payable in, or make any other distribution with respect to Series C
Preferred (except any distribution specifically provided for in the foregoing
subparagraph (a) and (b)) of, Series C Preferred then the Warrant Price shall be
adjusted, from and after the date of determination of stockholders entitled to
receive such dividend or distribution, to that price determined by multiplying
the Warrant Price in effect immediately prior to such date of determination by a
fraction (a) the numerator of which shall be the total number of shares of
Series C Preferred outstanding immediately prior to such dividend or
distribution, and (b) the denominator of which shall be the total number of
shares of Series C Preferred outstanding immediately after such dividend or
distribution.
-4-
<PAGE>
(d) Adjustment of Number of Shares. Upon each adjustment in the
Warrant Price, the number of Shares of Series C Preferred purchasable hereunder
shall be adjusted, to the nearest whole share, to the product obtained by
multiplying the number of Shares purchasable immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator of which shall be
the Warrant Price immediately prior to such adjustment and the denominator of
which shall be the Warrant Price immediately thereafter.
5. NOTICE OF ADJUSTMENTS.
Whenever any Warrant Price shall be adjusted pursuant to paragraph 4
hereof, the Company shall make a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment was
calculated, and the Warrant Price or Prices after giving effect to such
adjustment, and shall cause copies of such certificate to be mailed (by first
class mail, postage prepaid) to the holder of this Warrant.
6. NOTICE OF CERTAIN ACTIONS. In the event that this corporation shall
propose at any time:
(a) to declare any dividend or distribution upon any class or series
of its stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights;
(c) to effect any reclassification or recapitalization of its Common
Stock outstanding involving a change in the Common Stock; or
(d) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its assets or property, or to
liquidate, dissolve or wind up, whether voluntary or involuntary;
(e) to amend or repeal any provision of, or add any provision to, the
Company's Certificate of Incorporation or Bylaws if such action would alter or
change the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, Series C Preferred or increase or decrease the
number of shares of the Series C Preferred authorized;
(f) to authorize or issue shares of any class or series of stock
having any preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of the Series C Preferred, or
authorize or issue any bonds, debentures, notes or other obligations convertible
into or exchangeable for, or having preferences or priority as to dividends or
assets superior to or on a parity with any such performance or priority of the
Series C Preferred;
-5-
<PAGE>
(g) to reclassify any Common Stock or Series C Preferred into shares
having any preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of the Series C Preferred;
then, in connection with each such event, this Company shall send to the holders
of the Warrants:
(1) at least 10 days' prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (a) and (b) above;
(2) in the case of the matters referred to in (c) through (g)
above, at least 10 days' prior written notice of the date for the determination
of stockholders entitled to vote thereon (and specifying the date on which the
holders of Common Stock shares shall be entitled to exchange their Common Stock
for securities or other property deliverable upon the occurrence of such event);
and
(3) prompt notice of any material change in the terms of the
transactions described in (a) through (g) above.
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Warrants at the
address for each such holder as shown on the books of this corporation.
7. FRACTIONAL SHARES.
No fractional shares of Series C Preferred will be issued in
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Warrant
Price then in effect.
8. COMPLIANCE WITH SECURITIES ACT; NON-TRANSFERABILITY OF WARRANT.
(a) Compliance with Securities Act. The holder of this Warrant, by
acceptance hereof, agrees that this Warrant and the shares of Series C Preferred
to be issued upon exercise hereof are being acquired for investment and that he
will not offer, sell or otherwise dispose of this Warrant or any shares of
Series C Preferred to be issued upon exercise hereof except under circumstances
which will not result in a violation of the Securities Act of 1933, as amended
(the "ACT"). Upon exercise of this Warrant, the holder hereof shall confirm in
writing, in a form of Exhibit B, that the shares of Series C Preferred so
purchased are being acquired for investment and not with a view toward
distribution or resale. In addition, the holder shall provide such additional
information regarding such holder's financial and investment background as the
Company may reasonably request. This Warrant and all shares of Series C
Preferred issued upon exercise of this Warrant (unless registered under the Act)
shall be stamped or imprinted with a legend in substantially the following form:
-6-
<PAGE>
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER INCLUDING A 180-DAY LOCKUP IN CONNECTION WITH
AN INITIAL PUBLIC OFFERING AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE STOCKHOLDER RIGHTS
AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES,
A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.
SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES."
(b) Non-transferability of Warrant. This Warrant and the shares
acquired upon exercise thereof may not be transferred or assigned in whole or in
part except in compliance with (i) the Amended and Restated Stockholder Rights
Agreement between the original Holder and the Company dated February ___, 1998
(the "STOCKHOLDER RIGHTS AGREEMENT") and (ii) applicable federal and state
securities laws.
(c) Stop-Transfer Notices. In order to ensure compliance with the
restrictions referred to herein, the Company may issue appropriate "stop
transfer" instructions to its transfer agent, if any, and, if the Company
transfers its own securities, it may make appropriate notations to the same
effect in its own records.
(d) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books the Warrant or any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Warrant or the
Stockholder Rights Agreement or (ii) to treat as owner of such Shares or to
accord the right to vote or pay dividends to any purchaser or other transferee
to whom such Shares shall have been so transferred.
9. RIGHTS OF STOCKHOLDERS.
No holder of the Warrant or Warrants shall be entitled to vote or
receive dividends or be deemed the holder of Series C Preferred or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the holder of this Warrant, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stock holders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon
-7-
<PAGE>
any recapitalization, issuance of stock, reclassification of stock, change of
par value or change of stock to no par value, consolidation, merger, conveyance,
or otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant or Warrants shall have been
exercised and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein.
10. REGISTRATION AND OTHER RIGHTS.
The shares of Series C Preferred obtained upon exercise of this
Warrant shall have the registration and other rights set forth in the
Stockholder Rights Agreement and, effective as of the Date of Grant, the term
"Registrable Securities" as defined in the Stockholder Rights Agreement shall
include the Common Stock issuable upon conversion of the Series C Preferred
obtained upon exercise of this Warrant.
11. GOVERNING LAW.
The terms and conditions of this Warrant shall be governed by and
construed in accordance with Delaware law.
12. MISCELLANEOUS.
The headings in this Warrant are for purposes of convenience and
reference only, and shall not be deemed to constitute a part hereof. Neither
this Warrant nor any term hereof may be changed, waived, discharged or
terminated orally but only by an instrument in writing signed by the Company and
the registered holder hereof. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first-class registered
or certified mail or recognized commercial courier service, postage prepaid, to
the address furnished to the Company in writing by the last holder of this
Warrant who shall have furnished an address to the Company in writing.
____________, 1998 COVAD COMMUNICATIONS GROUP, INC.
_________________________________
Signature of Authorized Signatory
_________________________________
Print Name and Title
-8-
<PAGE>
EXHIBIT C-A
NOTICE OF EXERCISE
TO: COVAD COMMUNICATIONS GROUP, INC.
1. The undersigned hereby elects to purchase ___________ shares of Series
C Preferred Stock of Covad Communications Group, Inc. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price of such
shares in full, together with all applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
Series C Preferred Stock in the name of the undersigned or in such other name as
is specified below:
_________________________________
(Name)
_________________________________
_________________________________
(Address)
3. The undersigned represents that the aforesaid shares of Series C
Preferred Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of
distributing or reselling such shares. In support thereof, the undersigned has
executed an Investment Representation Statement attached hereto as EXHIBIT B.
______________________________
Name of Warrantholder
______________________________
Signature of Authorized Signatory
______________________________
Print Name and Title
________________________
Date
<PAGE>
EXHIBIT C-B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER : ____
COMPANY : COVAD COMMUNICATIONS GROUP, INC.
SECURITY : SERIES C PREFERRED STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed securities and underlying
Common Stock (the "SECURITIES"), I, the Purchaser, represent to the Company the
following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("SECURITIES ACT").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities except as set forth in
the Stockholder Rights Agreement. In addition, I understand that the
certificate evidencing the Securities will be imprinted with a legend which
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel for the Company.
<PAGE>
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I further understand that at the time I wish to sell the Securities
there may be no public market upon which to make such a sale.
(f) I further understand that in the event all of the requirements of Rule
144 are not satisfied, registration under the Securities Act, compliance with
Regulation A, or some other registration exemption will be required; and that,
notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
_______________________________
Name of Purchaser
_______________________________
Signature of Authorized Signatory
_______________________________
Print Name and Title
_______________________________
Date
-2-
<PAGE>
EXHIBIT D
Warrant No. C-____
THIS WARRANT AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY SET FORTH HEREIN AND IN THE
STOCKHOLDER RIGHTS AGREEMENT, A COPY OF WHICH IS AVAILABLE FROM THE
SECRETARY OF THE COMPANY.
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION.
THE SALE OF THESE SECURITIES HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS SUCH SALE OR
TRANSFER IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
WARRANT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED
UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE
COMPANY AND LEGAL COUNSEL FOR THE COMPANY.
Void after February 20, 2003
COVAD COMMUNICATIONS GROUP, INC.
WARRANT TO PURCHASE UP TO ____ SHARES OF COMMON STOCK
__________
THIS CERTIFIES THAT, for value received, 3 is entitled at any time prior to
expiration of this Warrant to subscribe for and purchase up to 2 shares of the
fully paid and nonassessable Common Stock of Covad Communications Group, Inc., a
Delaware corporation (hereinafter called the "COMPANY"), at the price of $0.01
per share (such price and such other price as shall result, from time to time,
from the adjustments specified in paragraph 4 hereof is herein
<PAGE>
referred to as the "WARRANT PRICE"), subject to the provisions and upon the
terms and conditions hereinafter set forth. As used herein, the terms "COMMON
STOCK" and "SHARES" shall mean the Company's presently authorized Common Stock,
and the term "DATE OF GRANT" shall mean February 20, 1998.
1. TERM.
This Warrant is exercisable, in whole or in part, at any time and from
time to time from the Date of Grant through February 20, 2003; provided,
however, that this Warrant must be either exercised or the Warrant terminates
immediately before the closing of a firmly underwritten public offering of
Common Stock or other equity security of the Company; provided that the Company
has given the holder of this Warrant at least fifteen (15) days prior written
notice of such closing.
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT.
(a) Subject to paragraph 1 hereof, the purchase right represented by
this Warrant may be exercised by the Holder hereof, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
EXHIBIT A duly executed) at the principal office of the Company and (i) by the
payment to the Company, by check, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased,
or (ii) on or after the date on which the Company's Common Stock becomes
publicly traded or in conjunction with a Merger or Consolidation, by surrender
of the right to receive upon exercise hereof a number of Shares equal to the
value (as determined below) of the Shares with respect to which this Warrant is
being exercised, in which case the number of shares to be issued to the Holder
upon such exercise shall be computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common to be issued to the Holder.
Y = the number of shares of Common with respect to which this Warrant
is being exercised.
A = the fair market value of one share of Common.
B = Warrant Price.
As used herein, "MERGER OR CONSOLIDATION" shall mean the merger or
consolidation of the corporation into or with another corporation in which this
corporation shall not survive and the stockholders of this corporation shall own
less than 50% of the voting securities of the surviving corporation or the sale,
transfer or lease (but not including a transfer or lease by pledge or mortgage
to a bona fide lender) of all or substantially all of the assets of the
corporation.
-2-
<PAGE>
(b) As used herein, "FAIR MARKET VALUE OF ONE SHARE OF COMMON" shall
mean, as of any date, the value of Common Stock determined as follows:
(i) In conjunction with a Merger or Consolidation, then the "fair
market value of one share of Common" shall be the value received by the holders
of the Company's Common Stock pursuant to such transaction for each share of
Common Stock, and such purchase shall be effective upon the closing of such
transaction, subject to the due, proper and prior surrender of this Warrant;
provided, however, that should such Merger or Consolidation or such offering not
be consummated, the Company shall refund to the holder the Warrant Price and the
Holder may exercise the purchase right represented by this Warrant, in whole or
in part, at any time and from time to time during the remainder of its term.
(ii) In conjunction with the initial underwritten public offering
of the Company's Common Stock pursuant to a registration statement filed under
the Securities Act of 1933, the "fair market value of one share of Common" shall
be the price at which registered shares are sold to the public in such offering,
and such purchase shall be effective upon the date of such offering, subject to
the due, proper and prior surrender of this Warrant and the closing of the
offering.
(c) In the event of any exercise of the purchase right represented by
this Warrant, certificates for the shares of stock so purchased shall be
delivered to the holder hereof within thirty days of the effective date of such
purchase and, unless this Warrant has been fully exercised or expired, a new
Warrant representing the portion of the Shares, if any, with respect to which
this Warrant shall not then have been exercised shall also be issued to the
holder hereof within such thirty day period. Upon the effective date of such
purchase, the Holder shall be deemed to be the holder of record of the Shares,
notwithstanding that Certificates representing the Shares shall not then be
actually delivered to such Holder or that such Shares are not then set forth on
the stock transfer books of the Company.
3. STOCK FULLY PAID; RESERVATION OF SHARES.
All Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its Common Stock to
provide for the exercise of the rights represented by this Warrant.
-3-
<PAGE>
4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Warrant Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
(a) Reclassification or Merger. In case of any reclassification or
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corpora tion
(other than a merger with another corporation in which the Company is a
continuing corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company, the
Company shall, as condition precedent to such transaction, execute a new Warrant
or cause such successor or purchasing corporation, as the case may be, to
execute a new Warrant, providing that the holder of this Warrant shall have the
right to exercise such new Warrant and upon such exercise to receive, in lieu of
each share of Common Stock theretofore issuable upon exercise of this Warrant,
the kind and amount of shares of stock, other securities, money and property
receivable upon such reclassification, change or merger by a holder of one share
of Common Stock. Such new Warrant shall provide for adjustments which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this paragraph 4. The provisions of this subparagraph (a) shall similarly apply
to successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the Warrant Price shall be proportionately decreased in the
case of a subdivision or increased in the case of a combination.
(c) Stock Dividends. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend with respect to Common Stock
payable in, or make any other distribution with respect to Common Stock (except
any distribution specifically provided for in the foregoing subparagraph (a) and
(b)) of, shares of Common Stock, then the Warrant Price shall be adjusted, from
and after the date of determination of stockholders entitled to receive such
dividend or distribution, to that price determined by multiplying the Warrant
Price in effect immediately prior to such date of determination by a fraction
(a) the numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend or distribution, and (b) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
Warrant Price, the number of Shares of Common Stock purchasable hereunder shall
be adjusted, to the nearest whole share, to the product obtained by multiplying
the number of Shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction, the numerator of which shall be the
-4-
<PAGE>
Warrant Price immediately prior to such adjustment and the denominator of which
shall be the Warrant Price immediately thereafter.
5. NOTICE OF ADJUSTMENTS.
Whenever any Warrant Price shall be adjusted pursuant to paragraph 4
hereof, the Company shall make a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment was
calculated, and the Warrant Price or Prices after giving effect to such
adjustment, and shall cause copies of such certificate to be mailed (by first
class mail, postage prepaid) to the holder of this Warrant.
6. NOTICE OF CERTAIN ACTIONS. In the event that this corporation shall
propose at any time:
(a) to declare any dividend or distribution upon any class or series
of its stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(b) to effect any reclassification or recapitalization of its Common
Stock outstanding involving a change in the Common Stock; or
(c) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its assets or property, or to
liquidate, dissolve or wind up, whether voluntary or involuntary;
then, in connection with each such event, this Company shall send to the holders
of the Warrants:
(1) at least 10 days' prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (a) above;
(2) in the case of the matters referred to in (c) above, at least
10 days' prior written notice of the date for the determination of stockholders
entitled to vote thereon (and specifying the date on which the holders of Common
Stock shares shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event); and
(3) prompt notice of any material change in the terms of the
transactions described in (a) through (c) above.
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Warrants at the
address for each such holder as shown on the books of this corporation.
-5-
<PAGE>
7. FRACTIONAL SHARES.
No fractional shares of Common Stock will be issued in connection with
any exercise hereunder, but in lieu of such fractional shares the Company shall
make a cash payment therefor upon the basis of the Warrant Price then in effect.
8. COMPLIANCE WITH SECURITIES ACT; NON-TRANSFERABILITY OF WARRANT.
(a) Compliance with Securities Act. The holder of this Warrant, by
acceptance hereof, agrees that this Warrant and the shares of Common Stock to be
issued upon exercise hereof are being acquired for investment and that he will
not offer, sell or otherwise dispose of this Warrant or any shares of Common
Stock to be issued upon exercise hereof except under circumstances which will
not result in a violation of the Securities Act of 1933, as amended (the "ACT").
Upon exercise of this Warrant, the holder hereof shall confirm in writing, in a
form of Exhibit B, that the shares of Common Stock so purchased are being
acquired for investment and not with a view toward distribution or resale. In
addition, the holder shall provide such additional information regarding such
holder's financial and investment background as the Company may reasonably
request. This Warrant and all shares of Common Stock issued upon exercise of
this Warrant (unless registered under the Act) shall be stamped or imprinted
with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER INCLUDING A 180-DAY LOCKUP IN CONNECTION WITH
AN INITIAL PUBLIC OFFERING AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE STOCKHOLDER RIGHTS
AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES,
A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.
SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES."
(b) Non-transferability of Warrant. This Warrant and the shares
acquired upon exercise thereof may not be transferred or assigned in whole or in
part except in compliance with (i) the Amended and Restated Stockholder Rights
Agreement between the original Holder and the Company dated February 20, 1998
(the "STOCKHOLDER RIGHTS AGREEMENT") and (ii) applicable federal and state
securities laws.
-6-
<PAGE>
(c) Stop-Transfer Notices. In order to ensure compliance with the
restrictions referred to herein, the Company may issue appropriate "stop
transfer" instructions to its transfer agent, if any, and, if the Company
transfers its own securities, it may make appropriate notations to the same
effect in its own records.
(d) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books the Warrant or any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Warrant or the
Stockholder Rights Agreement or (ii) to treat as owner of such Shares or to
accord the right to vote or pay dividends to any purchaser or other transferee
to whom such Shares shall have been so transferred.
9. RIGHTS OF STOCKHOLDERS.
No holder of the Warrant or Warrants shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the holder of this Warrant, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stock holders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until the Warrant or Warrants shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein.
10. REGISTRATION AND OTHER RIGHTS.
The shares of Common Stock obtained upon exercise of this Warrant
shall have the registration and other rights set forth in the Stockholder Rights
Agreement and, effective as of the Date of Grant, the term "Registrable
Securities" as defined in the Stockholder Rights Agreement shall include the
Common Stock obtained upon exercise of this Warrant.
11. GOVERNING LAW.
The terms and conditions of this Warrant shall be governed by and
construed in accordance with Delaware law.
-7-
<PAGE>
12. MISCELLANEOUS.
The headings in this Warrant are for purposes of convenience and
reference only, and shall not be deemed to constitute a part hereof. Neither
this Warrant nor any term hereof may be changed, waived, discharged or
terminated orally but only by an instrument in writing signed by the Company and
the registered holder hereof. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first-class registered
or certified mail or recognized commercial courier service, postage prepaid, to
the address furnished to the Company in writing by the last holder of this
Warrant who shall have furnished an address to the Company in writing.
February 20, 1998 COVAD COMMUNICATIONS GROUP, INC.
_________________________________
Signature of Authorized Signatory
_________________________________
Print Name and Title
<PAGE>
EXHIBIT D-A
NOTICE OF EXERCISE
TO: COVAD COMMUNICATIONS GROUP, INC.
1. The undersigned hereby elects to purchase ___________ shares of Common
Stock of Covad Communications Group, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full, together with all applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
_________________________________
(Name)
_________________________________
_________________________________
(Address)
3. The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares. In support thereof, the undersigned has executed an Investment
Representation Statement attached hereto as EXHIBIT B.
______________________________
Name of Warrantholder
______________________________
Signature of Authorized Signatory
______________________________
Print Name and Title
________________________
Date
<PAGE>
EXHIBIT D-B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER : ____
COMPANY : COVAD COMMUNICATIONS GROUP, INC.
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed securities (the
"SECURITIES"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("SECURITIES ACT").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities except as set forth in
the Stockholder Rights Agreement. In addition, I understand that the
certificate evidencing the Securities will be imprinted with a legend which
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel for the Company.
<PAGE>
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I further understand that at the time I wish to sell the Securities
there may be no public market upon which to make such a sale.
(f) I further understand that in the event all of the requirements of Rule
144 are not satisfied, registration under the Securities Act, compliance with
Regulation A, or some other registration exemption will be required; and that,
notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
_______________________________
Name of Purchaser
_______________________________
Signature of Authorized Signatory
_______________________________
Print Name and Title
_______________________________
Date
-2-
<PAGE>
EXHIBIT E
---------
COVAD COMMUNICATIONS GROUP, INC.
AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT
(Subsequently amended and restated March 11, 1998;
See Exhibit 4.6 to the Registration Statement)
<PAGE>
EXHIBIT F
[COVAD LETTERHEAD]
February 20, 1998
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, NY 10017-3147
Attention: Joseph P. Landy
Crosspoint Venture Partners 1996
The Pioneer Hotel Building
2925 Woodside Road
Woodside, CA 94062
Attention: Rich Shapero
Intel Corporation
2200 Mission College Boulevard
Santa Clara, CA 95052-8199
Attention: James W. McCall
Re: Disclosure Letter for the Series C Preferred Stock and Warrant
Subscription Agreement by and among Covad Communications Group,
Inc., Warburg Pincus Ventures, L.P., Crosspoint Venture Partner
1996 and Intel Corporation
Gentlemen:
This Disclosure Letter is provided pursuant to Section 3 of the Series C
Preferred Stock and Warrant Subscription Agreement dated February 20, 1998 (the
"Agreement") by and among Covad Communications Group, Inc. (the "Company"),
Warburg Pincus Ventures, L.P., Crosspoint Venture Partners 1996 and Intel
Corporation. The Section numbers in this Disclosure Letter correspond to the
Section numbers in the Agreement. Any information disclosed under any Section
number of this Disclosure Letter shall be deemed disclosed under and
incorporated into any other Section number under the Agreement where such
disclosure would be appropriate. Any terms defined in the Agreement have the
same meaning when used in this Disclosure Letter unless the context otherwise
requires.
3.2(a) Pursuant to Section 15 of that certain Stockholder Rights Agreement
dated as of July 16, 1997, as amended, the Company has granted the
Investors preemptive rights with respect to the issuance of any new
securities.
3.2(c) 1. The Company has, subject to the achievement of certain subscriber
levels, agreed to provide options to purchase shares of Common
Stock to Bruce Woodrey, for the calendar year 1997-1998, as
follows: 1 share per subscriber for which Subsidiary obtains a
commitment to take the Subsidiary's service by July 1, 1998 for
the first 10,000 California subscribers, 2 shares per subscriber
for which
<PAGE>
Disclosure Letter
February 20, 1998
Page 2
Subsidiary obtains a commitment to take Subsidiary's service by
July 1, 1998 for the next 10,000 California subscribers, and a
10,000 shares bonus upon reaching 20,000 subscribers. For every
subscriber commitment obtained in excess of 20,000 subscribers up
to 50,000 subscribers, 2 shares per subscriber. Shares for
subscribers in excess of 50,000 will be determined by the Board
of Directors if this situation occurs. For the entire plan,
shares will only be provided for subscribers that are "paying
subscribers" - i.e. subscribers for whom Subsidiary receives
payment that is booked as revenues to Subsidiary consistent with
GAAP. One half of these shares vests upon Subsidiary's obtaining
the commitment for such subscribers and the other half of these
shares vests upon the commencement of provision of service to
these subscribers which must occur before December 31, 1998.
2. The Company offered an option to purchase 5,500 shares of Common
Stock in options to Howard Karr & Associates ("Howard Karr") in
the event Howard Karr successfully completes a search for the
Subsidiary's Chief Financial Officer position. Howard Karr did
not identify the CFO hired by the Company, was paid in full, and
the Company does not believe that Howard Karr continues to have a
claim for any shares, and nor does the Company expect Howard Karr
to assert any such claim.
3. The Company has offered and granted an option to purchase 4,000
shares of Common Stock to Tracy Hoyt in consideration for
recruiting engineering personnel.
4. The Company has offered an option to purchase up to a maximum of
5,000 shares of Common Stock to Naren Thapetta, Esq., based on
250 shares to be granted for every patent filed by Mr. Thapetta
in 1998.
5. The Company has offered Heidrick & Struggles ("H&S") up to one-
third of the first year stock options granted to the Chief
Operating Officer of the Company to be hired by the Company as
the result of H&S's efforts.
3.5 The issuance of the shares of Series C Preferred, the Series C
Preferred Warrants and the Common Warrants require the consent of the
Investors and the holders of the outstanding Preferred Stock under the
Stockholder Rights Agreement and the protective provisions of the
Company's Certificate of Incorporation.
3.7 The Company Financials are included in the Preliminary Offering
Memorandum of the Company relating to the High Yield Offering and are
incorporated herein by reference.
<PAGE>
Disclosure Letter
February 20, 1998
Page 3
3.8 On February 5, 1998, the California Subsidiary sent to Pacific Bell a
notice of the California Subsidiary's intent to arbitrate Pacific
Bell's breach of contract because of its failure to timely deliver
operational physical collocation spaces and to challenge its present
physical collocation procedures and practices. The Company plans to
assert numerous claims against Pacific Bell to obtain Pacific Bell's
compliance with the Company's agreement with Pacific Bell, damages and
obtain more favorable collocation procedures, pricing and
availability. The Company is not aware of any plans by Pacific Bell to
assert any counter claims. If this matter proceeds to arbitration, the
prevailing Party will be entitled to recover fees and costs.
3.9(b) On February 11, 1998, the Company amended its Certificate of
Incorporation to increase the number of authorized shares of Series B
Preferred Stock to 5,700,001.
3.9(c) In the ordinary course of business, the Company's California
Subsidiary continues to order physical collocation facilities from
Pacific Bell and GTE, purchase a variety of equipment from Diamond
Lane Communications, Cisco, Pulsecom and have a variety of
installation work performed and transmission lines, loops and services
provided by vendors such as Pacific Bell, GTE, Butler, Chat, MFS,
Brooks Fiber and others. Also in the ordinary course of its business,
the Company has purchased or licensed software and software
development services from such vendors as Oracle Corporation,
Nightfire Software, Object Mart Inc., GeoSystems Global Corporation.
These expenditures in aggregate are well over $100,000 and
individually in many cases exceed $50,000.
3.9(g) On February 19, 1998, the Board of Directors determined that the fair
market value of the Company's Common Stock as of that date was $1.20
per share.
3.90(j) 1. In January 1998, the Board of Directors of the Company authorized
the Company to enter into indemnification agreements with each of
its directors and executive officers. On February 2, 1998, the
Board of Directors authorized the Company to indemnify Dhruv
Khanna, the Company's General Counsel, for liabilities resulting
from Mr. Khanna's opinion to be delivered in connection with the
High Yield Debt Offering.
2. In January 1998, the Board of Directors of the Company authorized
the Company to amend its existing option agreements and
restricted stock agreements to provide for accelerated vesting
under certain circumstances in the event of a change of control
of the Company.
3.9(m) The Company has borrowed $1.0 million under a secured line of credit
agreement which the Company intends to repay and cancel with the
proceeds of the High Yield Offering. The Company has granted a
security interest in its tangible assets in
<PAGE>
Disclosure Letter
February 20, 1998
Page 4
connection with financings under a line of credit agreement with
Charter Financial and Silicon Valley Bank.
3.9(q) The Company issued 33,334 shares of Series B Preferred at $3.00 per
share in February 1998.
3.10 The Subsidiary had no income in 1996 and did not file any tax returns
for that year.The Subsidiary was an S corporation through June 30,
1997.
3.12(a)
3.12.a. Lease Information/1/
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Property Address Lessor Date of Lease Annual Rent Other Fees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3560 Bassett Street Intevac, Inc. 08/15/97 $237,600 None
Santa Clara, CA 95054 (Sublandlord)
- ------------------------------------------------------------------------------------------------------------------------------------
444 Castro Street, Suite 413 The Travelers Insurance 09/01/97 $10,560 None
Mountain View, CA Company
- ------------------------------------------------------------------------------------------------------------------------------------
55 South Market Street, Suite 1430 Market-Post Tower, Inc. 08/30/97 $57,5101 None
San Jose, CA 95113
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3-12(b) The Subsidiary has received numerous items of hardware and software on
a trial basis for evaluation from a variety of xDSL equipment
suppliers and suppliers of routers and other networking equipment
which have not been paid for by the Subsidiary or the Company, and for
which no payment is due and no invoices or demands for payment have
been received to date.
3.13 Neither the Subsidiary nor the Company has applied for any patents as
of the date hereof. A company by the name of Telespeed OPS based in
Flushing NY that sells video broadcast equipment in Eastern Europe has
asserted an ownership interest in the Telespeed name. Matrix
Marketing, a telemarketing and customer service subsidiary of
Cincinnati Bell, has registered the Telespeed name with respect to
telemarketing services.
3.14(a) See exceptions noted in 3.9 above.
The California Subsidiary has entered into material contracts with
Pacific Bell, GTE California, and New York Telephone Company; the
California Subsidiary has also adopted the interconnection agreement
of GTE Northwest with MCI as its own
___________________
/1/ Rent increases approximately 4% per annum
<PAGE>
Disclosure Letter
February 20, 1998
Page 5
agreement ("Interconnection Agreements"). The agreement with New
York Telephone Company is pending approval at the New York Public
Service Commission. The agreement with GTE Northwest is yet to be
submitted to the Washington Utilities and Transportation
Commission. These Interconnection Agreements contain mutual
indemnification provisions, including indemnification for
infringement of intellectual property rights. All employees have
signed confidentiality agreements, including inventions
assignments clauses, with the Company or its California
Subsidiary.
The Company has entered into (i) restricted stock purchase
agreements with Charles J. McMinn, Dhruv Khanna, Charles J. Haas,
Duncan M. Davidson, Daniel Lynch, Rex Cardinale, Timothy Laehy
and Frank Marshall for common stock in the amount of shares set
forth in Exhibit A to the Amended and Restated Stockholder Rights
Agreement; (ii) preferred stock Series A subscription agreements
with Charles J. McMinn, Dhruv Khanna, Charles J. Haas, and Daniel
Lynch for the sale of Series A preferred stock in the amount of
shares set forth in Exhibit A to the Amended and Restated
Stockholder Rights Agreement; and (iii) preferred stock Series B
agreements with Warburg Pincus Ventures, L.P., Crosspoint Venture
Partners 1996 and Intel Corporation in the amount of shares set
forth in Exhibit A to the Amended and Restated Stockholder Rights
Agreement.
The Company has also entered into stock option agreements with
its employees and certain consultants as set forth in Attachment
1 hereto, which is incorporated herein by reference.
The Company and/or its California Subsidiary have also entered
into a number of agreements with a variety of vendors as noted in
3.9(c) above which in aggregate far exceed $100,000 and in many
instances individually exceed $50,000.
The Company has entered into a secured line of credit agreement
with Silicon Valley Bank up to the amount of $1.5 million, and a
sale lease-back equipment financing agreement with Charter
Financial under which the Company is obligated to make aggregate
future payments of $834,000.
The Company has agreed to enter into indemnification agreements
with each of its officers and directors. The Company has agreed
to indemnify Dhruv Khanna, Esq., its General Counsel, against
liabilities arising out of the opinions to be delivered by Mr.
Khanna in connection with the High Yield Offering.
3.14(b) The California Subsidiary has signed an Interconnection Agreement
with GTE California based on a prior agreement GTE entered into
with AT&T for the state of California. Similarly, the Subsidiary
has entered into an agreement with GTE
<PAGE>
Disclosure Letter
February 20, 1998
Page 6
Northwest for Washington based on a prior agreement GTE has
entered into with MCI. It is GTE's legal position that the
Subsidiary's Interconnection Agreements with GTE are subject to
all of the claims and appeals asserted by GTE in Federal District
Court against GTE's interconnection agreement with AT&T in
California and with MCI in Washington as ordered by the CPUC and
the Washington Utilities and Transportation Commission,
respectively. Should the Federal District Courts or further
courts of appeal uphold GTE's positions, the Subsidiary's
Interconnection Agreements with GTE may be correspondingly
affected, and thus subject to further review and revision by the
respective state commissions. In addition, all of the
Subsidiary's Interconnection Agreements may in the interim be
modified by or be subject to modification by rulings by the
respective state regulatory commissions, the Federal
Communications Commission ("FCC") and courts. In addition, the
Interconnection Agreements as well as the Subsidiary's status as
competitive local exchange carrier and its certification as a
telephone company by state regulatory commissions are subject to
ongoing changes in telecommunication laws and regulation. There
is also some uncertainty with respect to the jurisdictional
character of the services the Subsidiary provides which will
affect the surcharges, taxes and other fees that may be levied on
the Subsidiary as well as its costs of regulatory compliance in
the state and federal jurisdictions.
3.15 The Company has a sale-lease back financing arrangement with
Charter Financial, in which Warburg Pincus Ventures, L.P. is
affiliated. (Warburg owns a majority of the stock of Charter
Financial.) The Company is obligated to make future payments of
$834,000 under the sale-lease back transaction. Through December
31, 1997, total lease payments to Charter Financial, including
principal and interest payments, were approximately $26,000. The
Company believes that the terms of the lease financing with
Charter Financial were completed at rates similar to those
available from alternative providers.
The Company purchases equipment from Diamond Lane Communications,
in which Crosspoint Venture Partners 1996 is affiliated.
(Crosspoint owns approximately 12% of the capital stock of
Diamond Lane Communications.) The Company's payments to Diamond
Lane through December 31, 1997 totaled approximately $140,000.
The Company believes that the terms of its transactions with
Diamond Lane were completed at rates similar to those available
from alternative vendors.
The Company sells its TeleSpeed(SM) services to Intel, which has
an ownership interest in the Company.
3.16 The California Subsidiary is certificated telephone company in
the states of California, Washington, New York, Illinois, Oregon
and Massachusetts.The Subsidiary's Interconnection Agreements
with Pacific Bell and GTE California are
<PAGE>
Disclosure Letter
February 20, 1998
Page 7
effective and sufficient for the Subsidiary to provide its
services within Pacific Bell's and GTE's service territory in
California, subject to limitations in the availability Pacific
Bell's and GTE's own facilities and services. The Subsidiary's
Interconnection Agreement with New York Telephone Company is
signed but not yet effective or approved by the New York
commission. The Subsidiary has adopted the GTE Northwest-MCI
agreement for the state of Washington and that agreement is yet to
be submitted to the Washington commission for its approval. Other
than the above-stated states and agreements, the Subsidiary is not
certificated as a telephone company and does not currently have
any interconnection agreement with any other incumbent local
exchange carriers ("ILECs") in California or any other state. The
Virginia Subsidiary has certification applications pending in
Virginia, Maryland, and the District of Columbia. The Subsidiaries
are in negotiations with Ameritech for Illinois and Bell Atlantic
for Massachusetts, among other negotiations.
3.18 1. The Company has entered into employment agreements with Dhruv
Khanna, Rex Cardinale, Tom Regan and Tom Koutsky.
2. The Company maintains a 1997 Stock Plan and has reserved 1,756,750
shares of Common Stock for stock and option grants thereunder.
3. The Company has adopted a bonus plan for its officers based on the
number of end users served by the Subsidiaries.
3.22 The Company expects to grant registration rights in connection
with the High Yield Offering.
3.24 Policy No. 57 UECFH3882. Activity Date 2/15/97-2/15/98. ITT
Hartford Multiflex Policy with Business Liability limits:
<TABLE>
<S> <C>
General Aggregate Limit (Other than Products-Completed Operations) $2,000,000
Products-Completed Operations Aggregate Limit $1,000,000
Each Occurrence Limit $1,000,000
Personal and Advertising injury $1,000,000
Fire Damage Any One Fire $ 300,000
Medical Expense Limit (Any One Person) $ 10,000
Umbrella $4,000,000
</TABLE>
<PAGE>
Disclosure Letter
February 20, 1998
Page 8
Worker's Compensation Insurance meets applicable legal requirements.
Sincerely,
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Dhruv Khanna
-----------------------------------
Dhruv Khanna
Vice President and General Counsel
<PAGE>
Disclosure Letter
February 20, 1998
Page 9
Attachment 1
------------
Name Share Amount
Bruce Woodrey 40,000
Tom J. Regan 80,000
John Reilly 80,000
Richard A. (Dick) Rawson 102,000
Paul Havlik 102,000
Sean L. Walsh 75,000
Rangaswamy Ramachandran 40,000
John Rugo 200,000
Kim Maxwell 4,000
Core Competence, Inc. 4,000
Robert Berger 4,000
William H. Lane 4,000
David Farber 4,000
Frank Marshall 4,000
Dale Hatfield 4,000
Daniel Lynch 4,000
The McKenna Group 3,750
Paul Knopf 2,000
John Hansen 20,000
Louis G. Pelosi 70,000
Laura M'Guinness 7,000
Eric Moyer 1,000
Christian Metcalfe 1,000
Jamie L. Pond 7,500
Blake Alexander 5,000
Noemi Berry 24,000
Ellie Ruiz 50,000
Tom Koutsky 20,000
Brenda Jones 1,000
Marguerite Donaldson 15,000
Vinu Sundaresan 70,000
Mark Hallman 15,000
Mike T. Walsh 20,000
Mike Miscevic 15,000
Erin Dworak 3,500
John Miller 7,500
Jerry Siebenmorgen 7,500
Bill Sans 7,500
<PAGE>
Disclosure Letter
February 20, 1998
Page 10
Rob Heuser 10,000
Dorris Lynn Stevens 12,500
Christopher Perry 10,000
Eric N. Gary 50,000
Donald Brent Chapman 50,000
Daniel Estabrook 15,000
Laura Knapp 2,500
Tracy Hoyt 2,000
Robert Michaelis 7,500
Madie Knight 12,750
Yan Or 20,000
Franklin Gurnee 3,750
Elizabeth Fetter 4,000
Sharon Nelson 4,000
R. Gregory Paquin 3,000
Madhu Gopinathan 20,000
Teresa Y. Shaw 15,000
Shahin Bakshandeh 25,000
Sharon Hearn 15,000
Gillian Tracy 6,100
Curt Johnson 12,000
Dale Mann 30,000
Juliet Settlemier 10,000
Robert Patterson 10,000
David Strohm 4,000
Laura M'Guinness #2 3,000
Blake Alexander #2 5,000
Tom Koutsky #2 10,000
Dorris Lynn Stevens #2 2,500
Monica Garlit 5,000
Mimi Van Son 10,000
Brian Esperson 8,000
Shashank Joshi 15,000
Janet L. O'Brien 2,500
Johan Casier 20,000
Tracy Mattson 1,600
Peter Hitchcock 6,000
Christina D. Kolman 3,000
Tracy Hoyt #2 2,000
<PAGE>
EXHIBIT G1
----------
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 11, 1998
Warburg, Pincus Ventures, L.P.
c/o E.M. Warburg, Pincus & Co., LLC
466 Lexington Avenue
New York, NY 10017-3147
Crosspoint Venture Partners 1996
1 First Street
Los Altos, CA 94022
RE: COVAD COMMUNICATIONS GROUP, INC.
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
Ladies and Gentlemen:
Reference is made to the Series C Preferred Stock and Warrant Subscription
Agreement dated as of February 20, 1998 (the "Agreement"), complete with all
listed exhibits thereto, by and among Covad Communications Group, Inc., a
Delaware corporation (the "Company"), and the entities listed in Exhibit A to
the Agreement (the "Purchasers"), which provides for, among other things, the
issuance by the Company to the Purchasers of shares of Series C Preferred Stock
of the Company (the "Series C Shares"), warrants to purchase shares of Series C
Preferred Stock (the "Series C Warrants") and warrants to purchase shares of
Common Stock (the "Common Warrants" and together with the Series C Shares and
the Series C Warrants, the "Securities"). This opinion is rendered to you
pursuant to Section 5.1(a) of the Agreement, and all terms used herein have the
meanings defined for them in the Agreement unless otherwise defined herein.
We have acted as counsel for the Company in connection with the negotiation
of the Agreement and the issuance of the Securities. As such counsel, we have
made such legal and factual examinations and inquiries as we have deemed
advisable or necessary for the purpose of rendering this opinion. In addition,
we have examined originals or copies of such corporate records of the Company,
certificates of public officials and such other documents which we consider
necessary or advisable for the purpose of rendering this opinion. In such
examination we have assumed the genuineness of all signatures on original
documents, the legal capacity of all natural persons, the authenticity and
completeness of all documents submitted to us as originals, the conformity to
original documents of all copies submitted to us and the due execution and
delivery of all documents (except as to due execution and delivery by the
Company) where due execution and delivery are a prerequisite to the
effectiveness thereof.
<PAGE>
Warburg, Pincus Ventures, L.P.
Crosspoint Venture Partners 1996
Page 2
As used in this opinion, the expressions "to our knowledge," "known to us"
or similar language with reference to matters of fact mean that, after an
examination of documents made available to us by the Company, and after
inquiries of officers of the Company, but without any further independent
factual investigation, we find no reason to believe that the opinions expressed
herein are factually incorrect. Further, the expressions "to our knowledge",
"known to us" or similar language with reference to matters of fact refer to the
current actual knowledge of the attorneys of this firm who have devoted a
substantial amount of time to matters for the Company. Except to the extent
expressly set forth herein or as we otherwise believe to be necessary to our
opinion, we have not undertaken any independent investigation to determine the
existence or absence of any fact, and no inference as to our knowledge of the
existence or absence of any fact should be drawn from our representation of the
Company or the rendering of the opinion set forth below.
For purposes of this opinion, we are assuming that you have all requisite
power and authority, and have taken any and all necessary corporate action, to
execute and deliver the Agreement, and we are assuming that the representations
and warranties made by the Purchasers in the Agreement are true and correct. We
are also assuming that each Purchaser has purchased its Securities for value, in
good faith and without notice of any adverse claims, and has taken delivery of
its securities, each with an effective endorsement to such Purchaser, all within
the meaning of the California Uniform Commercial Code.
The opinions hereinafter expressed are subject to the following
qualifications:
(a) We express no opinion as to the effect of applicable bankruptcy,
insolvency, reorganization, moratorium or other similar federal or state laws
affecting the rights of creditors;
(b) We express no opinion as to the effect of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity);
(c) We express no opinion as to compliance or non-compliance with the
anti-fraud provisions of applicable securities laws;
(d) We express no opinion as to the enforceability of the
indemnification provisions of Section 10 of the Amended and Restated Stockholder
Rights Agreement dated February 20, 1998 (the "Stockholder Rights Agreement") to
the extent the provisions thereof may be subject to limitations of public policy
and the effect of applicable statutes and judicial decisions;
<PAGE>
Warburg, Pincus Ventures, L.P.
Crosspoint Venture Partners 1996
Page 3
(e) We are members of the Bar of the State of California and we
express no opinion as to any matter relating to the laws of any jurisdiction
other than the federal laws of the United States of America and the laws of the
State of California and the Delaware General Corporation Law. In particular, we
express no opinion as to the state securities or "blue sky" laws of any state
other than California.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing
under, and by virtue of, the laws of the State of Delaware and is in good
standing as a domestic corporation under the law of such state. The Company has
the corporate power and authority to own its property and conduct its business
as currently conducted. The Company is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company on a consolidated basis.
2. The Company has all requisite legal and corporate power and authority
to enter into this Agreement, the Series C Warrants, the Common Warrants and the
Stockholder Rights Agreement, to sell and issue the Securities, to issue the
Common Stock issuable upon conversion of the Series C Shares and the Series C
Preferred issuable upon exercise of the Series C Warrants and upon exercise of
the Common Warrants, to issue the Series C Preferred upon exercise of the Series
C Warrants and to carry out and perform its obligations under the terms of the
Agreement.
3. As of February 15, 1998, the authorized capital stock of the Company
consisted of 30,000,000 shares of authorized Common Stock, $.001 par value, of
which 3,787,068 shares were issued and outstanding, and 15,000,000 shares of
Preferred Stock, $.001 par value, of which 250,000 shares were designated Series
A Preferred Stock, all of which were outstanding, 5,700,001 shares were
designated Series B Preferred, all of which are outstanding, and 3,716,429
shares were designated Series C Preferred, none of which were outstanding. All
outstanding shares of the Company's capital stock were duly authorized, validly
issued, fully paid and non-assessable. The Company had no other capital stock
authorized, issued or outstanding. To our knowledge, except as set forth in the
Agreement (including the Disclosure Letter attached as Exhibit E thereto), there
were no options, warrants, convertible securities or other rights to issue or
purchase any of the Company's authorized but unissued capital stock.
4. The Series C Shares and the Common Warrants issued under the Agreement
are validly issued, fully paid and nonassessable, free of any liens,
encumbrances and preemptive or similar rights contained in the Certificate of
Incorporation or Bylaws of the Company or, to our knowledge, in any
<PAGE>
Warburg, Pincus Ventures, L.P.
Crosspoint Venture Partners 1996
Page 4
agreement to which the Company is a party, except as specifically provided in
the Agreement, the Common Warrants and the Stockholder Rights Agreement. The
Series C Warrants, when issued in accordance with the terms of the Agreement for
the consideration expressed therein, will be duly and validly issued, fully paid
and nonassessable. The Series C Preferred issuable upon exercise of the Series C
Warrants has been duly and validly reserved and, when issued, sold and delivered
in accordance with the terms of the Series C Warrants, will be validly issued,
fully paid and nonassessable. The Common Stock issuable upon exercise of the
Common Warrants and upon conversion of the Series C Shares and the Series C
Preferred issuable upon exercise of the Series C Warrants has been duly and
validly reserved and, when issued, sold and delivered in accordance with the
terms of the Common Warrants or the Company's Certificate of Incorporation, as
the case may be, will be duly and validly issued, fully paid and nonassessable.
5. The certificates representing the Series C Shares are in due and
proper form and the certificates have been duly and validly executed by the
officers of the Company named thereon.
6. All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of the Agreement and the Stockholder Rights Agreement by the
Company, the authorization, sale, issuance and delivery of the Securities (and
the Common Stock or Series C Preferred Stock issuable upon conversion or
exercise thereof) and the performance of the Company's obligations under the
Agreement and the Stockholder Rights Agreement have been taken. The Agreement,
the Common Warrants and the Stockholder Rights Agreement have been duly and
validly executed and delivered by the Company and constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
its terms.
7. The execution, delivery and performance of and compliance with the
Agreement and the Stockholder Rights Agreement, and the issuance of the
Securities and the shares of Series C Preferred or Common Stock issuable upon
conversion thereof, do not conflict with, or constitute a default under any
terms of the Company's Certificate of Incorporation or Bylaws. To our
knowledge, the execution, delivery and performance of and compliance with this
Agreement and the Stockholder Rights Agreement, and the issuance of the
Securities (and the shares of Series C Preferred Stock or Common Stock issuable
upon conversion or exercise thereof), do not materially violate or conflict
with, or constitute a material default under any material contract, agreement,
instrument, judgement or decree binding upon the Company.
8. To our knowledge, there are no actions, suits, proceedings or
investigations pending against the Company or its properties before any court or
governmental agency which would, if adversely determined, have a material
adverse effect on the Company.
<PAGE>
Warburg, Pincus Ventures, L.P.
Crosspoint Venture Partners 1996
Page 5
9. No consent, approval or authorization of, or filing, registration or
qualification with, any governmental or regulatory authority or body is required
in connection with or as a condition to the execution and delivery of the
Agreement, the Common Warrants, the Series C Warrants or the Stockholder Rights
Agreement or the consummation of the transactions contemplated thereby
(including, without limitation, the offer, issuance, sale or delivery of the
Securities), except for (a) filing of the Amended and Restated Certificate of
Incorporation in the Office of the Secretary of State of the State of Delaware
and (b) qualification (or taking such action as may be necessary to secure an
exemption from qualification) under the California Corporate Securities Law and
other applicable blue sky laws of the offer and sale of the Securities (and the
Series C Preferred Stock and Common Stock issuable upon exercise or conversion
thereof). The filing referred to in clause (a) above has been accomplished and
is effective. Our opinion herein is otherwise subject to the timely and proper
completion of all filings and other actions contemplated herein where such
filings and actions are to be undertaken on or after the date hereof.
10. Subject to the accuracy of each Purchaser's representations in Section
4 of the Agreement and its responses (if any) to the Company's inquiries, we are
of the opinion that the offer, sale and issuance of the Securities in conformity
with the terms of the Agreement constitute transactions exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended.
This opinion is furnished to you solely for your benefit in connection with
the purchase of the Securities, and may not be relied upon by any other person
or for any other purpose without our prior written consent. We would expect
any person or entity to whose receipt hereof we consented to be bound by this
paragraph.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
<PAGE>
EXHIBIT G2
----------
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 11, 1998
Intel Corporation
2200 Mission College Boulevard
Santa Clara, CA 95052-8199
Ladies and Gentlemen:
Reference is made to the Series C Preferred Stock and Warrant Subscription
Agreement dated as of February 20, 1998 (the "Agreement"), complete with all
listed exhibits thereto, by and among Covad Communications Group, Inc., a
Delaware corporation (the "Company"), and the entities listed in Exhibit A to
the Agreement (the "Purchasers"), which provides for, among other things, the
issuance by the Company to Intel Corporation ("Intel") of 120,048 shares of
Series C Preferred Stock of the Company (the "Intel Shares"), warrants to
purchase 98,500 shares of Series C Preferred Stock (the "Intel Series C
Warrants") and warrants to purchase 35,284 shares of Common Stock (the "Intel
Common Warrants" and together with the Intel Shares and the Intel Series C
Warrants, the "Intel Securities"). This opinion is rendered to you pursuant to
Section 5.1(a) of the Agreement, and all terms used herein have the meanings
defined for them in the Agreement unless otherwise defined herein.
We have acted as counsel for the Company in connection with the negotiation
of the Agreement and the issuance of the Intel Securities. As such counsel, we
have made such legal and factual examinations and inquiries as we have deemed
advisable or necessary for the purpose of rendering this opinion. In addition,
we have examined originals or copies of such corporate records of the Company,
certificates of public officials and such other documents which we consider
necessary or advisable for the purpose of rendering this opinion. In such
examination we have assumed the genuineness of all signatures on original
documents, the legal capacity of all natural persons, the authenticity and
completeness of all documents submitted to us as originals, the conformity to
original documents of all copies submitted to us and the due execution and
delivery of all documents (except as to due execution and delivery by the
Company) where due execution and delivery are a prerequisite to the
effectiveness thereof.
As used in this opinion, the expressions "to our knowledge," "known to us"
or similar language with reference to matters of fact mean that, after an
examination of documents made available to us by the Company, and after
inquiries of officers of the Company, but without any further independent
factual investigation, we find no reason to believe that the opinions expressed
herein are factually incorrect. Further, the expressions "to our knowledge",
"known to us" or similar language with reference to matters of fact refer to the
current actual knowledge of the attorneys of this firm who have devoted a
substantial
<PAGE>
Intel Corporation
Page 2
amount of time to matters for the Company. Except to the extent expressly set
forth herein or as we otherwise believe to be necessary to our opinion, we have
not undertaken any independent investigation to determine the existence or
absence of any fact, and no inference as to our knowledge of the existence or
absence of any fact should be drawn from our representation of the Company or
the rendering of the opinion set forth below.
For purposes of this opinion, we are assuming that you have all requisite
power and authority, and have taken any and all necessary corporate action, to
execute and deliver the Agreement, and we are assuming that the representations
and warranties made by Intel in the Agreement are true and correct. We are also
assuming that Intel has purchased the Intel Securities for value, in good faith
and without notice of any adverse claims within the meaning of the California
Uniform Commercial Code.
The opinions hereinafter expressed are subject to the following
qualifications:
(a) We express no opinion as to the effect of applicable bankruptcy,
insolvency, reorganization, moratorium or other similar federal or state laws
affecting the rights of creditors;
(b) We express no opinion as to the effect of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity);
(c) We express no opinion as to compliance or non-compliance with the
anti-fraud provisions of applicable securities laws;
(d) We express no opinion as to the enforceability of the
indemnification provisions of Section 10 of the Amended and Restated Stockholder
Rights Agreement dated February 20, 1998 (the "Stockholder Rights Agreement") to
the extent the provisions thereof may be subject to limitations of public policy
and the effect of applicable statutes and judicial decisions;
(e) We are members of the Bar of the State of California and we
express no opinion as to any matter relating to the laws of any jurisdiction
other than the federal laws of the United States of America and the laws of the
State of California and the Delaware General Corporation Law. In particular, we
express no opinion as to the state securities or "blue sky" laws of any state
other than California.
Based upon and subject to the foregoing, we are of the opinion that:
<PAGE>
Intel Corporation
Page 3
1. The Company is a corporation duly organized and validly existing
under, and by virtue of, the laws of the State of Delaware and is in good
standing as a domestic corporation under the law of such state.
2. The Company has all requisite legal and corporate power and authority
to enter into this Agreement, the Series C Warrants, the Common Warrants and the
Stockholder Rights Agreement, to sell and issue the Intel Securities, to issue
the Common Stock issuable upon conversion of the Intel Shares and the Series C
Preferred issuable upon exercise of the Series C Warrants and upon exercise of
the Intel Common Warrants, to issue the Series C Preferred upon exercise of the
Series C Warrants and to carry out and perform its obligations under the terms
of the Agreement.
3. The authorized capital stock of the Company consists of 30,000,000
shares of authorized Common Stock, $.001 par value, of which 3,787,068 shares
are issued and outstanding, and 15,000,000 shares of Preferred Stock, $.001 par
value, of which 250,000 shares are designated Series A Preferred Stock, all of
which are outstanding, 5,700,001 shares are designated Series B Preferred, all
of which are outstanding, and 3,716,429 shares are designated Series C
Preferred, none of which are outstanding. All outstanding shares of the
Company's capital stock are duly authorized, validly issued, fully paid and non-
assessable. The Company has no other capital stock authorized, issued or
outstanding. To our knowledge, except as set forth in the Agreement (including
the Disclosure Letter attached as Exhibit E thereto), there are no options,
warrants, convertible securities or other rights to issue or purchase any of the
Company's authorized but unissued capital stock.
4. The Intel Shares and the Intel Common Warrants issued under the
Agreement are validly issued, fully paid and nonassessable, free of any liens,
encumbrances and preemptive or similar rights contained in the Certificate of
Incorporation or Bylaws of the Company or, to our knowledge, in any agreement to
which the Company is a party, except as specifically provided in the Agreement,
the Intel Common Warrants and the Stockholder Rights Agreement. The Intel
Series C Warrants, when issued in accordance with the terms of the Agreement for
the consideration expressed therein, will be duly and validly issued, fully paid
and nonassessable. The Series C Preferred issuable upon exercise of the Intel
Series C Warrants has been duly and validly reserved and, when issued, sold and
delivered in accordance with the terms of the Intel Series C Warrants, will be
validly issued, fully paid and nonassessable. The Common Stock issuable upon
exercise of the Intel Common Warrants and upon conversion of the Intel Shares
and the Series C Preferred issuable upon exercise of the Intel Series C Warrants
has been duly and validly reserved and, when issued, sold and delivered in
accordance with the terms of the Common Warrants or the Company's Certificate of
Incorporation, as the case may be, will be duly and validly issued, fully paid
and nonassessable.
<PAGE>
Intel Corporation
Page 4
5. The certificates representing the Intel Shares are in due and proper
form and the certificates have been duly and validly executed by the officers of
the Company named thereon.
6. All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of the Agreement and the Stockholder Rights Agreement by the
Company, the authorization, sale, issuance and delivery of the Intel Securities
(and the Common Stock or Series C Preferred Stock issuable upon conversion or
exercise thereof) and the performance of the Company's obligations under the
Agreement and the Stockholder Rights Agreement have been taken. The Agreement,
the Intel Common Warrants and the Stockholder Rights Agreement have been duly
and validly executed and delivered by the Company and constitute valid and
binding obligations of the Company, enforceable against the Company in
accordance with its terms.
7. The execution, delivery and performance of and compliance with the
Agreement and the Stockholder Rights Agreement, and the issuance of the Intel
Securities and the shares of Series C Preferred or Common Stock issuable upon
conversion thereof, do not conflict with, or constitute a default under any
terms of the Company's Certificate of Incorporation or Bylaws. To our
knowledge, the execution, delivery and performance of and compliance with this
Agreement and the Stockholder Rights Agreement, and the issuance of the Intel
Securities (and the shares of Series C Preferred Stock or Common Stock issuable
upon conversion or exercise thereof), do not materially violate or conflict
with, or constitute a material default under any material contract, agreement,
instrument, judgement or decree binding upon the Company.
8. To our knowledge, there are no actions, suits, proceedings or
investigations pending against the Company or its properties before any court or
governmental agency which would, if adversely determined, have a material
adverse effect on the Company.
9. No consent, approval or authorization of, or filing, registration or
qualification with, any governmental or regulatory authority or body is required
in connection with or as a condition to the execution and delivery of the
Agreement, the Intel Common Warrants, the Intel Series C Warrants or the
Stockholder Rights Agreement or the consummation of the transactions
contemplated thereby (including, without limitation, the offer, issuance, sale
or delivery of the Intel Securities), except for (a) filing of the Amended and
Restated Certificate of Incorporation in the Office of the Secretary of State of
the State of Delaware and (b) qualification (or taking such action as may be
necessary to secure an exemption from qualification) under the California
Corporate Securities Law and other applicable blue sky laws of the offer and
sale of the Intel Securities (and the Series C Preferred Stock and Common Stock
issuable upon exercise or conversion thereof). The filing referred to in clause
(a) above has been accomplished and is effective. Our opinion herein is
otherwise subject to the timely and proper
<PAGE>
Intel Corporation
Page 5
completion of all filings and other actions contemplated herein where such
filings and actions are to be undertaken on or after the date hereof.
10. Subject to the accuracy of each Purchaser's representations in Section
4 of the Agreement and its responses (if any) to the Company's inquiries, we are
of the opinion that the offer, sale and issuance of the Intel Securities in
conformity with the terms of the Agreement constitute transactions exempt from
the registration requirements of Section 5 of the Securities Act of 1933, as
amended.
This opinion is furnished to Intel solely for its benefit in connection
with the purchase of the Intel Securities, and may not be relied upon by any
other person or for any other purpose without our prior written consent.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
<PAGE>
EXHIBIT 10.6
INTEVAC, INC. - SUBLEASE
------------------------
1. PARTIES
-------
This Sublease dated August 15, 1997, is made between Intevac, Inc.
("Sublandlord"), and Covad Communications Group, Inc. ("Subtenant").
2. MASTER LEASE
------------
Sublandlord is the lessee under a written lease dated May 26, 1994, wherein
Kontrabecki Associates I ("Landlord") leased to Sublandlord the real property
located in the City of Santa Clara, County of Santa Clara, State of California,
described as 3550, 3560, 3570 and 3580 Bassett Street ("Master Premises"). Said
lease has been amended by the following addendums: Addendum I dated May 26,1994,
Addendum II dated January 1, 1995, Addendum III dated July 27, 1995, Addendum IV
dated November 8, 1996 and Addendum V dated March 19, 1997; said lease and
amendments are herein collectively referred to as the "Master Lease" and are
attached hereto as Exhibit "A".
3. PREMISES
--------
Sublandlord hereby subleases to Subtenant on the terms and conditions set forth
in this Sublease the following portion of the Master Premises ("Premises")
located at 3560 Bassett Street and as described in Exhibit B. The Premises size
is agreed to be approximately 18,000 square feet and consists of the second
floor of 3560 Bassett Street and its first floor lobby. Use of the first floor
lobby is exclusive to the Subtenant with the exception of emergency use by
Sublandlord personnel as required by applicable fire codes. Subtenant and
Sublandlord will both have access to first floor restrooms behind the lobby.
4. WARRANTY BY SUBLANDLORD
-----------------------
4.1 Sublandlord warrants and represents to Subtenant that the Master Lease has
not been amended or modified except as expressly set forth herein, that
Sublandlord is not now, and as of the commencement of the Term hereof will not
be, in default or breach of any of the provisions of the Master Lease, and that
Sublandlord has no knowledge of any claim by Lessor that Sublandlord is in
default or breach of any of the provisions of the Master Lease.
4.2 Sublandlord warrants and represents that the Premises have been constructed
in a first class manner and in full compliance with all governmental
regulations, ordinances and laws in effect as of the Commencement Date,
including, but not limited to, the American with Disabilities Act of 1990 and
laws pertaining to hazardous substances, in
1
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order to make the Building and the Premises and the site upon which the Building
is situated suitable for occupancy by a tenant utilizing the space for business
and professional offices.
5. TERM
----
5.1 The Term of this Sublease shall commence on the earlier of the date the
Subtenant occupies the Premises or September 15, 1997 ("Commencement Date") and
end on August 31, 1999 ("Termination Date").
5.2 Subtenant, at its option, along with its contractors, subcontractors,
agents, etc. shall be permitted to enter the premises at any time prior to the
projected Commencement Date with no obligation to pay rent, for the purposes of
installing furniture, fixtures, equipment and leasehold improvements.
5.3 Possession of the Premises ("Possession") shall be delivered to Subtenant
on the Commencement Date. If for any reason Sublandlord does not deliver
Possession to Subtenant on the Commencement Date, Sublandlord shall not be
subject to any liability for such failure, the Termination Date shall not be
extended by the delay, and the validity of this Sublease shall not be impaired,
but rent shall abate until delivery of Possession. Notwithstanding the
foregoing, if Sublandlord has not delivered Possession to Subtenant within
thirty (30) days after the Commencement Date, then at any time thereafter and
before delivery of Possession, Subtenant may give written notice to Sublandlord
of Subtenant's intention to cancel this Sublease. Said notice shall set forth an
effective date of such cancellation which shall be at least ten (10) days after
delivery of said notice to Sublandlord. If Sublandlord delivers Possession to
Subtenant on or before such effective date, this Sublease shall remain in full
force and effect. If Sublandlord fails to deliver Possession to Subtenant on or
before such effective date, this Sublease shall be canceled, in which case all
consideration previously paid by Subtenant to Sublandlord on account of this
Sublease shall be returned to Subtenant, this Sublease shall thereafter be of no
further force or effect, and Sublandlord shall have no further liability to
Subtenant on account of such delay or cancellation. If Sublandlord permits
Subtenant to take Possession prior to the commencement of the Term, such early
Possession shall not advance the Termination Date and shall be subject to the
provisions of this Sublease, excluding the payment of rent and operating
expenses.
5.4 Subtenant shall have the option to extend the term of this Sublease for one
(1) year. Notice shall be provided by Subtenant in writing to Sublandlord no
later than one hundred and eighty (180) days prior to the expiration of the
initial term. The rent for the extended term shall be at the then current market
rent.
2
<PAGE>
6. RENT
----
6.1 Subtenant shall pay to Sublandlord as rent, without deduction, setoff,
notice, or demand, at 3550 Bassett Street or at such other place as Sublandlord
shall designate from time to time by notice to Subtenant, the sum of nineteen
thousand eight hundred dollars ($19,800.00) per month, in advance on the first
day of each month of the Term. Subtenant shall pay to Sublandlord upon execution
of this Sublease the sum of nineteen thousand eight hundred dollars ($19,800.00)
as rent for the first month. If the term begins or ends on a day other than the
first or last day of a month, the rent for the partial months shall be prorated
on a per diem basis.
6.2 Subtenant's rent and operating expenses for each month are due on the first
day of the month. If any installment of rent or operating expenses is not
received by Sublandlord within five calendar days after the due date, Subtenant
shall pay to Sublandlord an additional charge of five percent (5%) of the amount
overdue.
7. OPERATING EXPENSES
------------------
7.1 Subtenant shall pay to Sublandlord as operating expenses, without
deduction, setoff, notice, or demand, at 3550 Bassett Street or at such other
place as Sublandlord shall designate from time to time by notice to Subtenant,
the sum of five thousand two hundred twenty dollars ($5,220.00) per month, in
advance on the first day of each month of the Term. Subtenant shall pay to
Sublandlord upon execution of this Sublease the sum of five thousand two hundred
twenty dollars ($5,220.00) as operating expenses for the first month. If the
term begins or ends on a day other than the first or last day of a month, the
operating expenses for the partial months shall be prorated on a per diem basis.
The $5,220.00 monthly operating expenses include $2,700.00 per month for
electricity, gas and water, and an estimate of $2,520.00 per month for taxes,
insurance, HVAC maintenance, elevator maintenance, and other costs of building
maintenance. The charges for utilities are fixed and are not subject to audit.
The $2,520.00 per month for taxes, insurance, HVAC maintenance, elevator
maintenance and other costs of building maintenance is subject to annual
adjustment based on actual expenses incurred. A reconciliation and audit of the
actual expenses will be conducted at the end of each rental year. The Subtenant
shall either receive a credit for any overpayment made or reimburse Sublandlord
within thirty (30) days of the audit for any additional balance due.
7.2 Subtenant may, at its option, either contract and pay for its own
janitorial services, or use Sublandlord's janitorial service at Sublandlord's
cost. If Subtenant chooses to use Sublandlord's janitorial service, then the
cost of this service will be added to the monthly rent to cover such services.
7.3 Sublandlord shall, upon request by Subtenant, furnish Subtenant with copies
of all statements submitted by Lessor of actual or estimated operating costs
during the Term. If the Master Lease provides for the payment by Sublandlord of
operating costs on the
3
<PAGE>
basis of an estimate thereof, then as and when adjustments between estimated and
actual operating costs are made under the Master Lease, the obligations of
Sublandlord and Subtenant hereunder shall be adjusted in a like manner; and if
any such adjustment shall occur after the expiration or earlier termination of
the Term, then the obligations of Sublandlord and Subtenant under this
Subsection 7.3 shall survive such expiration or termination.
8. SECURITY DEPOSIT
Subtenant shall deposit with Sublandlord upon execution of this Sublease the sum
of twenty-five thousand twenty dollars ($25,020.00) as security for Subtenant's
faithful performance of Subtenant's obligations hereunder ("Security Deposit").
If Subtenant fails to pay rent or other charges when due under this Sublease, or
fails to perform any of its other obligations hereunder, Sublandlord may use or
apply all or any portion of the Security Deposit for the payment of any rent or
other amount then due hereunder and unpaid, for the payment of any other sum for
which Sublandlord may become obligated by reason of Subtenant's default or
breach, or for any loss or damage sustained by Sublandlord as a result of
Subtenant's default or breach. If Sublandlord so uses any portion of the
Security Deposit, Subtenant shall, within ten (10) days after written demand by
Sublandlord, restore the Security Deposit to the full amount originally
deposited, and Subtenant's failure to do so shall constitute a default under
this Sublease. Sublandlord shall not be required to keep the Security Deposit
separate from its general accounts, and shall have no obligation or liability
for payment of interest on the Security Deposit. In the event Sublandlord
assigns its interest in this Sublease, Sublandlord shall deliver to its assignee
so much of the Security Deposit as is then held by Sublandlord. Within ten (10)
days after the Term has expired, or Subtenant has vacated the Premises, or any
final adjustment pursuant to Subsection 7.3 hereof has been made, whichever
shall last occur, and provided Subtenant is not then in default of any of its
obligations hereunder, the Security Deposit, or so much thereof as had not
theretofore been applied by Sublandlord, shall be returned to Subtenant or to
the last assignee, if any, of Subtenant's interest hereunder.
9. USE OF PREMISES
---------------
Subtenant shall have the right to use the Premises for general office space and
any other legally permitted use compatible with a first-class office building.
10. ASSIGNMENT AND SUBLETTING
-------------------------
10.1 Subtenant shall not assign this Sublease or further sublet all or part of
the Premises without the prior written consent of Sublandlord (and the consent
of Lessor, if such is required under the terms of the Master Lease).
10.2 Subtenant will have the right, subject to Sublandlord's prior written
consent, which shall not be unreasonably withheld, to Sub-Sublease or Assign any
portion of the
4
<PAGE>
Premises at any time during the Initial or Extended term. In no event shall any
sublease conflict with the terms and conditions stipulated in the Master Lease.
Any amounts collected in excess of rents and operating expenses paid under this
Sublease agreement, shall be payable and paid to the Sublandlord.
10.3 Any reorganization, merger, sale, partnership change, assignment, transfer
or hypothecation of any partnership or ownership interest in Subtenant shall not
be deemed an Assignment or Sub-sublease under the Sublease. Neither the use by,
nor the Sub-subletting to, any subsidiary or affiliate of Subtenant of all or a
portion of the Premises shall be deemed an Assignment or Sub-sublease under the
Sublease.
11. OTHER PROVISIONS OF SUBLEASE
----------------------------
All applicable terms and conditions of the Master Lease are incorporated into
and made a part of this Sublease as if Sublandlord were the lessor thereunder,
Subtenant the lessee thereunder, and the Premises the Master Premises, except
for the following: Subtenant assumes and agrees to perform the lessee's
obligations under the Master Lease during the Term or the extent that such
obligations are applicable to the Premises, except that the obligation to pay
rent to Lessor under the Master Lease shall be considered performed by Subtenant
to the extent and in the amount rent is paid to Sublandlord in accordance with
Sections 6 and 7 of this Sublease. Subtenant shall not commit or suffer any act
or omission that will violate any of the provisions of the Master Lease.
Sublandlord shall exercise due diligence in attempting to cause Lessor to
perform its obligations under the Master Lease for the benefit of Subtenant. If
the Master Lease terminates, this Sublease shall terminate and the parties shall
be relieved of any further liability or obligation under this Sublease,
provided, however, that if the Master Lease terminates as a result of a default
or breach by Sublandlord or Subtenant under this Sublease and/or the Master
Lease, then the defaulting party shall be liable to the nondefaulting party for
the damage suffered as a result of such termination. Notwithstanding the
foregoing, if the Master Lease gives Sublandlord any right to terminate the
Master Lease in the event of the partial or total damage, destruction, or
condemnation of the Master Premises or the building or project of which the
Master Premises are a part, the exercise of such right by Sublandlord shall not
constitute a default or breach hereunder.
12. ATTORNEYS' FEES
---------------
If Sublandlord, Subtenant, or Broker shall commence an action against the other
arising out of or in connection with this Sublease, the prevailing party shall
be entitled to recover its costs of suit and reasonable attorneys' fees.
5
<PAGE>
13. AGENCY DISCLOSURE
-----------------
Sublandlord and Subtenant each warrant that they have dealt with no other real
estate broker in connection with this transaction except BT COMMERCIAL REAL
ESTATE, who represents Intevac, Inc. and Markley Stearns Partners, who
represents Covad Communications Group, Inc.
14. COMMISSION
----------
Upon execution of this Sublease, a commission will be paid in accordance with
Sublandlord's listing agreement with BT Commercial. The fee will be split 50/50
with Markley Stearns Partners. BT Commercial is hereby. made a third party
beneficiary of this Sublease for the purposes of enforcing its right to said
commission.
15. NOTICES
-------
All notices and demands which may or are to be required or permitted to be given
by either party on the other hereunder shall be in writing. All notices and
demands by the Sublandlord to Subtenant shall be sent by United States Mail,
postage prepaid, addressed to the Subtenant at the Premises, and to the address
hereinbelow, or to such other place as Subtenant may from time to time designate
in a notice to the Sublandlord. All notices and demands by the Subtenant to
Sublandlord shall be sent by United States Mail, postage prepaid, addressed to
the Sublandlord at the address set forth herein, and to such other person or
place as the Sublandlord may from time to time designate in a notice to the
Subtenant.
To Sublandlord: Chief Financial Officer
Intevac, Inc.
3550 Bassett Street
Santa Clara, CA 95054
To Subtenant: Chief Financial Officer
Covad Communications Group, Inc.
3560 Bassett Street
Santa Clara, CA 95054
16. COMPLIANCE
----------
The parties hereto agree to comply with all applicable federal, state and
location laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
6
<PAGE>
17. HVAC
----
17.1 HVAC will be available Monday through Friday from 5:00 a.m. to 6:00 p.m.
Any usage by Subtenant outside the operating hours Monday through Friday or on
Saturday and Sunday will be billed at a rate of $20.00 per hour and invoiced
monthly by the fifteenth day of the following month. Landlord will install a
timing device to track after hours HVAC usage.
17.2 The HVAC system has been zoned and includes separate controls for
Subtenant's use. The HVAC plan will be made available to Subtenant for approval.
Subtenant shall have three (3) days from receipt to approve the plan or to
cancel this Sublease agreement. The HVAC system will be deemed to be approved if
no action is taken by Subtenant within the three (3) day period.
17.3 Subtenant shall have the right to add a HVAC unit in one computer room.
The plans for the unit shall be approved by Sublandlord prior to installation.
18. PARKING
-------
Subtenant shall have the right to utilize fifty nine (59) parking spaces.
Subtenant may mark thirty (30) of the allotted spaces at Subtenant's expense.
The particular spaces to be marked shall be mutually agreed between Sublandlord
and Subtenant prior to marking. Any such space markings shall be removed by
Subtenant at Subtenant's cost upon expiration of the Sublease agreement.
19. SIGNAGE
-------
Subtenant shall have the right to install its identification signs on the entry
doors to the Building, in the elevator lobby and on the floor on which the
Premises are located. Any directory board and sign registrations are subject to
all provisions and restrictions of the Master Lease.
20. TENANT IMPROVEMENTS
-------------------
20.1 Sublandlord shall provide an improvement allowance of up to $13,500.00
for improvements to the building lobby and lobby conference area. If Subtenant
does not utilize said allowance, Sublandlord shall not be obligated to provide
any excess allowance to Subtenant.
20.2 Landlord will shampoo carpets and repair/repaint any damaged areas of
Premises prior to September 15, 1997. Subtenant to identify punchlist of repair
items for Sublandlord by August 22, 1997.
7
<PAGE>
20.3 Electrical is available for Subtenant's use based on the existing
buildout. Subtenant shall have access to a telephone panel and may elect to use
any telecommunications providers they choose.
20.4 Subtenant shall be permitted to install its own security system.
21. CONSENT
-------
Whenever consent shall be required by either Sublandlord or Subtenant, it shall
be understood that neither party shall unreasonably withhold or delay the giving
of such consent.
SUBLANDLORD SUBTENANT
INTEVAC, INC. COVAD COMMUNICATIONS GROUP, INC.
By /s/ Charles B. Eddy III By /s/ Charles J. McMinn
Chief Financial Officer Title CEO
Exhibit A -Master Lease
Exhibit B -Description of Premises
8
<PAGE>
Exhibit A
The Kontrabecki Group
May 9, 1994
Mr. Charles Eddy
Chief Financial Officer
INTEVAC CORPORATION
3580 Bassett Street
Santa Clara, CA 95050
Re: Lease Agreement 3580 Bassett Street, Santa Clara, CA
Dear Mr. Eddy:
Kontrabecki Associates I is the Landlord and Intevac Corporation is the Tenant
under a lease agreement (the "Lease") dated May 26, 1994 for the premises known
as 3580 Bassett Street, Santa Clara, CA. Notwithstanding anything contained in
the Lease to the contrary, Tenant may occupy the premises for the first four (4)
months of the lease term without paying rent. Please indicate your agreement
with the terms of this letter agreement by signing below.
Very truly,
/s/ John T. Kontrabecki
John T. Kontrabecki
Agreed and Accepted this May 26, 1994.
Intevac Corporation
By: /s/ C. Eddy
Its: CFO
3600 West Bayshore Road, Suite 101, Palo Alto, California 94303
(415) 858-3600 Fax: (415) 858-3611
9
<PAGE>
The Kontrabecki Group
May 9, 1994
Mr. Charles Eddy
Chief Financial Officer
INTEVAC CORPORATION
3580 Bassett Street
Santa Clara, CA 95050
Re: Option to Lease -3550 Bassett Street, Santa Clara, CA
Dear Mr. Eddy:
Kontrabecki Associates I is the Landlord and Intevac Corporation is the Tenant
under a lease agreement (the "Lease") dated May 26, 1994 for the premises known
as 3580 Bassett Street, Santa Clara, CA. Varian Associates, Inc. is the sub-
Landlord and Intevac Corporation is the sub-Tenant under a sub-lease agreement
for the premises known as 3550 Bassett Street, Santa Clara, CA. In consideration
of the Lease and other promises made, Intevac Corporation hereby grants to
Kontrabecki Associates I the right to sublease the premises known as 3550
Bassett Street, Santa Clara, CA, at anytime during the term of the sub-lease
agreement at a rate of $.40 per square foot triple net. Kontrabecki Associates I
may exercise this option by giving Intevac Corporation written notice thereof
sixty (60) days prior to the effective date of the sublease. The sublease shall
be memorialized in a lease agreement substantially similar in form to the Lease
for the premises know as 3580 Bassett Street, Santa Clara, CA. Please indicate
your agreement with the terms of this letter agreement by signing below.
Very truly,
/s/ John T. Kontrabecki
John T. Kontrabecki
Agreed and Accepted this May 26, 1994.
Intevac Corporation
By: /s/ C. Eddy
Its: CFO
3600 West Bayshore Road, Suite 101, Palo Alto, California 94303
(415) 858-3600 Fax: (415) 858-3611
<PAGE>
THE KONTRABECKI GROUP
---------------------
INDUSTRIAL LEASE
----------------
This Lease, dated May 26, 1994 for reference purposes only, is made and
entered into by and between KONTRABECKI ASSOCIATES I, a California Limited
Partnership ("Landlord"), whose address is 3600 West Bayshore Road, Suite 101,
Palo Alto, 94303, and INTEVAC CORPORATION, a California corporation ("Tenant"),
whose present address is 3580 Bassett Street, Santa Clara, California, 95054,
from and after the Commencement Date (as defined below) shall be the address of
the Premises, which is 3580 Bassett Street, Santa Clara, California 95054.
Landlord and Tenant agree to the terms, covenants and conditions of this Lease,
as follows:
1. Definitions.
-----------
1.1 Property. The term "Property" shall mean the real property with
--------
all improvements now or hereafter located thereon described by the site plan
attached hereto as Exhibit "A", consisting of seven (7) buildings with an
aggregate gross area of which is approximately four hundred thousand (400,000)
square feet (the "Property Gross Area").
1.2 Building. The term "Building" shall mean the structure situated
--------
on the Property in which the Premises are located, containing approximately
forty thousand eight hundred ninety (40,890) square feet of gross leasable area
(the "Building Gross Leasable Area"), and located at the following address: 3580
Bassett Street, Santa Clara, California 95054.
1.3 Premises. The term "Premises" shall mean those certain Premises
--------
located within the Building outlined on the site plan attached hereto as Exhibit
"A" containing approximately forty thousand eight hundred ninety (40,890) square
feet of gross leasable area (the "Premises Gross Leasable Area").
1.4 Tenant's Share. The term "Tenant's Share" shall mean the
--------------
percentage obtained by dividing the Premises Gross Leasable Area by the Building
Gross Leasable Area, which the parties agree is one hundred percent (l00%).
1.5 Outside Areas. The term "Outside Areas" shall mean all areas and
-------------
facilities within the Property, except for the Building and any other buildings
located thereon, provided and designated by Landlord for the general use and
convenience of Tenant and other tenants of all or any part of the Property,
including, without limitation, parking areas, access and perimeter roads,
sidewalks, landscaped areas, service areas, and trash disposal facilities.
2. Demise, Term and Possession.
---------------------------
2.1 Demise of Premises. Landlord hereby leases the Premises to Tenant
------------------
and Tenant hereby leases the Premises from Landlord for the term, at the rental,
and upon all of the other terms, covenants and conditions set forth herein,
together with (a) the non-assigned and non-exclusive right to use no more than
one hundred forty-four (144) parking spaces located on the property and (b) the
non-exclusive right to use the Common Areas and Outside Areas, all subject to
the rules and regulations of Landlord promulgated pursuant to Paragraph 4.5
hereof.
2.2 Term. The term of this Lease shall be for thirty-six (36) months,
----
<PAGE>
commencing on July 1, 1994 (the "Commencement Date"), and ending on June 30,
1997 (the "Expiration Date"), unless sooner terminated or extended pursuant to
the provisions hereof.
<PAGE>
3. Rent.
----
3.1 Base Rent. Subject to adjustment of the rent pursuant to
---------
provisions of the Addendum to this Lease relating thereto, if any, Tenant shall
pay to Landlord for each calendar month of the term of this Lease, monthly base
rent (hereafter called "Base Rent"), in installments of twenty-nine thousand
thirty-one and no/90's dollars ($29,031.90).
3.2 Manner of Payment. Tenant shall pay to Landlord all rent payable
-----------------
under this Lease without deduction, offset, or abatement, and without prior
notice or demand, in advance on the first day of each calendar month of the term
of this Lease. Rent shall be payable in lawful money of the United States to
Landlord at the address stated in the initial paragraph above or to such other
persons or at such other places as Landlord may from time to time designate in
writing. Tenant's obligation to pay rent for any partial month shall be prorated
on the basis of a thirty (30) day month.
3.3 Late Payment Charge. If any installment of rent or any other sum
-------------------
due from Tenant is not received by Landlord within five (5) days after the due
date, Tenant shall pay to Landlord an additional sum equal to five percent (5%)
of the amount overdue as a late charge to compensate for processing and
accounting charges and any charges that may be incurred by Landlord with regard
to any financing secured by the Property. Acceptance of any late charge shall
not constitute a waiver of Tenant's default with respect to the overdue amount.
3.4 Prepayment of Rent. None.
------------------
3.5. Security Deposit. None
----------------
4. Use.
---
4.1 Permitted Uses. The Premises shall be used and occupied only for
--------------
the following purposes: office, research and development, manufacturing, sales,
and warehouse uses, and for any lawful purpose incidental thereto, and for no
other use or purpose.
4.2 Compliance with Law. Landlord warrants to Tenant that as of the
-------------------
Commencement Date the Premises do not violate any applicable building code,
regulation or ordinances. Tenant shall accept possession of the Premises in
their physical condition existing as of the date of Landlord's delivery of
possession thereof to Tenant, subject to all laws, ordinances, codes, rules,
orders, directions and regulations of lawful governmental authority
(collectively, "Regulations" for purposes of this paragraph) regulating the use
or occupancy of the Premises, and all matters disclosed by any exhibits attached
hereto. Tenant, at Tenant's sole expense, shall promptly comply with all
regulations as may now or hereafter be in effect relating to or affecting the
condition, use or occupancy of the Premises.
4.3 Restrictions on Use. Tenant shall not use or permit the use of
-------------------
the Premises in any manner that will tend to create waste on the Premises or
constitute a nuisance to any other occupant or user of the Building or any
building on the Property or adjacent thereto or do or keep anything that will
cause cancellation of or an increase in rates of any insurance covering the
Building in which the Premises are located. Tenant shall not use any apparatus,
machinery, or other equipment in or about the Premises that may interfere with
the use and enjoyment of the adjacent buildings by the other Tenants, or that
may cause substantial vibration that may damage the building, or overload
<PAGE>
existing electrical systems, and shall not place any loads upon the floors,
walls, or ceilings of the Premises which may jeopardize the structural integrity
of the Building or any part thereof. Tenant
2
<PAGE>
shall not make any penetrations of the roof or exterior of the Building without
the prior written approval of Landlord. No materials or articles of any nature
shall be stored in the Common Areas, or upon any portion of the Outside Areas
unless located within an enclosure approved by Landlord and which complies with
any applicable governmental requirements, the covenants, conditions and
restrictions set forth in Exhibit "C" hereto (if any), and with the rules and
regulations set forth in Exhibit "D" hereto (if any).
4.4 Toxic Materials.
---------------
4.4.1 Tenant's Obligations
--------------------
(a) Tenant shall not cause or permit to be discharged into the
plumbing or sewage system of the Building or onto the land underlying or
adjacent to the Building any hazardous, toxic, or radioactive materials,
including, but not limited to, those materials identified in Section .66680 of
Title 22 of the California Administrative Code, Division 4, Chapter 30, as
amended from time to time (collectively "Toxic Materials"). Tenant shall
neutralize, by filtering or otherwise, or dispose of as required or permitted by
law, all Toxic Materials generated by Tenant's activities on the Premises.
Tenant shall at its sole expense comply with any and all rules, regulations,
codes, ordinances, statutes, and other requirements of lawful governmental
authority respecting Toxic Materials, pollution, harmful chemicals and other
materials in connection with Tenant's activities on or about the Premises.
Tenant specifically agrees to comply with any such requirements relating to the
handling, use, storage and disposal of Toxic Materials and other materials which
are considered by any such governmental authorities as harmful, dangerous,
toxic, flammable, or otherwise deserving of special care. Tenant shall pay the
full cost of any clean-up work performed on or about the Premises as required by
any such governmental authority in order to remove, neutralize or otherwise
treat materials of any type whatsoever directly or indirectly placed by Tenant
or its agents, employees or contractors on or about the Premises or the land
under or about the Premises.
(b) Tenant shall be solely responsible for and shall indemnify,
defend, and hold Landlord harmless from any and all claims, judgments, losses,
demands, causes of action, proceedings, or hearings relating to the storage,
placement, or use of Toxic (hereinafter collectively referred to as "Claims") by
Materials Tenant, its agents, or invitees on or about the Premises, including,
but not limited to, Claims resulting from the contamination of subterranean
water beneath, adjoining, or in the vicinity of the Premises. Tenant shall
reimburse Landlord for (i) losses in or reductions to rental income resulting
from Tenant's use, storage, and disposal of Toxic Materials; (ii) all costs of
refitting or other alterations to the Premises necessitated by Tenant's use,
storage, or disposal of Toxic Materials including, but not limited to,
alterations required to accommodate an alternate use of the Premises; and (iii)
any diminution in the fair market value of the Premises caused by Tenant's use,
storage, or disposal of Toxic Materials. Tenant agrees to defend all such Claims
on behalf of Landlord with counsel reasonably acceptable to Landlord, and to pay
all fees, costs, damages, or expenses relating to or arising out of any such
Claim including attorneys' fees and costs. Tenant shall further be solely
responsible for and shall indemnify, defend and hold Landlord harmless from and
against all claims, including reasonable attorneys' fees and costs, arising out
of or in connection with any removal, clean-up, or restoration work which is
required by any government agency having jurisdiction and which arises from
Tenant's storage, use, or disposal of Toxic Materials on the Premises during the
term of this Lease.
(c) The obligations of Tenant under this Paragraph 4.4 shall
survive the expiration of the Lease term.
3
<PAGE>
4.4.2 Landlord's Obligations.
----------------------
(a) Landlord hereby makes the following representations
and warranties to Tenant, each of which is made to the best knowledge of
Landlord as of the date of this Lease, based on a review of all documents in
Landlord's possession relating to the Premises, Building, and Property, and
interviews with all of the current employees of Landlord who are responsible for
or have knowledge of the day-to-day management of the Premises, Building, and
Property.
1. Landlord has provided to Tenant prior to the date
of this Lease, copies of the most recent ground water monitoring report in
Landlord's possession concerning the environmental condition of the Property and
the soil and groundwater in, on, and about the same, and is hereinafter referred
to as the "Project Environmental Report."
2. Except as otherwise stated in the Project
Environmental Report, the Property (including the soil and groundwater on or
under the Project) does not contain hazardous Materials in material amounts.
3. Except as otherwise stated in the Project
environmental Report, during the time that Landlord has directly held fee title
to the Property or held an interest in an entity which held fee title to the
Property, Landlord (or such entity in which Landlord held an interest) has
received no written notice of (i) any violation, or alleged violation, of any
law pertaining to hazardous Materials with respect to the Project or any other
property in the vicinity of the Project, (ii) any pending claims relating to the
presence of Hazardous Materials on the Project, or (iii) any pending
investigation by any governmental agency concerning the Property relating to
Hazardous Materials.
4. There are no underground storage tanks presently
existing under the Property.
(b) Landlord's Covenant. Landlord shall not cause or allow
-------------------
any of its employees, agents, customers, visitors, invitees, licensees,
contractors, assignees or other tenants (collectively "Landlord's Parties) to
cause any Hazardous Materials to be used, generated, stored or disposed of, on
or about the Premises.
(c) Tenant's Rights. To the extent such Hazardous Materials
---------------
are present in violation of any applicable laws, Landlord shall immediately
provide Tenant with notice of such fact. Tenant may, at Tenant's sole choice,
either: (i) treat such a condition as a breach of this Lease by Landlord; or
(ii) require Landlord, at its sole expense, to comply with all Regulations
regarding the use, storage, generation or removal of Hazardous Materials in, on
or under the Premises. Tenant shall have the right at all reasonable times to
conduct tests and investigations to determine whether Landlord is in compliance
with the foregoing provisions.
(d) Indemnifications. Landlord shall indemnify, defend by
----------------
counsel acceptable to Tenant, protect and hold Tenant harmless from and against
all liabilities, losses, costs and expenses, demands, causes of action, claims
or judgements directly or indirectly arising out of (i) the failure of the
representations and warranties of Landlord in Section A above to be true, (ii)
the existence of any Hazardous Materials on the Premises as of the Commencement
Date of the Lease, or (iii) the use, generation, storage or disposal of
Hazardous Materials by Landlord or any of Landlord's Parties. Landlord's
obligations pursuant to the foregoing indemnity shall survive the termination of
this Lease.
4.5 Covenants, Conditions. and Restrictions. Tenant shall comply with
---------------------------------------
the covenants, conditions, and restrictions set
<PAGE>
forth in Exhibit "C" hereto (if any) and any subsequent amendments thereto.
4.6 Rules and Regulations. Tenant shall comply with all rules and
----------------------
regulations set forth in Exhibit "D" hereto (if any) and any subsequent
amendments thereto. Landlord from time to time may promulgate additional rules
and regulations or modifications thereto applicable to all occupants of the
Property for the safety, care, cleanliness and orderly management of the
Property, its Common Areas and Outside Areas, and Tenant shall abide by all such
rules and regulations from and after receipt of a written copy thereof.
5. Taxes.
-----
5.1 Tenant's Personal Property. Tenant shall pay prior to delinquency
--------------------------
all taxes, license fees, and public charges assessed or levied against Tenant or
Tenant's. estate in this Lease or Tenant's leasehold improvements, trade
fixtures, furnishings, equipment and all other personal property and merchandise
of Tenant situated in or about the Premises.
5.2 Tenant's Obligations to Pay Real Property Taxes. Tenant shall pay
-----------------------------------------------
Tenant's Share of all Real Property Taxes (as hereinafter defined) which become
due during the Lease term; provided, however, if the Property contains more than
one building, then Tenant shall pay Tenant's Share of all Real Property Taxes
which Landlord reasonably determines is allocable to the Building, including a
proportionate share based on the Building Gross Leasable Area as a percentage of
the Property Gross Leasable Area, of all Real Property Taxes assessed with
respect to the Outside Areas that are not fairly allocable to any one building.
Notwithstanding the foregoing, in the event there is more than one tenant in the
Building, Landlord reserves the right to adjust the share of Tenant of the Real
Property Taxes respecting the Building to reflect the portion thereof which is
equitably allocable to Tenant. Tenant shall pay to Landlord all Real Property
Taxes due and payable hereunder on or before the later of (a) ten (10) days
prior to the delinquency thereof, or (b) three (3) days after the date on which
Tenant receives a copy of the tax bill and notice of Landlord's determination
hereunder and other reasonable evidence of the amount of Real Property Taxes due
and payable by Tenant hereunder. Tenant's liability to pay Real Property Taxes
shall be prorated on the basis of a 365 day year to account for any fractional
portion of a fiscal tax year included in the Lease term at the commencement or
expiration of the term. If Landlord's lender requires Landlord to pay any or all
Real Property Taxes into an impound account on a periodic basis during the term
of this Lease, Tenant, on notice from Landlord indicating this requirement,
shall pay a sum of money toward its liability under this paragraph to Landlord
on a periodic basis in accordance with the lender's requirements.
5.3 Real Property Taxes. The term "Real Property Taxes" as used
-------------------
herein shall mean (a) all taxes, assessments, levies, and other charges of any
kind or nature whatsoever, general and special, foreseen and unforeseen, now or
hereafter imposed by any governmental or quasi-governmental authority or special
district having the direct or indirect power to tax or levy assessments, which
are levied or assessed against or with respect to; (1) the value, occupancy or
use of the Property (as now constructed or as may at any time hereinafter be
constructed, altered, or otherwise changed), (2) the fixtures, equipment, and
other real or personal property of Landlord that are an integral part of the
Property, (3) the gross receipts, income, and rentals from the Property, or (4)
the use of the Outside Areas, Common Areas, public utilities, or energy within
the Property; (b) all charges, levies or fees imposed by reason of environmental
regulation or other governmental control of the property; (c) new excise,
transaction, sales, privilege or other taxes now or
5
<PAGE>
hereafter imposed upon Landlord as a result of this Lease; and (d) all costs and
fees (including attorneys' fees previously approved by Tenant) incurred by
Landlord in contesting any Real Property Taxes and in negotiating with public
authorities as to any Real Property Taxes. If at any time during the Lease term
the taxation or assessment of the property prevailing as of the Commencement
Date shall be altered so that in lieu of or in addition to any Real Property
Taxes described above there shall be levied, assessed or imposed (whether by
reason of a change in the method of taxation or assessment, creation of a new
tax or charge, or any other cause) an alternate, substitute, or additional tax
or charge (a) on the value, use or occupancy of the property, (b) on or measured
by the gross receipts, income, or rentals from the property, or on Landlord's
business of leasing the Property, or (c) computed in any manner with respect to
the operation of the Property, then any such tax or charge, however designated,
shall be included within the meaning of the term "Real Property Taxes" for
purposes of the Lease. If any Real Property Tax is based upon property or rents
unrelated to the property, then only that part of such Real Property Tax that is
fairly allocable to the property as determined by Landlord shall be included
within the meaning of the term "Real Property Taxes." Notwithstanding the
foregoing, the term "Real property Taxes" shall not include estate, inheritance,
transfer, gift or franchise taxes of Landlord or the federal or state net income
tax imposed on Landlord's income from all sources, for any similar or
replacement tax or assessment.
6. Maintenance and Repairs.
-----------------------
6.1 Tenant's Obligations. Except as otherwise specifically provided
--------------------
herein Tenant shall, at Tenant's expense, keep in good and safe condition, order
and repair the Premises and every part thereof, including without limitation,
(a) all plumbing, fire sprinkler and sewage systems, and all ducts, pipes, vents
or other parts of the heating, ventilation and air conditioning system (the
"HVAC") which service only the Premises (as opposed to servicing an area larger
than the Premises), (b) all electrical and lighting facilities, systems,
appliances, and equipment within the Premises including all wiring therein, (c)
all fixtures, interior walls, interior surfaces of exterior walls, floors, and
ceilings, and (d) all windows, doors, entrances, all glass (including plate
glass), and skylights located within the Premises, and the roof membrane.
Tenant's responsibility for maintenance and repair shall include all such
facilities or systems that are located on or within the walls and floor of the
Premises. Tenant shall using properly qualified persons or contractors maintain,
repair and replace when necessary all HVAC equipment which services only the
Premises. If the Premises consists of the entire Building, and the Building is
the only building on the property, then Tenant at its expense shall also (a)
maintain and replace the landscaping on the Property and repair when necessary
the parking areas on the Property, and (b) wash as and when needed to keep in a
clean and sightly condition all windows and plate glass of the Premises (both
interior and exterior surfaces). All repairs required to be made by Tenant shall
be made promptly with new materials of like kind and quality. If the repair work
affects the structural parts of the Building, or if the estimated cost of any
item of repair exceeds $25,000, then Tenant shall first obtain Landlord's
written approval of the scope of work, plans therefor, materials to be used and
the contractor. Tenant hereby waives the benefit of any statute now or
hereinafter in effect which would otherwise afford Tenant the right to make
repairs at Landlord's expense or to terminate this Lease because of Landlord's
failure to keep the Premises in good condition, order and repair Tenant
specifically waives all rights it may have under Sections 1932(1), 1941, and
1942 of the California Civil Code, and any similar or successor statute or law.
6.2 Landlord's Obligations. Landlord shall maintain in good
----------------------
condition, order and repair the Common Areas, the foundation
6
<PAGE>
and exterior walls of the Building (excluding the interior of all walls and,
except as provided in Paragraph 6.3 below, the exterior and interior of all
windows, doors and plate glass), and the exterior roof of the Building,
including structural supports and excluding the roof membrane. The manner in
which such systems and facilities shall be maintained and the expenditures
therefor shall be at the sole discretion of Landlord. Landlord shall exercise
reasonable diligence in performing such repairs as soon as practicable. However,
Landlord shall have no obligation to make repairs under this paragraph until a
reasonable time after Landlord's receipt of written notice from Tenant of the
need for such repairs. Except as otherwise specifically provided herein, there
shall be no abatement of rent or other sums payable by Tenant prior to or during
any repairs by Tenant or Landlord. Landlord may enter into a preventive
maintenance contract with a qualified service company satisfactory to Landlord
providing for periodic inspection of the roof of the Building and for repair and
maintenance of the roof membrane, including without limitation patching of any
worn areas, replacement of all or any portion of the roof membrane when
necessary, caulking and repair of flashing provided the roof is not maintained
to Landlord's satisfaction. Tenant's Share of the cost of these preventive
maintenance contracts shall be borne by the Tenant.
6.3 Maintenance and Control of Outside Areas. Landlord shall maintain
----------------------------------------
in good condition, order and repair the Outside Areas, together with all
facilities and improvements now or hereafter located thereon, and together with
all other improvements adjacent to the Property as may be required from time to
time by governmental authority. Such obligation shall include maintenance and
replacement of landscaping and repair of parking areas of the Property, and
washing exterior windows and plate glass of the Building, unless the Premises
consist of the entire Building and the Building is the only building on the
Property, in which case Tenant shall at its sole cost perform such obligation.
Such obligation shall also specifically include painting the outside surface of
the exterior walls of the Building as and when necessary, as determined by
Landlord in its reasonable discretion. The manner in which such areas shall be
maintained and the expenditures therefor shall be at the sole discretion of
Landlord. Tenant's Share of the cost of this maintenance shall be borne by the
Tenant.
Landlord shall at all times have exclusive control of the Outside Areas and may
at any time temporarily close any part thereof, may exclude and restrain anyone
from any part thereof (except the bona fide employees and invitees of Tenant who
use the Outside Areas in accordance with the rules and regulations that Landlord
may from time to time promulgate), and Landlord may change the configuration of
the Outside Areas or the location of facilities thereon so long as any such
change by Landlord does not unreasonably interfere with Tenant's use of or
access to the Premises. Landlord shall also be entitled to employ third parties
to operate and maintain all or any part of such areas on such terms and
conditions as Landlord shall in its sole discretion deem reasonable and proper.
In exercising any of Landlord's rights hereunder, Landlord shall make a
reasonable effort to minimize costs and any disruption of Tenant's business.
6.4 Tenant's Obligation to Reimburse. Tenant shall pay Tenant's Share
--------------------------------
of all Direct Operating Expenses (as hereinafter defined) as may be paid or
incurred by Landlord during the term of this Lease; provided, however, that if
the property contains more than one building, Tenant shall pay Tenant's Share of
all Direct Operating Expenses fairly allocable to the Building as reasonably
determined by Landlord, and a proportionate share, based on the Building Gross
Leasable Area as a percentage of the Property Gross Leasable Area, of all Direct
Operating Expenses which relate to the Property in general and are not fairly
allocable to any one
7
<PAGE>
building on the Property. Tenant shall pay to Landlord on the first day of each
calendar month during the period immediately following the Commencement Date
until the first December 1 thereafter a fraction of the amount which Landlord
estimates will be Tenant' s Share of all Direct Operating Expenses for such
period, the numerator of which is the number of calendar months during said
period, and the denominator of which is twelve (12). Thereafter during the lease
term, on the first day of each calendar month during each twelve (12) month
period commencing January 1, Tenant shall pay to Landlord until the first
December 1 thereafter an amount estimated by Landlord to be one-twelfth of
Tenant's Share of the Direct Operating Expenses for such twelve (12) month
period. Within sixty (60) days following the end of each calendar year, Landlord
shall furnish Tenant a statement covering the calendar year and the payments
made by Tenant with respect to such period as set forth in this paragraph. If
Tenant's payments for Tenant's Share of said Direct Operating Expenses did not
equal Tenant's of the actual amount of said Direct Operating Expenses, Share
Tenant shall pay to Landlord the deficiency within ten (10) days after receipt
of such statement. If said payments exceed the actual Direct Operating Expense,
Landlord shall refund the amount of the overpayments to Tenant in cash within
ten (10) days after Landlord sends such statement. Direct Operating Expenses
shall be prorated as of the Commencement Date and the Expiration Date to reflect
the portion of the calendar year occurring within the Lease term. Tenant's Share
of Direct Operating Expenses are initially estimated to be five hundred and
no/100's dollars ($500.00) per month.
6.5 Direct Operating Expenses Defined. The term "Direct Expenses"
---------------------------------
shall mean the sum of the following costs and Operating expenses paid or
incurred by Landlord:
(a) All labor, materials, supplies and services used or consumed
in maintaining, operating and repairing the Outside Areas and the Common Areas,
including without limitation, landscaping maintenance and replacement, cleaning,
repairing concrete walkways and patios, sweeping and repairing parking areas,
operation, maintenance and replacement of lighting, maintenance and replacement
of all directional and security signs, cleaning, maintenance and replacement of
carpets and other fixtures in the Common Areas, cleaning, repainting and
resurfacing the exterior surface of Common Area walls and the exterior walls of
the Building, utilities and water servicing such areas, pest control service
(exterior only), janitorial service, if any, security patrol service, if any,
trash removal, and the operation and the rental or the purchase of maintenance
equipment (the cost of purchasing any such equipment to be amortized over its
expected actual useful life as reasonably determined by Landlord);
(b) All labor, materials, supplies and services used or consumed
in maintaining, repairing or replacing the membrane of the roof of the Building
and the cost of all maintenance contracts entered into by Landlord pursuant to
Paragraph 6.2 hereof; and
(c) A fee for administrative expenses incurred by Landlord in
connection with such work equal to ten (10%) of the total costs and expenses
referred to above.
6.6 Tenant's Negligence. Notwithstanding anything in this Paragraph
-------------------
6 to the contrary, and subject to the waiver of subrogation rights pursuant to
Paragraph 12.7, Tenant shall pay for the entire cost of maintaining and
repairing the Premises, the Building, the Common Areas, the Outside Areas and
any other portion of the Property if such cost is incurred and to the extent it
is incurred as a result of the negligence or willful misconduct of Tenant, its
agents, customers, employees, contractors or invitees.
8
<PAGE>
7. Alterations.
-----------
7.1 Landlord's Consent Required. Tenant shall not, without
-----------------------------
Landlord's prior written consent, make any alterations, improvements, additions,
or utility installations (collectively the "alterations") in, on or about the
Premises, except for nonstructural alterations which in the aggregate do not
exceed Ten Thousand Dollars ($10,000) in cost during any twelve month period
during the Lease Term. As used in this Paragraph 7.1, the term "utility
installation" means power panels, wiring, florescent fixtures, space heaters,
conduits, air conditioning and plumbing. Prior to construction or installation
of any alterations, Landlord may require Tenant to provide Landlord, at Tenant's
expense, a lien and completion bond in an amount equal to one and one-half times
the estimated cost of such alterations, to insure Landlord against any liability
for mechanic's and materialmen's liens and to insure completion of the work.
Should Tenant make any alterations without the prior written consent of
Landlord, Tenant shall immediately remove the same at Tenant's expense upon
demand by Landlord. Any alterations made by Tenant shall not interfere with the
use or occupancy of the Building by any other tenants nor interfere with the
operation of any mechanical apparatus or electrical or plumbing system in the
Building.
7.2 Plans and Permits. Any alteration that Tenant desires to make in
-----------------
or about the Premises and which requires the consent of Landlord shall be
presented to Landlord in written form, with proposed detailed plans and
specifications therefor prepared at Tenant's sole expense. Any consent by
Landlord thereto shall be deemed conditioned upon Tenant's acquisition of all
permits required to make such alteration from all appropriate governmental
agencies, the furnishing of copies thereof to Landlord prior to commencement of
the work, and the compliance by Tenant with all conditions of said permits in a
prompt and expeditious manner, all at Tenant's sole expense. Upon completion of
any such alteration, Tenant, at Tenant's sole cost, shall immediately deliver to
Landlord "as-built" plans in milar form and specifications therefor.
7.3 Construction Work Done by Tenant. All construction work required
--------------------------------
or permitted to be done by Tenant shall be performed in a prompt, diligent, and
good and workmanlike manner and shall conform in quality and design with the
Premises existing as of the Commencement Date, and shall not diminish the value
of the Building or the Property. In addition, all such construction work shall
be performed in compliance with all applicable statutes, ordinances,
regulations, codes and orders of governmental authorities and insurers of the
Premises. Tenant or its agents shall secure all licenses and permits necessary
therefor.
7.4 Roof Repairs. All installation of air conditioning equipment and
------------
duct work requiring penetration of the roof shall be properly flashed and
caulked. Any equipment placed by Tenant on the roof shall be elevated and
supported by Tenant so as not to create vibration, or inhibit drainage.
7.5 Title to Alterations. Unless Landlord requires the removal
--------------------
thereof as set forth in Paragraph 7.6, any alterations which may be made on the
Premises, shall upon installation or construction thereof on the Premises become
the property of Landlord and shall remain upon and be surrendered with the
Premises at the expiration or sooner termination of the term of this Lease.
Without limiting the generality of the foregoing, all heating, lighting,
electrical (including all wiring, conduits, main and subpanels), air
conditioning, partitioning, drapery, and carpet installations made by Tenant,
regardless of how affixed to the Premises, together with all other alterations
that have become an integral part of the Premises, shall be and become the
property of Landlord upon installation, and shall not be deemed trade fixtures,
and shall remain upon and be surrendered with the Premises at the
9
<PAGE>
expiration or sooner termination of this Lease. Notwithstanding the provisions
of this Paragraph 7.5, Tenant's furnishings, machinery and equipment, other than
that which is affixed to the Premises so that it cannot be removed without
material damage to the Premises, shall remain the property of Tenant and may be
removed by Tenant; Tenant at Tenant's expense immediately after removal shall
repair any damage to the Premises caused thereby. Tenant shall be solely
responsible for the maintenance and repair of any and all alterations, additions
or improvements made by Tenant to the Premises.
7.6 Removal of Alterations. Tenant shall ascertain from Landlord
-----------------------
within thirty (30) days before the end of the term of this Lease or within five
(5) days after sooner termination, thereof, whether Landlord desires to have the
Premises, or any part or parts thereof, restored to their condition as of the
commencement of this Lease. Landlord may elect, by notice to Tenant to require
Tenant to remove any alterations that Tenant has made to the Premises and to
restore the Premises as hereafter provided. If Landlord so elects, Tenant shall,
at its sole expense, upon expiration of the Lease term or within twenty (20)
days after any sooner termination thereof, remove such alterations, repair any
damage occasioned thereby, and restore the Premises to the condition existing as
of the Commencement Date subject to normal wear and tear. The obligations of
Tenant set forth in this paragraph shall survive the termination of this Lease.
8. Mechanics' Liens. Tenant shall keep the Premises and the Property
----------------
free from any liens. If any claim of lien is recorded, Tenant shall bond against
or discharge the same within ten (10) days after the same has been recorded
against the Premises or the Property. Tenant shall give Landlord notice of the
date of commencement of any work in the Premises not less than ten (10) days
prior thereto, and Landlord shall have the right to post notices of non-
responsibility or similar notices in or on the Premises in connection therewith.
9. Utilities and Services. Tenant shall pay all charges for water, gas,
----------------------
electricity, telephone, central station monitor, refuse pickup, janitorial
services, and all other utilities and services supplied or furnished to the
Premises during the term of this Lease, together with any taxes thereon. Said
utilities may be supplied to Tenant in common with any other tenant(s) in the
Building, or at Landlord's or Tenant's option, be separately metered at Tenant's
expense. If separately metered, or if the Premises consist of the entire
building Tenant shall pay all such charges directly to the charging authority
when due. If not separately metered, Tenant shall pay its allocable portion
based upon the ratio between the Premises Gross Leasable Area and the total
gross leasable square feet of space served by the common utility. However, if
Landlord determines that Tenant is using a disproportionate amount of any
utility service not separately metered, then Landlord may either install a
separate meter to measure the utility service, at Tenant's cost, or charge
Tenant a sum equal to Landlord's reasonable estimate of the cost of Tenant's
excess use of such utility service. Tenant shall reimburse Landlord on a
monthly basis for landlord's cost in furnishing utilities and services to the
Premises within ten (10) days after Tenant receives an invoice from Landlord and
in no event shall Landlord be liable to Tenant for any such failure or
interruption unless caused by the misconduct of Landlord. No failure or
interruption of any such utilities or services shall entitle Tenant to terminate
this Lease or to withhold rent or other sums due hereunder and unless otherwise
specifically provided herein. Landlord shall not be responsible for providing
security guards or other security protection for all or any portion of the
Premises or the Property, and Tenant shall at its own expense provide or obtain
such security services as Tenant shall desire to ensure the safety of the
Premises and the Property.
10
<PAGE>
10. Indemnity. Tenant hereby indemnifies Landlord and holds Landlord
---------
harmless from and against any and all claims for damage, loss, expense or
liability due to, but not limited to, bodily injury, including death resulting
at any time therefrom, and/or property damage, now or hereafter arising from any
act, work or things done or permitted to be done or otherwise suffered, or any
omission to act, in or about the Premises, by Tenant or by any of Tenant's
agents, employees, contractors, or invitees, or from any breach or default by
Tenant in the performance of any obligation on the part of Tenant to be
performed under the terms of this Lease, except to the extent such damage, loss,
expense or liability is caused by the sole negligence or misconduct of Landlord
or its employees or agents. Tenant shall also indemnify Landlord from and
against all damage, loss, expense (including without limitation, attorneys'
fees), and liability incurred or suffered by Landlord in the defense of or
arising out of or resulting from any such claim or any action or proceeding
brought thereon. In the event any action or proceeding shall be brought against
Landlord by reason of any such claim, Tenant upon notice from Landlord shall
defend the same at Tenant's expense by counsel reasonably satisfactory to
Landlord. The obligations of Tenant contained in this paragraph shall survive
the termination of this Lease.
11. Waiver of Claims. Tenant hereby waives any claims against Landlord
----------------
for injury to Tenant's business or any loss of income therefrom or for damage to
the goods, wares, merchandise or other property of Tenant, or for injury or
death of Tenant's agents, employees, invitees, or any other person in or about
the Premises from any cause whatsoever, except to the extent caused by
Landlord's sole negligence or misconduct.
12. Insurance.
---------
12.1 Tenant's Liability Insurance. Tenant shall, at Tenant's expense,
----------------------------
obtain and keep in force during the term of this Lease, a policy of
comprehensive public liability insurance insuring Landlord and Tenant against
any liability arising out of the condition, use, occupancy or maintenance of the
Premises. Such policy of insurance shall have a combined single limit for both
bodily injury and property damage in an amount not less than Three Million
Dollars ($3,000,000). The policy shall contain cross liability endorsements and
shall insure performance by Tenant of the indemnity provisions of Paragraph 10.
The limits of said insurance shall not, however, limit the liability of Tenant
hereunder. Not more frequently than once each calendar year if, in the
reasonable opinion of Landlord, the amount of liability insurance required
hereunder is not consistent with reasonably prudent business practices in Santa
Clara County, Tenant shall increase said insurance coverage as reasonably
required by Landlord.
12.2 Tenant's Property Insurance. Tenant shall, at Tenant's sole
---------------------------
expense, obtain and keep in force during the term of this Lease, a policy of
fire and extended coverage insurance including a standard "all risk"
endorsement, and a sprinkler leakage endorsement (if the Premises shall be
sprinklered), insuring the inventory, fixtures, equipment, personal property,
and leasehold improvements and alterations of Tenant within the Premises for the
full replacement value thereof, as the same may increase from time to time due
to inflation or otherwise. The proceeds from any of such policies shall be used
for the repair or replacement of such items so insured and Landlord shall have
no interest in the proceeds of such insurance.
12.3 Landlord's Liability Insurance. Landlord may maintain a policy
------------------------------
or policies of comprehensive general liability insurance insuring Landlord (and
such other entities as may be designated by Landlord) against liability for
personal injury, bodily injury or death and damage to property occurring or
resulting from an occurrence in, on, or about the Property with a
11
<PAGE>
combined single limit of not less than Three Million Dollars ($3,000,000), or
such greater coverage as Landlord may from time to time determine is reasonably
necessary for its protection.
12.4 Property Insurance. Landlord shall obtain and keep in force
------------------
during the term of this Lease a policy or policies of insurance for the benefit
of Landlord and Tenant covering loss or damage to the Building, the Common
Areas, and the Outside Areas, but excluding coverage of merchandise, fixtures,
equipment, and leasehold improvements of Tenant, which are not considered part
of the real estate for insurance purposes, in the amount of the full replacement
value thereof, providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
special extended perils (all risk), including (at Landlord's sole discretion)
flood and earthquake (provided that earthquake insurance is available at
commercially reasonable rates), boiler and machinery coverage (if applicable)
and an inflation endorsement. In addition, Landlord shall obtain and keep in
force, during the term of this Lease, a policy of rental loss insurance covering
a period of one year, commencing on the date of loss, with proceeds payable to
Landlord, which insurance shall also cover all Real Property Taxes, Direct
Operating Expenses, insurance premiums, and other sums payable by Tenant to
Landlord hereunder for said period. The insurance coverage shall include
sprinkler leakage insurance if the Building contains fire sprinklers. All
proceeds under such policies of insurance shall be payable to Landlord, and
Tenant shall have no interest in or right to such proceeds. The cost of any
increase in property insurance coverage specifically caused by Tenant's own use
of the Premises shall be borne by the tenant causing the increase.
12.5 Payment. Tenant shall pay to Landlord during the term hereof
-------
Tenant' s Share of the premiums for any insurance obtained by Landlord pursuant
to Paragraphs 12.3 and 12.4. Notwithstanding the foregoing, Landlord may obtain
liability insurance and property insurance for the Building separately, or
together with other buildings and improvements under blanket policies of
insurance. In such case Tenant shall be liable for only such portion of the
premiums for such blanket policies as are allocable to the Premises, as
reasonably determined by the insurer or Landlord. Tenant shall pay such premiums
to Landlord within thirty (30) days after receipt by Tenant of a copy of the
premium statement or other reasonable evidence of the amount due. If the term of
this Lease does not expire concurrently with the expiration of the period
covered by such insurance, Tenant's liability for premiums shall be prorated on
an annual basis.
12.6 Insurance Policies. The insurance required to be obtained by
------------------
Tenant pursuant to Paragraphs 12.1 and 12.2, and Paragraph 12.4 if Tenant is the
insuring party thereunder, shall be primary insurance and (a) shall provide that
the insurer shall be liable for the full amount of the loss up to and including
the total amount of liability set forth in the declarations without the right of
contribution from any other insurance coverage of Landlord, (b) shall be in a
form satisfactory to Landlord, (c) shall be carried with companies acceptable to
Landlord, and (d) shall specifically provide that such policies shall not be
subject to cancellation, reduction of coverage or other change except after at
least thirty (30) days prior written notice to Landlord. The policy or policies,
or duly executed certificates for them, together with satisfactory evidence of
payment of the premium thereon, shall be deposited with Landlord on or prior to
the Commencement Date, and upon each renewal of such policies, which shall be
effected not less than, thirty (30) days prior to the expiration date of the
term of such coverage. Tenant shall not do or permit to be done anything which
shall invalidate any of the insurance policies to be carried by Tenant or
Landlord hereunder.
12.7 Waiver of Subrogation. Tenant and Landlord each hereby waives
---------------------
any and all rights of recovery against the other, or
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against the officers, employees, agents and representatives of the other, for
loss of or damage to the property of the waiving party or the property of others
under its control, where such loss or damage is insured against under any
insurance policy carried by Landlord or Tenant and in force at the time of such
loss or damage. Tenant and Landlord shall, upon obtaining the policies of
insurance required hereunder, give notice to the insurance carrier or carriers
that the foregoing mutual waiver of subrogation is contained in this Lease.
12.8 No Limitation of Liability. Landlord makes no representation that
--------------------------
the limits of liability specified to be carried by Tenant or Landlord under the
terms of this Lease are adequate to protect any party. If Tenant believes that
the insurance coverage required under this Lease is insufficient to adequately
protect Tenant, Tenant shall provide, at its own expense, such additional
insurance as Tenant deems adequate.
12.9 Impounding of Premiums. If Landlord's lender requires Landlord to
----------------------
pay insurance premiums into an impound account on a periodic basis during the
term of this Lease, Tenant, upon notice from Landlord indicating this
requirement, shall pay a sum of money toward its liabilities under this
Paragraph 12 to Landlord on a periodic basis in accordance with the lender's
requirements.
13. Damage or Destruction.
---------------------
13.1 Partial Damage-Insured. Subject to the provisions of Paragraphs
----------------------
13.3 and 13.4, if the Premises or the Building, as the case may be, are damaged
to the extent of less than seventy-five percent (75%) of the then replacement
value thereof (excluding excavations and foundations with respect to the
Building), and such damage was caused by an act or casualty covered under an
insurance policy required to be maintained pursuant to Paragraph 12.4, and the
proceeds of such insurance received by Landlord are sufficient to repair the
damage, Landlord shall at Landlord's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect.
13.2 Partial Damage-Uninsured. Subject to the provisions of
------------------------
Paragraphs 13.3 and 13.4, if at any time during the term hereof the Premises or
the Building, as the case may be, are damaged and the proceeds received by
Landlord are not sufficient to repair such damage, or such damage was caused by
an act or casualty not covered under an insurance policy required to be
maintained by Landlord pursuant to Paragraph 12.4, Landlord may at Landlord's
option either (a) repair such damage as soon as reasonably possible at
Landlord's expense, in which event this Lease shall continue in full force and
effect, or (b) give written notice of termination of this Lease to Tenant within
thirty (30) days after the date of the occurrence of such damage, with the
effective date of such termination to be the date of the occurrence of such
damage. In the event Landlord gives such notice of termination of this Lease,
Tenant shall have the right, within ten (10) days after receipt of such notice,
to agree in writing on a basis satisfactory to Landlord to pay for the entire
cost of repairing such damage less only the amount of insurance proceeds, if
any, received by Landlord, in which event the notice of termination shall be
ineffective and this Lease shall continue in full force and effect, and Landlord
shall proceed to make such repairs as soon as reasonably possible. If Tenant
does not give such notice within such ten (10) day period this Lease shall be
terminated pursuant to such notice of termination by Landlord.
13.3 Total Destruction. If at any time during the term hereof either
-----------------
the Premises or the Building is destroyed to the extent of seventy-five percent
(75%) or more of the then replacement value thereof (excluding excavations and
foundations with respect to the Building), from any cause whether or not
13
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covered by the insurance maintained pursuant to Paragraph 12.4, this Lease shall
at the option of Landlord terminate as of the date of such destruction. Landlord
shall exercise its right to terminate this Lease by delivery of notice of
termination to Tenant within thirty (30) days after the date that Tenant
notifies Landlord of the occurrence of such damage. In the event Landlord does
not elect to terminate this Lease, Landlord shall at Landlord's expense repair
such damage as soon as reasonably possible, and this Lease shall continue in
full force and effect.
13.4 Damage Near End of Term. If the Premises are destroyed or damaged
-----------------------
in whole or in part to the extent of at least fifty percent (50%) of the then
replacement value thereof (excluding excavations and foundations with respect to
the Building) whether from an insured or uninsured casualty, during the last six
(6) months of the term of this Lease, Landlord may at Landlord's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Tenant of Landlord's selection to do so within thirty (30)
days after the date of occurrence of such damage.
13.5 Abatement of Rent. Notwithstanding anything to the contrary
-----------------
contained in Paragraph 13.3 or elsewhere in this Lease, if the Premises are
partially damaged and Landlord repairs or restores them pursuant to the
provisions of this Paragraph 13, the rent, including Tenant's Share of Direct
Operating Expenses, Real Property Taxes, and insurance premiums, payable
hereunder for the period commencing on the occurrence of such damage and ending
upon completion of such repair or restoration shall be abated in proportion to
the extent to which Tenant's use of the Premises is impaired during the period
of repair; provided that, nothing herein shall be construed to preclude Landlord
from being entitled to collect the full amount of any rental loss insurance
proceeds. Except for abatement of rent, if any, Tenant shall have no claim
against Landlord for any damage suffered by reason of any such damage,
destruction, repair or restoration.
13.6 Waiver. Tenant waives the provisions of California Civil Code
------
Sections 1932(2) and 1933(4), and any similar or successor statutes relating to
termination of leases when the thing leased is substantially or entirely
destroyed, and agrees that any such occurrence shall instead be governed by the
terms of this Lease.
13.7 Tenant's Property. Landlord's obligation to rebuild or restore
-----------------
shall not include restoration of Tenant's trade fixtures, equipment,
merchandise, or any improvements, alterations or additions made by Tenant to the
Premises.
13.8 Notice of Damage. Tenant shall notify Landlord within five (5)
----------------
days after the occurrence thereof of any damage to all or any portion of the
Premises. In no event shall Landlord have any obligation to repair or restore
the Premises pursuant to this Paragraph 13 until a reasonable period of time
after Landlord's receipt of notice from Tenant of the nature and scope of any
damage to the Premises, and a reasonable period of time to collect insurance
proceeds arising from such damage (unless such damage is clearly not covered by
insurance then in effect covering the Premises).
13.9 Replacement Cost. The determination in good faith by Landlord
of the estimated cost of repair of any damage, or of the replacement cost, shall
be conclusive for purposes of this Paragraph 13.
14. Condemnation.
------------
14.1 Partial Taking. If an area less than or equal to
--------------
14
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thirty-three percent (33%) of the floor area of the Premises is taken for any
public or quasi-public use, under any statute or right of eminent domain
(collectively a "taking"), this Lease shall, as to the part so taken, terminate
as of the date the condemnor or purchaser takes possession of the property being
taken, and the rent payable hereunder shall be reduced in the same proportion
that the floor area of the portion of the Premises so taken bears to the
original floor area of the Premises. Landlord shall, at its own cost and
expense, make all necessary alterations to the Premises in order to make the
portion of the Premises not taken a complete architectural unit. Such work shall
not, however, exceed the scope of the work done by Landlord in originally
constructing the Premises. Each party hereto waives the provisions of California
Code of Civil Procedure Section 1265.130 allowing either party to petition the
Superior Court to terminate this Lease in the event of a partial taking of the
Premises.
14.2 Total Taking. If more than thirty-three percent (33%) of the
------------
floor area of the Premises is taken, then any such taking shall be treated as a
total taking, and this Lease shall terminate upon the date possession shall be
taken by the condemning authority.
14.3 Distribution of Award. If a part or all of the Premises is
---------------------
taken, all compensation awarded upon such taking shall belong to and be paid to
Landlord, except that Tenant shall receive from the award a sum attributable to
Tenant's movable property or trade fixtures on the Premises which Tenant has the
right to remove from the Premises pursuant to the provisions of this Lease, but
elects not to remove; or, if Tenant elects to remove any such property or trade
fixtures, Tenant shall receive a sum for reasonable removal and relocation costs
not to exceed the market value thereof on the date possession of the Premises is
taken.
14.4 Sale Under Threat of Condemnation. A sale by Landlord to any
---------------------------------
authority having the power of eminent domain, either under threat of
condemnation or while condemnation proceedings are pending, shall be deemed a
taking under the power of eminent domain for purposes of this Paragraph 14.
15. Assignment and Subletting. Tenant shall not assign this Lease, or any
-------------------------
interest therein, voluntarily or involuntarily, and shall not sublet the
Premises or any part thereof, or any right or privilege appurtenant thereto, or
suffer any other person (the agents and servants of Tenant excepted) to occupy
or use the Premises, or any portion thereof, without the prior written consent
of Landlord in each instance pursuant to the terms and conditions set forth
below, which consent shall not unreasonably be withheld. In lieu of consenting
to a proposed assignment or sublease, Landlord shall be entitled to terminate
this Lease with respect to all or such portion of the Premises which Tenant
proposes to assign or sublease. Such election to terminate shall be made by
Landlord's giving written notice thereof to Tenant. Any such termination shall
be effective on the later of the scheduled commencement date of the proposed
assignment or sublease or thirty (30) days after Landlord's notice of
termination. Upon such termination, any prior subleases of portions of the
Premises, at the option of Landlord, shall also concurrently terminate. Upon
termination of the Lease with respect to all or any portion of the Premises
pursuant to the foregoing, Landlord shall be entitled to enter into a lease with
the proposed assignee or sublessee or with any other party, on terms the same as
or different from those contained in the proposed assignment or sublease.
15.1 Documentation. Prior to any assignment or sublease which Tenant
-------------
desires to make, Tenant shall provide to Landlord the name and address of the
proposed assignee or sublessee, and true and complete copies of all documents
relating to Tenant's prospective agreement to assign or sublease, and shall
specify all consideration to be received by Tenant for such assignment or
15
<PAGE>
sublease in the form of lump sum payments, installments of rent, or otherwise.
For purposes of this Paragraph 15, the term "consideration" shall include,
without limitation, all monies or other consideration of any kind, including but
not limited to, bonus money, and payments (in excess of book value thereof) for
Tenant's assets, fixtures, inventory, accounts, good will, equipment, furniture,
general intangibles, and any capital stock or other equity ownership of Tenant.
Within thirty (30) days after the receipt of such documentation and other
information, Landlord shall notify Tenant in writing that Landlord elects to
terminate this Lease as to the portion of the Premises to be assigned or
subleased, or if Landlord does not elect any such termination, then Landlord
shall either (a) consent in writing to the proposed assignment or sublease
subject to the terms and conditions hereinafter set forth, or (b) notify Tenant
in writing that Landlord refuses such consent, specifying reasonable grounds for
such refusal.
15.2 Terms and Conditions. As a condition to Landlord's granting its
--------------------
consent to any assignment or sublease, (a) Landlord may require that Tenant pay
to Landlord, as and when received by Tenant, one-half of the amount of any
excess of such consideration to be received by Tenant in connection with said
assignment or sublease over and above the rental amount fixed by this Lease and
payable by Tenant to Landlord, and (b) Tenant and the proposed assignee or
sublessee must demonstrate to Landlord's reasonable satisfaction that the
assignee or sublessee is financially responsible and proposes to use the
Premises for substantially the same use or a use which is otherwise satisfactory
to Landlord, and which is not injurious to the Premises. Each assignment or
sublease agreement to which Landlord has consented shall be an instrument in
writing in form satisfactory to Landlord, and shall be executed by both Tenant
and the assignee or sublessee, as the case may be. Each such assignment or
sublease agreement shall recite that it is and shall be subject and subordinate
to the provisions of this Lease, that the assignee or sublessee accepts such
assignment or sublease and agrees to perform all of the obligations of Tenant
hereunder (to the extent such obligations relate to the portion of the Premises
assigned or subleased), and that the termination of this Lease shall, at
Landlord's sole election, constitute a termination of every such assignment or
sublease. In the event Landlord shall consent to an assignment or sublease,
Tenant shall nonetheless remain primarily liable for all obligations and
liabilities of Tenant under this Lease, including but not limited to the payment
of rent. Tenant agrees to reimburse Landlord upon demand for reasonable
attorneys' fees incurred by Landlord in connection with the negotiation, review,
and documentation of any such requested assignment or sublease. Tenant hereby
stipulates that the foregoing terms and conditions are reasonable.
15.3 Partnership. If Tenant is a partnership, a transfer, voluntary or
-----------
involuntary, of all or any part of an interest in the partnership, or the
dissolution of the partnership, shall be deemed an assignment requiring
Landlord's prior written consent.
15.4 Corporation. If Tenant is a corporation, any dissolution,
-----------
merger, consolidation, or other reorganization of Tenant, or the transfer,
either all at once or in a series of transfers, of a controlling percentage of
the capital stock of Tenant, or the sale, or series of sales within any one (1)
year period, of all or substantially all of Tenant's assets located in, on, or
about the Premises, shall be deemed an assignment. The phrase "controlling
percentage" means the ownership of, and the right to vote, stock possessing at
least fifty-one percent (51%) of the total combined voting power of all classes
of Tenant's capital stock issued, outstanding, and entitled to vote for the
election of directors. The provisions of this paragraph shall not apply to
Tenant if Tenant is a corporation the stock of which is listed on
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<PAGE>
a national securities exchange (as this term is used in the Securities Exchange
Act of 1934, as amended) or is publicly traded on the over-the-counter market
and prices therefor are published daily on business days in a recognized
financial journal. The provisions of this paragraph shall not apply to Tenant if
Tenant provides Landlord with sufficient written confirmation and assurances of
(i) the continuation of Tenant's lease obligations and (ii) no materially
adverse change in Tenant's financial condition, subsequent to any change in
ownership of Tenant as provided in this paragraph.
15.5 Landlord's Remedies. Any assignment or sublease without
-------------------
Landlord's prior written consent shall at Landlord's election be void, and shall
constitute a default. The consent by Landlord to any assignment or sublease
shall not constitute a waiver of the provisions of this Paragraph 15, including
the requirement of Landlord's prior written consent, with respect to any
subsequent assignment or sublease. If Tenant shall purport to assign this Lease
or sublease all or any portion of the Premises, or permit any person or persons
other than Tenant to occupy the Premises, without Landlord's prior written
consent, Landlord may collect rent from the person or persons then or thereafter
occupying the Premises and apply the net amount collected to the rent reserved
herein, but no such collection shall be deemed a waiver of Landlord's rights and
remedies under this Paragraph 15 or the acceptance of any such purported
assignee, sublessee or occupant, or a release of Tenant from the further
performance by Tenant of covenants on the part of Tenant herein contained.
15.6 Encumbrances, Licenses and Concession Agreements. Tenant shall
------------------------------------------------
not encumber its interest under this Lease or any rights of Tenant hereunder, or
enter into any license or concession agreement respecting all or any portion of
the Premises, without Landlord's prior written consent which consent shall not
unreasonably be withheld subject to the terms and conditions referred to in
Paragraph 15.2 above, and Tenant's granting of any such encumbrance, license, or
concession agreement shall constitute an assignment for purposes of this
Paragraph 15.
16. Default by Tenant.
-----------------
16.1 Event of Default. The occurrence of any one or more of the
----------------
following events (an "Event of Default"), shall constitute a default and breach
of this Lease by Tenant:
(a) The failure by Tenant to make any payment of rent or any
other payment required to be made by Tenant hereunder, as and when due, and such
failure shall not have been cured within three (3) days after receipt of written
notice thereof from Landlord;
(b) Tenant's failure to perform any other term, covenant or
condition contained in this Lease and such failure shall have continued for
fifteen (15) days after written notice of such failure is given to Tenant;
provided that, where such failure cannot reasonably be cured within said fifteen
(15) day period, Tenant shall not be in default if Tenant commences such cure
within said fifteen (15) day period, and thereafter diligently continues to
pursue all reasonable efforts to complete said cure until completion thereof;
(c) Tenant's failure to continuously and uninterruptedly provide
security protection for the Premises reasonably satisfactory to Landlord;
(d) Tenant's assignment of its assets for the benefit of its
creditors;
17
<PAGE>
(e) 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 on the Premises, and Tenant shall have failed to
obtain a return or release on such property within sixty (60) days thereafter,
or prior to sale pursuant to such sequestration, attachment or execution,
whichever is earlier;
(f) An entry of any of the following orders by a court having
jurisdiction, and such order shall have continued for a period of sixty (60)
days: (1) an order for relief in any proceeding under Title 11 of the United
States Code, or an order adjudicating Tenant to be bankrupt or insolvent; (2) an
order appointing a receiver, trustee or assignee of Tenant's property in
bankruptcy or any other proceeding; or (3) an order directing the winding up or
liquidation of Tenant; or
(g) The filing of a petition to commence against Tenant an involuntary
proceeding under Title 11 of the United States Code, and Tenant shall fail to
cause such petition to be dismissed within sixty (60) days thereafter.
16.2 Remedies. Upon any Event of Default, Landlord shall have the following
--------
remedies, in addition to all other rights and remedies provided by law or
equity:
(a) Landlord shall be entitled to keep this Lease in full force and
effect for so long as Landlord does not terminate Tenant's right to possession
(whether or not Tenant shall have abandoned the Premises) and Landlord may
enforce all of its rights and remedies under this Lease, including the right to
recover rent and other sums as they become due under this Lease, plus interest
at the lower of five percent (5%) per annum plus the discount rate of the
Federal Reserve Bank of San Francisco, or the highest rate then allowed by law,
from the due date of each installment of rent or other sum until paid; or
(b) Landlord may terminate the Tenant's right to possession by giving
Tenant written notice of termination. On the giving of the notice, this Lease
and all of Tenant's rights in the Premises shall terminate. 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 the event this Lease is terminated pursuant to this Paragraph
16.2(b), Landlord may recover from Tenant:
(1) the worth at the time of award of the unpaid rent which had
been earned at the time of termination; plus
(2) 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 for the same period that Tenant
proves could have been reasonably avoided; plus
(3) 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 for the same period that Tenant proves could be
reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the
detriment approximately 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.
The "worth at the time of award" of the amounts referred to in
Subparagraphs (1) and (2) of this Paragraph 16.2(b)
18
<PAGE>
shall be computed by allowing interest at the lower of five percent (5%) per
annum plus the discount rate of the Federal Reserve Bank of San Francisco, or
the maximum rate then permitted by law. The "worth at the time of award" of the
amount referred to in Subparagraph (3) of this paragraph shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%). The term, "rent" as used
in this paragraph shall include all sums required to be paid by Tenant to
Landlord pursuant to the terms of this Lease.
(c) This Lease may be terminated by a judgment specifically providing
for termination, or by Landlord's delivery to Tenant of written notice
specifically terminating this Lease. In no event shall any one or more of the
following actions by Landlord, in the absence of a written election by Landlord
to terminate this Lease, constitute a termination of this Lease or a waiver of
Landlord's right to recover damages under this Paragraph 16:
(1) appointment of a receiver in order to protect Landlord's
interest hereunder;
(2) 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
(3) any other action by Landlord or Landlord's agents intended to
mitigate the adverse effects of any breach of this Lease by Tenant, including
without limitation any action taken to maintain and preserve the Premises, or
any action taken to relet the Premises or any portion thereof for the account of
Tenant and in the name of Tenant.
16.3 No Relief From Forfeiture After Default. Tenant waives all rights of
---------------------------------------
redemption or relief from forfeiture under California Code of Civil Procedure
Sections 1174 and 1179, and under any other present or future law, in the event
Tenant is evicted or Landlord otherwise lawfully takes possession of the
Premises by reason of any Event of Default.
16.4 Landlord's Right to Perform Tenant's Obligations. If Tenant shall
------------------------------------------------
at any time fail to make any payment or perform any other act required to be
made or performed by Tenant under this Lease, then Landlord may, but shall not
be obligated to, make such payment or perform such other act to the extent
Landlord may deem desirable, and may, in connection therewith, pay any and all
expenses incidental thereto and employ counsel. No such action by Landlord shall
be deemed a waiver by Landlord of any rights or remedies Landlord may have as a
result of such failure by Tenant, or a release of Tenant from performance of
such obligation. All sums so paid by Landlord, including without limitation all
penalties, interest and costs in connection therewith, shall be due and payable
by Tenant to Landlord on the day immediately following any such payment by
Landlord. Landlord shall have the same rights and remedies for the nonpayment of
any such sums as Landlord may be entitled to in the case of default by Tenant in
the payment of rent.
16.5 Interest on Past Due Obligations. Any amount due to Landlord
--------------------------------
hereunder not paid when due shall bear interest at the lower of five percent
(5%) per annum plus the discount rate of the Federal Reserve Bank of San
Francisco, or the highest rate then allowed by law, from the date due until paid
in full. Payment of such interest shall not excuse or cure any default by Tenant
under this Lease.
16.6 Additional Rent. All sums payable by Tenant to Landlord or to third
---------------
parties under this Lease in addition to such sums payable pursuant to Paragraph
3 hereof shall be payable as additional sums of rent. For purposes of any
unlawful detainer
19
<PAGE>
action by Landlord against Tenant pursuant to California Code of Civil Procedure
Sections 1161-1174, or any similar or successor statutes, Landlord shall be
entitled to recover as rent not only such sums specified in Paragraph 3 as may
then be overdue, but also all such additional sums of rent as may then be
overdue.
16.7 Remedies Not Exclusive. No remedy or election hereunder shall be
----------------------
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies herein provided or permitted at law or in equity.
17. Default by Landlord.
-------------------
17.1 Cure Period. Landlord shall not be deemed to be in default in
-----------
the performance of any obligation required to be performed by it hereunder
unless and until it has failed to perform such obligation within the period of
time specifically provided herein, or if no period of time has been provided,
then within fifteen (15) days after receipt of written notice by Tenant to
Landlord specifying wherein Landlord has failed to perform such obligation;
provided, however, that if the nature of Landlord's obligation is such that more
than fifteen (15) days are reasonably required for its performance, then
Landlord shall not be deemed to be in default if it shall commence such
performance within such fifteen (15) day period and thereafter diligently
prosecute the same to completion.
17.2 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 furnished to Tenant, and before Tenant
shall have any right to terminate this Lease, Tenant shall grant such
beneficiary or mortgagee a reasonable period within which to cure the default,
if such action is necessary to effect a cure.
18. Advertisements and Signs. Tenant shall not place or permit to be
------------------------
placed any sign, display, advertisement, or decoration (collectively "sign") on
the exterior of the Building or elsewhere on the Property without the prior
written consent of Landlord as to the color, size, style, character, content,
and location of each such sign. Tenant shall at its sole expense comply with all
codes, ordinances, regulations, and other requirements of applicable
governmental authority relating to any sign Tenant places on or about the
Premises. Upon termination of this Lease, Tenant shall remove all signs which it
has placed on or about the Property, and shall repair any damage caused by the
installation or removal of each such sign.
19. Entry by Landlord. Landlord and its agents shall be entitled to enter
-----------------
into and upon the Premises at all reasonable times, upon reasonable notice
(except in the case of an emergency, in which event no notice shall be
required), for purposes of inspecting or making repairs, alterations or
additions to all or any portion thereof, or any other part of the Building (if
the Premises comprise only a portion of the Building), including the erection
and maintenance of such scaffolding, canopies, fences and props as may be
required, or for the purpose of posting notices of non-responsibility for
alterations, additions, or repairs, and during the one hundred eighty (180) day
period prior to the expiration of this Lease, to place upon the Premises any
usual or ordinary "for lease" signs and exhibit the Premises to prospective
tenants at reasonable hours, all without any abatement of rent and without
liability to Tenant for any injury or inconvenience to or interference with
Tenant's business, quiet enjoyment of the Premises, or any other loss occasioned
thereby. Landlord's rights of entry as set forth in this paragraph shall be
subject to the reasonable security regulations of Tenant. During any entry
within Tenant's business hours, Landlord shall act in a manner designed to
minimize interference with Tenant's business activities on the
20
<PAGE>
Premises.
20. Subordination and Attornment.
----------------------------
20.1 Subordination. Tenant agrees that this Lease may, at the option
-------------
of Landlord, be subject and subordinate to any mortgage, deed of trust, or other
instrument of security now of record or which is recorded after the date of this
Lease affecting all or any portion of the Premises, and such subordination is
hereby made effective without any further act of Tenant. Tenant shall execute
and return to Landlord any documents required by the lender to accomplish the
purposes of this paragraph, within seven (7) days after delivery thereof to
Tenant, and the failure of Tenant to execute and return any such instruments
shall constitute a default hereunder.
20.2 Attornment. Tenant shall attorn to any third party purchasing or
----------
otherwise acquiring the Premises at any sale or other proceeding, or pursuant to
the exercise of any rights, powers or remedies under any mortgages or deeds of
trust or ground leases now or hereafter encumbering all or any part of the
Premises, as if such third party had been named as Landlord under this Lease.
21. Estoppel Certificates and Financial Statements. Tenant shall within
----------------------------------------------
seven (7) days following request by Landlord: (a) execute and deliver to
Landlord any documents, including estoppel certificates, in the form presented
to Tenant by Landlord (1) certifying that this Lease has not been modified or,
if modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect; (2) stating the date to
which the rent and other charges are paid in advance, if at all; (3)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord hereunder, or if there are uncured defaults on the part of
Landlord, stating the nature of such uncured defaults; and (4) evidencing the
status of this Lease as may be required either by a lender making a loan to
Landlord to be secured by a deed of trust or mortgage encumbering the Premises
or a purchaser of the Premises from Landlord; and (b) deliver to Landlord the
current financial statements of Tenant including a balance sheet and profit and
loss statement for the then current fiscal year, and the two (2) immediately
prior fiscal years (if available), all prepared in accordance with generally
accepted accounting principles consistently applied. Tenant's failure to deliver
any such documents, including an estoppel certificate, or any such financial
statements within seven (7) days following such request shall be an Event of
Default under this Lease.
22. Notices. Any notice, approval, request, demand, or consent
-------
(collectively "notice") required or desired to be given under this Lease shall
be in writing and shall be personally served, delivered by United States mail,
registered or certified, postage prepaid, or delivered by other courier service,
and addressed to the party to be served 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 addresses of Landlord and Tenant are as set forth
above in the preamble to this Lease. Any not ice delivered by mail pursuant to
this paragraph shall be deemed to have been delivered three (3) days after the
posted date of mailing. All other notices shall be deemed delivered upon actual
receipt by the addressee.
23. Waiver. The waiver by either party 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 for any subsequent breach of the same or any
other term, covenant or condition herein contained. The subsequent acceptance of
rent hereunder by Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant or condition of this Lease, other than
the failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such
21
<PAGE>
preceding breach at the time of acceptance of such rent. No term, covenant or
condition shall be deemed to have been waived by either party unless such waiver
is in writing and signed by the party making such waiver.
24. No Accord and Satisfaction. No payment by Tenant, or receipt by
--------------------------
Landlord, of an amount which is less than the full amount of rent and all other
sums payable by Tenant hereunder at such time shall be deemed to be other than
on account of (a) the earliest of such other sums due and payable, and
thereafter (b) to the earliest rent due and payable hereunder. No endorsement or
statement on any check or any letter accompanying any payment of rent or such
other sums shall be deemed an accord and satisfaction, and Landlord may accept
any such check or payment without prejudice to Landlord's right to receive
payment of the balance of such rent and/or other sums, or Landlord's right to
pursue any remedies to which Landlord may be entitled to recover such balance.
25. Attorneys' Fees. If any action or proceeding at law or in equity, or
---------------
an arbitration proceeding (collectively an "action"), shall be brought to
recover any rent under this Lease, or for or on account of any breach of or to
enforce or interpret any of the terms, covenants, or conditions of this Lease,
or for the recovery of possession of the Premises, the prevailing party shall be
entitled to recover from the other party as a part of such action, or in a
separate action brought for that purpose, its reasonable attorneys, fees and
costs and expenses incurred in connection with the prosecution or defense of
such action. "Prevailing Party" within the meaning of this paragraph shall
include, without limitation, a party who brings an action against the other
after the other is in breach or default, if such action is dismissed upon the
other's payment of the sums allegedly due for performance of the covenants
allegedly breached, or if the party commencing such action or proceeding obtains
substantially the relief sought by it in such action, whether or not, such
action proceeds to a final judgment or determination.
26. Surrender. Tenant shall, upon expiration or sooner termination of
---------
this Lease, surrender the Premises to Landlord in the same condition as existed
on the date Tenant originally took possession thereof (reasonable wear and tear
and damage due to causes beyond the reasonable control of Tenant excepted) with
all interior walls cleaned, all interior painted surfaces repainted in the
original color, if necessary, all holes in walls repaired, all carpets shampooed
and cleaned, all HVAC equipment servicing only the Premises in operating order
and in good repair, and all floors cleaned and waxed, all to the reasonable
satisfaction of Landlord. Tenant shall at such time also surrender to Landlord
such alterations (to the Premises) as Landlord does not require Tenant to remove
in accordance with Paragraph 7.6 above. Tenant, on or before the expiration or
sooner termination of this Lease, shall remove all of its personal property and
trade fixtures from the Premises, and all property not so removed shall be
deemed abandoned by Tenant. Tenant shall be liable to Landlord for costs of
removal of any such abandoned trade fixtures or equipment of Tenant, or of any
alterations Tenant fails to remove if so required by Landlord, together with the
cost of returning the Premises to its condition as of the date Tenant originally
took possession thereof, and the transportation and storage costs of such items.
If the Premises are not so surrendered at the expiration or sooner termination
of this Lease, Tenant shall indemnify Landlord against loss or liability
resulting from delay by Tenant in so surrendering the Premises, including
without limitation, any claims made by any succeeding tenant founded on such
delay, losses to Landlord due to lost opportunities to lease to succeeding
tenants, and attorneys' fees and costs. All keys to the Premises or any part
thereof shall be surrendered to Landlord upon expiration or sooner termination
of the Lease term.
22
<PAGE>
27. 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 of the Lease term or give Tenant any
rights in or to the Premises unless otherwise expressly provided in this Lease.
Any holding over after the expiration with the express written consent of
Landlord shall be construed to be a tenancy from month to month, at one hundred
percent (100%) of the monthly Base Rent for the last month of the Lease term,
and shall otherwise be on the terms and conditions herein specified insofar as
applicable, unless otherwise mutually agreed in writing by the parties.
28. Transfer of Premises by 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 to the Premises. In the event of any transfer of such
fee title, the Landlord herein named (and in case of any subsequent transfer or
conveyances, the then grantor) shall after the date of such transfer or
conveyance be automatically freed and relieved of all liability with respect to
performance of any obligations on the part of Landlord contained in this Lease
thereafter to be performed; 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. The covenants and obligations contained in
this Lease on the part of Landlord shall, subject to the foregoing, be binding
upon each Landlord hereunder only during his or its respective period of
ownership.
29. General Provisions.
------------------
29.1 Entire Agreement. This instrument, together with the exhibits
----------------
attached hereto, contains all of the agreements and conditions made between the
parties hereto and may not be modified orally or in any manner other than by an
agreement in writing signed by all of the parties hereto or their respective
successors in interest. Any executed copy of this Lease shall be deemed an
original for all purposes.
29.2 Time. Time is of the essence with respect to the performance of
----
each and every provision of this Lease in which time of performance is a factor.
All references to days contained in this Lease shall be deemed to mean calendar
days unless otherwise specifically stated.
29.3 Captions. The captions and headings of the numbered paragraphs
--------
of this Lease are inserted solely for the convenience of the parties hereto, and
are not a part of this Lease and shall have no effect upon the construction or
interpretation of any part hereof.
29.4 California Law. This Lease shall be construed and interpreted in
--------------
accordance with the laws of the State of California. The language in all parts
of this Lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Landlord or Tenant, and without
reference to which party prepared this Lease.
29.5 Gender, Singular and Plural. When required by the context
---------------------------
of this Lease, the neuter includes the masculine, the feminine, a partnership, a
corporation, or a joint venture, and the singular shall include the plural.
29.6 Partial Invalidity. If any provision of this Lease is held
-------------------
by a
<PAGE>
court of competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the provisions hereof shall nonetheless continue in full force and
effect and shall in no way be affected, impaired, or invalidated thereby.
23
<PAGE>
29.7 No Warranties. Any agreements, warranties or representations
-------------
not expressly contained herein shall not 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, if any, not expressly
contained in this Lease.
29.8 Joint and Several Liability. If Tenant is more than one person
---------------------------
or entity, each such person or entity shall be jointly and severally liable for
the obligations of Tenant hereunder.
29.9 Binding on Successors. The covenants and conditions herein
---------------------
contained, subject to the provisions as to assignment, shall apply to and be
binding upon the parties hereto and their respective heirs, executors,
administrator, assigns, and other successors in interest.
29.10 Authority. The parties hereby represent and warrant that they
---------
have all necessary power and authority to execute and deliver this Lease on
behalf of Landlord and Tenant, respectively.
29.11 Memorandum of Lease. Neither Landlord nor Tenant shall record
-------------------
this Lease or a short form memorandum hereof without the prior written consent
of the other.
29.12 Merger. The voluntary or other surrender of this Lease, or a
------
mutual cancellation thereof, shall not work an automatic merger, but shall, at
the sole option of Landlord, either terminate all or any existing subleases or
subtenancies, or operate. as an assignment to Landlord of any or all of such
subleases or subtenancies.
29.13 Force Majeure. Any prevention of or delay in the performance
-------------
by a party hereto of its obligations under this Lease caused by inclement
weather, labor disputes (including strikes and lockouts), inability to obtain
materials or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other causes
beyond the reasonable control of the party obligated to perform (except
financial inability), shall excuse the performance by such party of its
obligations hereunder (except the obligation of Tenant to pay rent and other
sums hereunder) for a period of one day for each such day of delay.
29.14 Additional Paragraphs. Paragraphs 1 through 3 , as set forth
---------------------
in the attached Addendum as well as Exhibits A, B, C and D are added hereto and
made a part of this Lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the
dates specified below immediately adjacent to their respective signatures.
Delivery of this Lease to Landlord, duly executed by Tenant, constitutes an
offer by Tenant to lease the Premises as herein set forth, and under no
circumstances shall such delivery be deemed to create an option or reservation
to lease the Premises for the benefit of Tenant. This Lease shall only become
effective and binding upon execution of this Lease by Landlord and delivery of a
signed copy to Tenant.
LANDLORD
KONTRABECKI ASSOCIATES I
a California limited partnership
By: /s/ J.T. Kontrabecki
24
<PAGE>
Its: General Partner Date: 5/26/94
TENANT
INTEVAC CORPORATION
a California corporation
By: /s/ C. Eddy Date: 5/26/94
Its: CFO
By: _________________ Date: _________________
Its: _________________
25
<PAGE>
EXHIBIT "A"
SITE PLAN
26
<PAGE>
[EXHIBIT A NOT SHOWN]
<PAGE>
[EXHIBIT A NOT SHOWN]
<PAGE>
EXHIBIT "B"
INTERIOR IMPROVEMENTS
"As Is"
27
<PAGE>
EXHIBIT "C"
COVENANTS, CONDITIONS, AND RESTRICTIONS
NONE
28
<PAGE>
EXHIBIT "D"
RULES AND REGULATIONS
NONE
29
<PAGE>
ADDENDUM TO
-----------
THE KONTRABECKI GROUP
---------------------
INDUSTRIAL LEASE
----------------
This Addendum is executed by and between KONTRABECKI ASSOCIATES I, a California
limited partnership as Landlord, and INTEVAC CORPORATION, a California
Corporation, as Tenant with respect to those certain Premises commonly known as
3580 Bassett Street, Santa Clara, CA. This Addendum is an integral part of the
printed lease to which it is attached; provided, the provisions of this Addendum
supersede the provisions of the printed lease to the extent inconsistent
therewith.
1. Landlord currently leases the building adjacent to the Premises known as
3560 Bassett Street, Santa Clara, CA to Varian Associates, Inc. Tenant would
like to lease a portion of this building (the "Adjacent Space") as set forth in
Exhibit "A1", on the same terms and conditions provided in the Lease and subject
to the following:
A. Term - The lease for the Adjacent space shall Commence on January 1,
----
1995 and end on June 30, 1997, unless sooner terminated or extended pursuant to
the provisions hereof.
B. Premises - The term "Premises" as defined in paragraph 1.3 of the
--------
Lease shall be modified to include the Adjacent space containing approximately
sixteen thousand four hundred fifty seven (16,457) square feet of gross leasable
area.
C. Rent - The term "Base Rent" as defined in paragraph 3.1 of the Lease
----
shall be modified to include additional monthly rent for the Adjacent Space of
eleven thousand six hundred eighty five and no/100's dollars ($11,685.00).
D. Parking - Parking for the Premises as set forth in Paragraph 2.1 of
-------
the Lease shall be increased by fifty-eight (58) parking spaces.
2. An equipment pad is located next to the Premises as shown in Exhibit A.
This equipment pad is to be shared by Tenant and the occupant of the building
known as 3560 Bassett Street, Santa Clara, CA. Tenant shall provide access to
the equipment pad through the Adjacent Space if so required.
3. Landlord and Tenant hereby acknowledge that the utilities servicing the
Adjacent Space also service the entire building known as 3560 Bassett Street,
Santa Clara. Tenant agrees to share and measure the utility demand by installing
meters, to equitably allocate the cost of utility consumption.
LANDLORD
KONTRABECKI ASSOCIATES I
By: /s/ J.T. Kontrabecki
Its: General Partner Date: 5/26/94
TENANT
INTEVAC CORPORATION
By: /s/ C. Eddy Date: 5/26/94
Its: CFO
<PAGE>
[EXHIBIT "A1" NOT SHOWN]
<PAGE>
[EXHIBIT "A1"-BUILDING 31 NOT SHOWN]
<PAGE>
The Kontrabecki Group
December 1, 1994
Mr. Charles Eddy
Chief Financial Officer
INTEVAC CORPORATION
3580 Bassett Street
Santa Clara, CA 95050
Re: Lease Agreement 3580 Bassett Street, Santa Clara, CA
Dear Mr. Eddy:
Kontrabecki Associates I is the Landlord and Intevac Corporation is the Tenant
under a lease agreement (the "Lease") dated May 26, 1994 for the premises known
as 3580 Bassett Street, Santa Clara, CA. Notwithstanding anything contained in
the Lease to the contrary, beginning November 1, 1994, Tenant may occupy the
premises for two (2) months of the lease term without paying rent. This is in
addition to the four (4) months of occupancy without paying rent provided in the
letter dated May 9, 1994. Please indicate your agreement with the terms of this
letter agreement by signing below.
Very truly,
/S/ John T. Kontrabecki
John T. Kontrabecki
Agreed and Accepted this 1/10, 1995.
Intevac Corporation
By: /s/ C. Eddy
Its: CFO
3600 West Bayshore Road, Suite 101, Palo Alto, California 94303
(415) 858-3600 Fax: (415) 858-3611
<PAGE>
THE KONTRABECKI GROUP
3600 West Road Bayshore 101
Palo Alto, CA 94303
Tel: 415/858-3600 Fax. 415/858-3611
TO: Charley Eddy
FAX NO.: 408-727-5739
FROM: John Kontrabecki Group
DATE: January 6, 1995
I just received your letter dated January 3, 1995 regarding the lease amendment
for Triangle Technology Park. Frankly speaking, I was very surprised by both the
content and the tone because I completed the draft of the amendment and faxed it
to your office in the first week of December. Apparently, you either did not
receive it or it was misplaced by your staff. I have not been pressing you about
it because of the holiday season.
Please find enclosed the draft previously faxed to you. To insure that we do not
have another problem, please have your secretary call our office and confirm
receipt of this fax as soon as it is received by your office.
I would like to speak with you on Monday to gather any comments you may have so
we may complete the amendment and sign it as soon as possible.
Best wishes to you in the New Year!
<PAGE>
ADDENDUM II TO
--------------
THE KONTRABECKI GROUP
---------------------
INDUSTRIAL LEASE
----------------
This Addendum II is executed by and between KONTRABECKI ASSOCIATES I, a
California limited partnership as Landlord, and INTEVAC CORPORATION, a
California Corporation, as Tenant with respect to those certain Premises
commonly known as 3580 Bassett Street, Santa Clara, CA. This addendum is an
integral part of the printed lease to which it is attached; provided, the
provisions of this Addendum II supersede the provisions of the printed lease and
the addendum thereto to the extent inconsistent therewith.
1. Building - Effective March 1, 1995, the term "Building" as defined in
--------
paragraph 1.2 of the Lease shall be modified to include the structure containing
forty-nine thousand eighty (49,080) square feet of gross leasable area and
located at the following address: 3550 Bassett Street, Santa Clara, California.
The Total Building Gross Leasable Area is equal to eighty nine thousand nine
hundred seventy (89,970) square feet (49,080 square feet plus 40,890 square
feet).
2. Premises - Effective March 1, 1995 the term "Premises" as defined in
--------
paragraph 1.3 of the Lease shall be modified to include the Building outlined on
the site plan attached hereto as Exhibit "A2" containing approximately forty-
nine thousand eighty (49,080) square feet of gross leasable area. Effective
March 1, 1995, the term "Premises" as defined in paragraph 1.3 of the Lease
shall be modified to include the area outlined on the site plan attached hereto
as Exhibit "A3" containing twenty-one thousand one hundred eighteen (21,118)
square feet. This area includes the telephone switch room and an allocable
portion of the lobby, common central corridor, and rest-rooms. Effective March
1, 1995, the Premises Gross Leasable Area shall be seventy thousand hundred
ninety-eight (70,198) square feet.
3. Equipment Pad - An equipment pad is located next to the Premises at 3580
-------------
Bassett Street, Santa Clara, California as shown on Exhibit "A3". This equipment
pad is to be shared by Tenant and the occupant of the building known as 3560
Bassett Street, Santa Clara, California.
4. Term - The term as set forth in paragraph 2.2 of the Lease shall be
----
modified as follows:
<TABLE>
<CAPTION>
Address Premises Term Commencement/Expiration Date
- ------- -------- ---- ----------------------------
<S> <C> <C> <C>
3580 Bassett 40,890 s.f. 9 months 7/1/94 - 2/28/95
3580 Bassett 21,118 s.f 27 months 3/1/95 - 6/30/97
3550 Bassett 49,080 s.f 27 months 3/1/95 - 6/30/97
</TABLE>
5. Rent - The term "Base Rent" as defined in paragraph 3.1 of the Lease shall
be modified as follows:
<TABLE>
<CAPTION>
Term Rent Per Month
---- --------------
<S> <C>
7/1/94 -2/28/95 $29,031.90
3/1/95 -6/30/97 $49,840.58
</TABLE>
6. Operating Expenses - Effective March 1, 1995, Tenant's Share of Direct
------------------
Operating
<PAGE>
Expenses as set forth in and estimated pursuant to Paragraph 6.4 shall increase
from five hundred and no/100's dollars ($500.00) to nine hundred and no/100's
dollars ($900.00).
7. Parking - Effective March 1, 1995, parking for the Premises as set forth in
-------
Paragraph 2.1 shall increase from one hundred forty-four (144) spaces to two
hundred forty-five (245) spaces. One hundred seventy-one (171) spaces are
allocated to the Building known as 3550 Bassett Street, Santa Clara, California,
and seventy-four (74) spaces are allocated to the Building known as 3580 Bassett
Street, Santa Clara, as shown respectively in Exhibits "A2" and
8. Option - At the expiration of the term of the Lease June 30, 1997, Tenant
------
may extend the term of this Lease for an additional period of twenty-four (24)
months commencing following immediately the Expiration Date (the "Extended
Term'). Tenant shall exercise this option, if at all, by giving Landlord notice
of Tenant's intention to do so at least one hundred eighty (180) days prior to
the Expiration Date. In no event shall any purported exercise of such option by
Tenant be effective if (i) an Event of Default (as defined in Paragraph 16.1)
exists at the time of such exercise or at the time the Extended Term would
otherwise have commenced, or (ii) more than three (3) Events of Default have
occurred during the Lease term prior to the date the Extended Term would
otherwise have commenced. Such extended shall be upon all of the terms and
conditions hereof, except that the monthly rental for the Extended Term shall be
fifty thousand eight hundred ninety four ($50,894) dollars. Unless expressly
mentioned and approved in the written consent of Landlord referred to in
Paragraph 15 of Lease, the option rights of Tenant under this paragraph are
granted for Tenant's personal benefit and may not be assigned or transferred by
Tenant.
9. The Addendum dated May 26, 1994 attached to the Lease is null and void and
of no further force or effect. Except as provided herein, all other terms and
conditions of the Lease shall be as previously set forth and are hereby
ratified, affirmed, and in full force and effect.
<PAGE>
[EXHIBIT A2 NOT SHOWN]
<PAGE>
[EXHIBIT A3 NOT SHOWN]
<PAGE>
[EXHIBIT A4 NOT SHOWN]
<PAGE>
ADDENDUM III TO
----------------
THE KONTRABECKI GROUP
---------------------
INDUSTRIAL LEASE
----------------
This Addendum III is executed by and between KONTRABECKI ASSOCIATES I, a
California limited partnership as Landlord, and INTEVAC CORPORATION, a
California Corporation as Tenant with respect to those certain Premises commonly
known as 3550, 3570, and 3580 Bassett Street, Santa Clara, CA. This addendum is
an integral part of the printed lease to which it is attached; provided, the
provisions of this Addendum the III supersede provisions of the printed lease
and the addenda thereto to the extent inconsistent therewith.
1. Premises - Effective August 1, 1995, the term "Premises" as defined in
--------
paragraph 1.3 of the Lease shall be modified to include the area outlined on the
site plan attached hereto as Exhibit "A4" twenty-three containing thousand three
hundred seventy-two (23,372) square feet, known as 3570 Bassett Street Santa
Clara, CA. This area includes an allocable portion of the lobby, common central
corridor, and rest-rooms for the Building known as 3570-3580 Bassett Street,
Santa Clara, CA. Effective August 1, 1995, the Premises Gross Leasable Area
shall be equal to ninety-three thousand five hundred seventy (93,570) square
feet (49,080 square feet plus 44,490 square feet).
2. Term - Tenant hereby exercises its option to extend the lease term for 3550
----
Bassett Street and 3580 Bassett Street as set forth in Addendum II, paragraph 8,
and the Expiration Date is changed to June 30, 1999. The term as set forth in
paragraph 2.2 of the Lease shall be modified as follows:
Address Premises Term Commencement/Expiration Date
- ------- -------- ---- ----------------------------
3580 Bassett 23,372 s.f. 47 months 8/1/95 - 6/30/99
3. Rent - The term "Base Rent" as defined paragraph 3.1 of the Lease shall be
----
modified by the addition of rent for 3570 Street Santa Clara, Bassett CA as
follows:
Term Rent Per Month
---- --------------
8/l/95 - 7/31/98 $21,034.80
8/1/98 - 6/30/99 $25,709.20
4. Operating Expenses - Effective August 1, 1995, Tenant's Share of Direct
------------------
Operating Expenses as set forth in and to Paragraph 6.4 shall increase from nine
hundred and no/100's dollars ($900.00) to one thousand two hundred and no/100's
dollars ($1,200.00).
5. Parking - Effective August 1, 1995, parking for the Premises as set forth
-------
in Paragraph 2.1 shall increase from two hundred forty-five (245) spaces to
three hundred fifteen (315) spaces. One hundred seventy-one (171) spaces are
allocated to the Building known as 3550 Bassett Street, Santa Clara, California,
and one hundred forty four (144) spaces are allocated to the Building known as
3570-3580 Santa Clara, Street, Bassett in Exhibits "A2", "A3", and "A4".
6. Option - At the expiration of the term of the Lease on June 30, 1999,
------
Tenant may extend the term of this Lease for only the Premises known as 3570-
3580 Bassett Street for an additional period of sixty months commencing
following the Expiration Date (the "Extended Term"). Tenant shall exercise this
option, if at all, by giving Landlord notice
<PAGE>
of Tenant's intention to do so at least one hundred eighty (180) days prior to
the Expiration Date. In no event shall any purported exercise of such option by
Tenant be effective if (i) an Event of Default (as defined in Paragraph 16.1)
exists at the time of such exercise or at the time Extended the Term would would
otherwise have commenced, or (ii) more than three (3) Events of Default have
occurred during the Lease term prior to the date the would otherwise have
Extended commenced. Unless expressly mentioned and approved in the expressly
written consent of Landlord referred to in Paragraph 15 of this Lease, the
option rights Tenant under paragraph are granted for Tenant's personal benefit
and may not be assigned or transferred by Tenant Such Extended Term shall be
upon all of the terms and conditions hereof, except that the monthly rental and
method of rental adjustment for the Extended Term shall be determined as set
forth below.
As of the commencement of the Extended Term, the monthly Base Rent and the
method of rental adjustment (including the timing of adjustments and the basis
for calculating the adjustments) for the Extended Term shall be subject to
negotiation between Landlord and Tenant, with an effort to determine a fair
market rental for the Premises, as improved, and a method of rental adjustment
consistent with rental adjustment practices for comparable lease space in the
vicinity of the Premises. In the event the parties fail to agree upon the amount
of the monthly Base Rent and the method of rental adjustment for the Extended
Term prior to commencement thereof, the monthly Base Rent and the method of
rental adjustment for the Extended Term shall be determined by appraisal in the
manner hereafter set forth provided, however, that in no event shall the
monthly Base Rent for the Extended Term be less than the monthly Base Rent
payable hereunder for the last full month of the Lease term immediately
preceding commencement of the Extended Term.
In the event it becomes necessary under this subparagraph to determine the fair
market monthly Base Rent and the method of rental adjustment of the Premises by
appraisal, Landlord and Tenant each shall appoint a real estate appraiser who
shall be a member of the American Institute of Real Estate Appraisers ("AIREA")
and such appraisers shall each determine the fair market monthly Base Rent for
the Premises, and the method of rental
<PAGE>
adjustment taking into account the value of the Premises and the amenities
provided by the Outside Areas, the Building, and prevailing comparable rentals
and rental adjustment practices in the area. 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 monthly Base
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 monthly Base 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 the AIREA and who shall also be experienced in the appraisal of rental
values and adjustment practices for commercial properties in the vicinity of the
Premises. Such third appraiser shall, within twenty (20) business days after his
appointment, determine by appraisal the fair market monthly Base Rent of the
Premises, taking into account the same factors referred to above, and submit
his appraisal report to Landlord and Tenant. The market monthly Base Rent
determined by the third appraiser for the Premises shall be controlling, unless
it 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 appraise 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 appointed
properly 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 the AIREA, which shall appoint a member of said institute willing
to serve as appraiser. The cost of all appraisals under this subparagraph shall
be borne equally by Landlord and Tenant.
7. Except as provided herein all other terms and conditions of the Lease shall
be as previously set forth and are hereby ratified, affirmed, and in full force
and effect.
LANDLORD
KONTRABECKI ASSOCIATES I
By: /s/ J. T. Kontrabecki
Its: General Partner Date: 7/27/95
TENANT
INTEVAC CORPORATION
By: /s/ Signature Illegible
Its: Pres. Date: 7/27/95
<PAGE>
[EXHIBIT A4 NOT SHOWN]
<PAGE>
Addendum IV to
Kontrabecki Group Industrial
Lease dated 5/26/94
Intevac Letterhead
November 8, 1996
To: John Kontrabecki
From: Charley Eddy
Re: Short Term usage of 3580 Bassett Street space
I have a very short term requirement to store finished systems and some assorted
items for about two months prior to shipment overseas. I could store them in my
Mead Street warehouse, but manufacturing prefers not to move them prior to
shipment. It would require about 2,000 square if we could just roll these items
into 3560 Bassett and store them.
I suggest the following:
A two month lease from November 11, 1996 to January 10, 1997 at $0.95 gross
per foot per month, or $3800, for the 2,000 square feet space noted on
Attachment I. The $0.70 is consistent with the rate we discussed in our
8/26 and 8/28 faxes.
$3800 paid upon agreement with this proposal.
If the system shipment is delayed beyond January 10, 1997 then we will pay
prorata rent at the above rate until we vacate.
If you lease the building we will vacate with 2 weeks notice.
Let me know if this works for you. If so, I suggest we use this letter as the
form of the agreement.
/s/ Charley --95 cents and you have a deal. Also, let's attach letter to current
lease and treat it as an addendum. That way I get the benefit of insurance
coverage under lease.
John
John -- agreed -- we can make this addendum 4 to the lease. C. Eddy
<PAGE>
INTEVAC
November 8, 1996
To: John Kontrabecki From: Charley Eddy
Re: Short Term usage of 3560 Bassett Street space
I have a very short term requirement to store finished systems and some assorted
items for about two months prior to shipment overseas. I could store them in my
Mead Street warehouse, but manufacturing prefers not to move them prior to
shipment. It would require about 2,000 square if we could just roll these items
into 3560 Bassett and store them.
I suggest the following:
A two month lease from November 11, 1996 to January 10, 1997 at $0.70 gross
per foot per month, or $2800, for the 2,000 square feet space noted on
Attachment I. The $0.70 is consistent with the rate we discussed in our
8/26 and 8/28 faxes.
$2800 paid upon agreement with this proposal.
If the system shipment is delayed beyond January 10, 1997 then we will pay
prorata rent at the above rate until we vacate.
If you lease the building we will vacate with 2 weeks notice.
Let me know if this works for you. If so, I suggest we use this letter as the
form of the agreement.
Intevac, Inc. 3550 Bassett Street Santa Clara, CA 95054-2704
408/986-9888 FAX 408/727-5739
<PAGE>
[ATTACHMENT I NOT SHOWN]
<PAGE>
ADDENDUM V TO
--------------
THE KONTRABECKI GROUP
---------------------
INDUSTRIAL LEASE
----------------
This Addendum V is executed by and between KONTRABECKI ASSOCIATES I, a
California limited partnership as Landlord, and INTEVAC CORPORATION, a
California Corporation, as Tenant with respect to those certain Premises
commonly known as 3550,3560,3570 and 3580 Bassett Street, Santa Clara, CA. This
addendum is an integral part of the printed lease to which it is attached;
provided, the provisions of this Addendum V supersede the provisions of the
printed lease and the addendum thereto to the extent inconsistent therewith.
1. Premises - Effective April 1, 1997, the term "Premises" as defined in
--------
paragraph 1.3 of the Lease shall be modified to include the area outlined on the
site plan attached hereto as Exhibit "A5" containing seventy three thousand and
ninety three (73,093) square feet. Effective April 1, 1997, the Premises Gross
Leasable Area shall be equal to one hundred sixty seven thousand and sixty three
(167,063) square feet (49,080 square feet plus 44,890 square feet plus 73,093).
2. Term - The term as set forth in paragraph 2.2 of the Lease shall be
----
modified as follows:
Additional Commencement
---------- ------------
Address Premises Term Expiration Date
- ------- -------- ---- ---------------
3570-3580 Bassett St. 44,890 s.f. 33 months 7/l/99-3/31/02
3560 Bassett St. 73,093 s.f. 60 months 4/1/97-3/31/02
3550 Bassett St. 49,080 s.f. 33 months 7/1/99-3/31/02
3. Rent - The term "Base Rent" as defined in paragraph 3.1 of the Lease shall
----
be modified as follows:
Rent - 3560 Bassett Street:
----
Year Rent/Mo/NNN Per Square Foot
---- ----------- ---------------
1 $80,402.30 $1.10 4/1/97 - 3/31/98
2 $82,595.09 $1.13 4/1/98 - 3/31/99
3 $84,787.88 $1.16 4/1/99 - 3/31/00
4 $87,711.60 $1.20 4/1/00 - 3/31/01
5 $89,904.39 $1.23 4/1/02 - 3/31/02
Upon expiration of the original lease terms for 3550, 3570, and 3580 Bassett
Street (June 30, 1999), the new rent, per square foot, will correspond to the
schedule set forth above, so that the rent per square foot is the same each
month for all properties.
4. Operating Expenses - Effective April 1, 1997, Tenant's Share of Direct
------------------
Operating Expense as set forth in and estimated pursuant to Paragraph 6.4 of the
Lease shall increase from one thousand two hundred and no/100's dollars
($1,200.00) to two thousand two hundred and no/100's dollars ($2,200.00).
5. Sublease Rights - Tenant will have the right to sublease the new premises
---------------
in
<PAGE>
accordance with paragraph 15, 15.1 and 15.2 of the original lease. It is
understood that Tenant will have the right to sublease the 3560 Bassett Street
premises solely for the purpose of controlling Tenant's expansion space needs
without Landlord's permission, and without triggering Landlord's termination
rights, providing that any rent received by Tenant that is in excess of Tenant's
rent obligations per square foot hereunder shall be paid to Landlord by Tenant,
after Tenant recovers any costs incurred in subleasing.
6. Option - At the expiration of the term of the Lease on March 31, 2002,
------
Tenant may extend the term of this Lease for the Premises known as 3550, 3560,
3570, and 3580 Bassett Street for an additional period of sixty (60) months
commencing immediately following the Expiration Date (the "Extended Term").
Tenant shall exercise this option, if at all, by giving Landlord notice of
Tenant's intention to do so at least one hundred eighty (180) days prior to the
Expiration Date. In no event shall any purported exercise of such an option by
Tenant be effective if (i) an Event of Default (as defined in Paragraph 16.1)
exist at the time of such exercise or at the time the Extended Term would
commenced, or (ii) more than three (3) Events of Default have occurred during
the Lease term prior to the date the Extended Term would otherwise have
commence. Unless expressly mentioned and approved in the consent of Landlord
referred to in Paragraph 15 of this Lease, the option rights of Tenant under
this paragraph are granted for Tenant's personal benefit and may not be assigned
or transferred by Tenant. Such Extended Term shall be upon all of the terms and
conditions hereof, except that the monthly rental and methods of rental
adjustment for the Term Extended shall be determined as set forth below.
As the commencement of the Extended Term, the monthly Base Rent and the method
of rental adjustment (including the timing of the adjustments and the basis for
calculating the adjustments) for the Extended Term shall be subject to
negotiations between Landlord and Tenant, with an effort to determine a fair
market rental for the Premises, as improved, and a method of rental adjustment
consistent with rental adjustment practices for comparable lease space in the
vicinity of the Premises. In the event the parties fail to agree upon the amount
of the monthly Base Rent and the methods of rental adjustment for the Extended
Term prior to the commencement thereof, the monthly Base Rent and the method of
rental adjustment for the Extended Term shall be determined by appraisal in the
manner hereafter set forth; provided, however, that in no event shall the
monthly Base Rent for the Extended Term be less than the monthly Base Rent
payable hereunder for the last full month of the Lease term immediately
preceding commencement of the Extended Term.
In the event it becomes necessary under this subparagraph to determine the fair
market monthly Base Rent and the method of rental adjustment of the Premises by
appraisal, Landlord and Tenant each shall appoint a real estate appraiser who
shall be a member of the American Institute of Real Estate Appraisers ("AIREA")
and such appraisers
<PAGE>
shall each determine the fair market monthly Base Rent for the Premises, and
the methods of rental adjustments taking into account the value of the premises
and the amenities provided by the Outside Areas, the Building, and prevailing
comparable rentals and rental adjustment practices in the area. 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 monthly Base Rent of the Premises established in the two (2)
appraisals varies by more than five percent (5%) or less of the higher rental,
the average of the two shall be controlling. If said fair market monthly Base
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 appraisers who shall be a member of the AIREA and who shall
also be experienced in the appraisal of rental values and adjustment practices
for commercial properties in the vicinity of the Premises. Such third appraiser
shall, within twenty (20) business days after his appointment, determine by
appraisal the fair market monthly Base 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 monthly Base Rent determined by the third
appraiser for the Premises shall be controlling, unless it is less than set
forth in the lower 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 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 forgoing, the appraisal submitted by
the appraiser properly appointed and timely submitting appraisal shall be
controlling. If the two appraisers appointed by Landlord and Tenant are unable
to agree upon a appraiser within the required period in accordance with the
forgoing, application shall be made within twenty (20) days thereafter by either
Landlord or Tenant to the AIREA, which shall appoint a member of said institute
willing to serve as appraiser. The cost of all appraisals under this
subparagraph be borne equally by Landlord and Tenant.
7. Parking - Effective April 1, 1997, parking for the Premises, as set forth
-------
in Paragraph 2.1 of the Lease, shall increase from three hundred fifteen (315)
spaces to five hundred sixty seven (567) spaces. One hundred seventy one (171)
spaces are allocated to the Building known as 3550 Bassett Street, Santa Clara,
California., two hundred fifty two (252) spaces are allocated to the Building
known as 3560 Bassett Street Santa Clara, California, and one hundred forty four
(144) spaces are allocated to the Building known as 3570-3580 Bassett Street,
Santa Clara, California.
8. Except as provided herein, all other terms and conditions of the Lease
shall be as previously set forth and are hereby ratified, affirmed, and in full
force and effect.
LANDLORD
KONTRABECKI ASSOCIATES I
By: /s/ J.T. Kontrabecki
Its: General Partner Date: 3/18/97
TENANT
INTEVAC CORPORATION
By: /s/ C. Eddy
Its: /s/ CFO Date: 3/19/97
<PAGE>
[EXHIBIT A5 NOT SHOWN]
<PAGE>
[EXHIBIT 15 NOT SHOWN]
<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 Independent Auditors
We consent to the use of our report dated January 16, 1998 in the Registration
Statement (Form S-4) and related Prospectus of Covad Communications Group, Inc.
for the registration of $260,000,000 of 13 1/2% Senior Discount Notes due March
15, 2008, Series B.
/s/ Ernst & Young LLP
San Jose, California
April 24, 1998
<PAGE>
EXHIBIT 25.1
CONFORMED COPY
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [__]
__________________________________
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
__________________________________
COVAD COMMUNICATIONS GROUP, INC.
(Exact name of obligor as specified in its charter)
Delaware 77-0461529
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3560 Bassett Street
Santa Clara, California 95054
(Address of principal executive offices) (Zip code)
______________________
13 1/2% Senior Discount Notes due 2008, Series B
(Title of the indenture securities)
================================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Name Address
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(D).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains
the authority to commence business and a grant of powers to
exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to
Form T-1 filed with Registration Statement No. 33-6215, Exhibits
1a and 1b to Form T-1 filed with Registration Statement No. 33-
21672 and Exhibit 1 to Form T-1 filed with Registration Statement
No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-
44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
<PAGE>
CONFORMED COPY
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 21st day of April, 1998.
THE BANK OF NEW YORK
By: /S/LUCILLE FIRRINCIELI
-------------------------
Name: LUCILLE FIRRINCIELI
Title: VICE PRESIDENT
<PAGE>
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business December 31,
1997, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin.......... $ 5,742,986
Interest-bearing balances.................................... 1,342,769
Securities:
Held-to-maturity securities.................................. 1,099,736
Available-for-sale securities................................ 3,882,686
Federal funds sold and Securities purchased under agreements
to resell.................................................... 2,568,530
Loans and lease financing receivables:
Loans and leases, net of unearned income .................... 35,019,608
LESS: Allowance for loan and lease losses ................... 627,350
LESS: Allocated transfer risk reserve........................ 0
Loans and leases, net of unearned income, allowance, and
reserve.................................................... 34,392,258
Assets held in trading accounts................................ 2,521,451
Premises and fixed assets (including capitalized leases)....... 659,209
Other real estate owned........................................ 11,992
Investments in unconsolidated
subsidiaries and associated companies........................ 226,263
Customers' liability to this bank on acceptances outstanding... 1,187,449
Intangible assets.............................................. 781,684
Other assets................................................... 1,736,574
-----------
Total assets................................................... $56,153,587
===========
LIABILITIES
Deposits:
In domestic offices.......................................... $27,031,362
Noninterest-bearing ......................................... 11,899,507
Interest-bearing ............................................ 15,131,855
In foreign offices, Edge and
</TABLE>
* attach to back of Exhibit 25.1 to be a part of Exhibit 25.1
<PAGE>
<TABLE>
<S> <C>
Agreement subsidiaries, and IBFs............................. 13,794,449
Noninterest-bearing ......................................... 590,999
Interest-bearing ............................................ 13,203,450
Federal funds purchased and Securities
sold under agreements to repurchase.......................... 2,338,881
Demand notes issued to the U.S.
Treasury..................................................... 173,851
Trading liabilities............................................ 1,695,216
Other borrowed money:
With remaining maturity of one year or less.................. 1,905,330
With remaining maturity of more than
one year through three years............................... 0
With remaining maturity of more than three years............. 25,664
Bank's liability on acceptances executed and outstanding....... 1,195,923
Subordinated notes and debentures.............................. 1,012,940
Other liabilities.............................................. 2,018,960
-----------
Total liabilities.............................................. 51,192,576
-----------
EQUITY CAPITAL
Common stock................................................... 1,135,284
Surplus........................................................ 731,319
Undivided profits and capital reserves......................... 3,093,726
Net unrealized holding gains
(losses) on available-for-sale securities.................... 36,866
Cumulative foreign currency translation adjustments............ ( 36,184)
-----------
Total equity capital........................................... 4,961,011
-----------
Total liabilities and equity capital .......................... $56,153,587
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the above-
named bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Renyi ]
Alan R. Griffith ] Directors
J. Carter Bacot ]
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,578
<SECURITIES> 0
<RECEIVABLES> 25
<ALLOWANCES> 0
<INVENTORY> 43
<CURRENT-ASSETS> 4,819
<PP&E> 3,084
<DEPRECIATION> 70
<TOTAL-ASSETS> 8,074
<CURRENT-LIABILITIES> 1,022
<BONDS> 0
4
0
<COMMON> 6
<OTHER-SE> 8,805
<TOTAL-LIABILITY-AND-EQUITY> 8,074
<SALES> 26
<TOTAL-REVENUES> 26
<CGS> 0
<TOTAL-COSTS> 2,998
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 2,317
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,317
<EPS-PRIMARY> .63
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.1
[FORM OF LETTER OF TRANSMITTAL]
COVAD COMMUNICATIONS GROUP, INC.
OFFER FOR ALL OUTSTANDING
13 1/2% SENIOR DISCOUNT NOTES DUE 2008, SERIES A
IN EXCHANGE FOR
13 1/2% SENIOR DISCOUNT NOTES DUE 2008, SERIES B
PURSUANT TO THE PROSPECTUS, DATED _______, 1998.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON _______,
1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
<TABLE>
The Bank of New York
<S> <C> <C>
By Registered or Certified Facsimile Transmission By Hand/Overnight Delivery:
Mail: Number:
Attn.: _______ The Bank of New York
The Bank of New York Reorganization Section 101 Barclay Street
101 Barclay Street, Floor 7E (212) 815-____ Corporate Trust Services
New York, New York 10286 Window
Attn.: _______ (For Eligible Institutions Only) Ground Level
Reorganization Section Confirm by Telephone: New York, New York 10286
(212) 815-____ Attn.: _______
Reorganization Section
For Information Call:
(212) 815-____
</TABLE>
Delivery of this instrument to an address other than as set forth
above, or transmission of instructions via facsimile other than as set forth
above, will not constitute a valid delivery.
The undersigned acknowledges that he or she has received the
Prospectus, dated _______, 1998 (the "Prospectus") of Covad Communications
Group, Inc., a Delaware corporation (the "Company"), and this Letter of
Transmittal (this "Letter of Transmittal"), which together constitute the
Company's offer (the "Exchange Offer") to exchange an aggregate principal amount
at maturity of up to $260,000,000 13 1/2% Senior Discount Notes due 2008, Series
B (the "New Notes") of the Company for a like principal amount at maturity of
the issued and outstanding 13 1/2% Senior Discount Notes due 2008, Series A (the
"Old Notes") of the Company from the holders thereof. Capitalized terms used
herein and not otherwise defined shall have the meanings herein as ascribed
thereto in the Prospectus.
<PAGE>
This Letter of Transmittal is to be used if certificates for the Old
Notes are to be forwarded herewith. If delivery of the Old Notes is to be made
through book-entry transfer into the Exchange Agent's account at The Depository
Trust Company ("DTC"), this Letter of Transmittal need not be delivered;
provided, however, that tenders of the Old Notes must be effected in accordance
with DTC's Automated Tender Offer Program procedures and the procedures set
forth in the Prospectus under the caption "The Exchange Offer--Procedures for
Tender" and "--Book-Entry Transfer; Delivery and Form."
For each Old Note accepted for exchange, the holder of such Old Note
will receive a New Note having a principal amount at maturity equal to that of
the surrendered Old Note. Principal on the New Notes will accrete from the date
of issuance of the New Notes. If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then interest ("Additional Interest") will accrue on the Old Notes and the New
Notes (in addition to the stated interest on the Old Notes and the New Notes)
from and including the date on which any such Registration Default shall occur
to but excluding the date on which all Registration Defaults have been cured.
Additional Interest will accrue at a rate of 0.50% per annum over the rate at
which interest is then otherwise accruing or, as applicable, principal is then
accreting during the 90-day period immediately following the occurrence of any
Registration Default and shall increase by 0.25% per annum at the end of each
subsequent 90- day period, but in no event shall such Additional Interest exceed
2.00% per annum. Holders of Old Notes accepted for exchange will be deemed to
have waived the right to receive any other payments or accrued interest on the
Old Notes. The Company reserves the right, at any time or from time to time, to
extend the Exchange Offer at its discretion, in which event the term "Expiration
Date" shall mean the latest time and date to which the Exchange Offer is
extended. The Company shall notify the holders of the Old Notes of any extension
by means of a press release or other public announcement prior to 9:00 A.M., New
York City time, on the next business day after the previously scheduled
Expiration Date.
This Letter of Transmittal is to be completed by a holder of Old Notes
if certificates are to be forwarded herewith. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates and all other documents required by this Letter of Transmittal or
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's account at DTC (a "Book-Entry Confirmation") to the Exchange Agent on or
prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of
documents to DTC does not constitute delivery to the Exchange Agent.
-2-
<PAGE>
The undersigned has completed the appropriate boxes below and signed
this Letter of Transmittal to indicate the action the undersigned desires to
take with respect to the Exchange Offer.
List below the Old Notes to which this Letter of Transmittal relates.
If the space provided below is inadequate, the certificate numbers and principal
amount at maturity of Old Notes should be listed on a separate signed schedule
affixed hereto.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES 1 2 3
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate
Principal Amount Principal Amount
Name(s) and Address(es) of Registered Holder(s) Certificate at Maturity of at Maturity
(Please fill in, if blank) Number(s) Old Note(s) Tendered*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Total
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unless otherwise indicated in this column, a holder will be deemed to have
transferred ALL of the Old Notes represented by the Old Notes indicated in
column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount at maturity of $1,000 and any integral
multiple thereof. See Instruction 1.
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Registered Holder(s) _______________________________________
Window Ticket Number (if any) _________________________________________
Date of Execution of Notice of Guaranteed Delivery ____________________
Name of Institution which guaranteed delivery _________________________
[_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:___________________________________________________________________________
Address: _____________________________________________________________________
_____________________________________________________________________
-3-
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY AND FOLLOW THE INSTRUCTIONS
BEGINNING ON PAGE 6 HEREOF.
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount at
maturity of Old Notes indicated above. Subject to, and effective upon, the
acceptance for exchange of the Old Notes tendered hereby, the undersigned hereby
sells, assigns and transfers to, or upon the order of, the Company all right,
title and interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving each New Note, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes and that neither the holder of such Old Notes nor
any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that the Exchange Offer is being made in
reliance on an interpretation by the staff of the Securities and Exchange
Commission that the New Notes issued in exchange for the Old Notes pursuant to
the Exchange Offer may be offered for resale, resold or otherwise transferred by
holders thereof (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act; provided, that such New Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangements with any
person to participate in the distribution of such New Notes. If the undersigned
is not a broker-dealer, the undersigned represents that it is not engaged in,
and does not intend to engage in, a distribution of New Notes. If the
undersigned is a broker-dealer that will receive New Notes for its own account
in exchange for Old Notes that were acquired as a result of market-making
activities or other trading activities, it acknowledges that it will deliver a
prospectus in connection with any resale of such New Notes; however, by so
acknowledging and delivering a prospectus, the undersigned will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned
-4-
<PAGE>
and shall not be affected by, and shall survive, the death or incapacity of the
undersigned. This tender may be withdrawn only in accordance with the procedures
set forth in "The Exchange Offer--Withdrawal of Tenders" section of the
Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at DTC. Similarly,
unless otherwise indicated under the box entitled "Special Delivery
Instructions" below, please send the New Notes (and, if applicable, substitute
certificates representing Old Notes for any Old Notes not exchanged) to the
undersigned at the address shown above in the box entitled "Description of Old
Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED
THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
-5-
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Old Notes; Guaranteed Delivery
Procedures.
This Letter of Transmittal is to be completed by holders of Old Notes if
certificates are to be forwarded herewith. Certificates for all physically
tendered Old Notes as well as a properly completed and duly executed Letter of
Transmittal (or manually signed facsimile hereof) and any other documents
required by this Letter of Transmittal must be received by the Exchange Agent at
the address set forth herein on or prior to the Expiration Date, or the
tendering holder must comply with the guaranteed delivery procedures set forth
below. Old Notes tendered hereby must be in denominations of principal amount at
maturity of $1,000 and any integral multiple thereof.
Holders whose certificates for Old Notes are not immediately available or
who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer of the Old Notes into the Exchange Agent's
account at DTC on a timely basis, may tender their Old Notes pursuant to the
guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i)
such tender must be made through an Eligible Institution (as defined below),
(ii) prior to the Expiration Date, the Exchange Agent must receive from such
Eligible Institution a Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the Expiration Date, the
certificates for all physically tendered Old Notes and any other documents
required by this Letter of Transmittal, or a Book-Entry Confirmation, as the
case may be, will be delivered by the Eligible Institution to the Exchange
Agent, and (iii) the Exchange Agent must receive certificates for all physically
tendered Old Notes, in proper form for transfer, and all other documents
required by this Letter of Transmittal, or a Book-Entry Confirmation, as the
case may be, within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
The method of delivery of this Letter of Transmittal, the Old Notes and all
other required documents is at the election and risk of the tendering holders,
but the delivery will be deemed made only when actually received or confirmed by
the Exchange Agent. If Old Notes are sent by mail, it is suggested that the
mailing be made sufficiently in advance of the Expiration Date to permit the
delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
See "The Exchange Offer" section in the Prospectus.
2. Partial Tenders (not applicable to holders who tender by book-entry
transfer).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate principal
amount at maturity of Old Notes to be
-6-
<PAGE>
tendered in the box above entitled "Description of Old Notes--Principal Amount
at Maturity Tendered." A reissued certificate representing the balance of
untendered Old Notes will be sent to such tendering holder, unless otherwise
provided in the appropriate box on this Letter of Transmittal, promptly after
the Expiration Date. All of the Old Notes delivered to the Exchange Agent will
be deemed to have been tendered unless otherwise indicated.
3. Signatures on this Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures.
If this Letter of Transmittal is signed by the registered holder of the Old
Notes tendered hereby, the signature must correspond exactly with the name as
written on the face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
certificates.
When this Letter of Transmittal is signed by the registered holder or
holders of the Old Notes specified herein and tendered hereby, no endorsements
of certificates or separate bond powers are required. If, however, the New Notes
are to be issued, or any untendered Old Notes are to be reissued, to a person
other than the registered holder, then endorsements of any certificates
transmitted hereby or separate bond powers are required. Signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s) and signatures on such certificate(s)
must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
Endorsements on certificates for Old Notes or signatures on bond powers
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States or by such other
-7-
<PAGE>
Eligible Institution within the meaning of Rule 17(A)(d)-15 under the Securities
Exchange Act of 1934, as amended (each an "Eligible Institution").
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of Old Notes (which term, for purposes of the Exchange Offer, includes
any participant in the DTC system whose name appears on a security position
listing as the holder of such Old Notes) tendered who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
this Letter of Transmittal, or (ii) for the account of an Eligible Institution.
4. Special Issuance and Delivery Instructions.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter of
Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. Holders tendering Old Notes by book-entry transfer may request that
Old Notes not exchanged be credited to such account maintained at DTC as such
holder may designate hereon. If no such instructions are given, such Old Notes
not exchanged will be returned to the name and address of the person signing
this Letter of Transmittal.
5. Tax Identification Number.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which in the case of a tendering holder who is an individual, is his or
her social security number. If the Company is not provided with the current TIN
or an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery to
such tendering holder of New Notes may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, or (ii) the
holder has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends, or (iii) the
-8-
<PAGE>
Internal Revenue Service has notified the holder that such holder is no longer
subject to backup withholding. If the tendering holder of Old Notes is a
nonresident alien or foreign entity not subject to backup withholding, such
holder must give the Company a completed Form W-8, Certificate of Foreign Status
included herewith. If the Old Notes are in more than one name or are not in the
name of the actual owner, such holder should consult the W-9 Guidelines for
information on which TIN to report. If such holder does not have a TIN, such
holder should consult the W-9 Guidelines for instructions on applying for a TIN,
check the box in Part 2 of the Substitute Form W-9 and write "applied for" in
lieu of its TIN. Note: Checking this box and writing "applied for" on the form
means that such holder has already applied for a TIN or that such holder intends
to apply for one in the near future. If such holder does not provide its TIN to
the Company within 60 days, backup withholding will begin and continue until
such holder furnishes its TIN to the Company.
6. Transfer Taxes.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanged are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or if tendered Old Notes are registered
in the name of any person other than the person signing this Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
transfer of Old Notes to the Company or its order pursuant to the Exchange
Offer, the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes specified in this Letter of
Transmittal.
7. Waiver of Conditions.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. No Conditional Tenders.
No alternative, conditional, irregular or contingent tenders will be
accepted . All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to reserve notice of the acceptance of their
Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. Mutilated, Lost, Stolen or Destroyed Old Notes.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. Requests for Assistance or Additional Copies.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent, at the address and telephone number indicated
above.
-9-
<PAGE>
- -------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 3 and 4)
To be completed ONLY if certificates for Old Notes
not exchanged and/or New Notes are to be issued in the name
of and sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter of Transmittal above,
or if Old Notes delivered by book-entry transfer which are
not accepted for exchange are to be returned by credit to an
account maintained at DTC other than the account indicated
below.
Issue: New Notes and/or Old Notes to:
Name(s) ...................................................
(Please Type or Print)
...........................................................
(Please Type or Print)
Address ...................................................
...........................................................
(Zip Code)
(Complete Substitute Form W-9)
Credit unexchanged Old Notes for "Debentures"
delivered by book-entry transfer to the DTC account set
forth below.
- ------------------------------------------------------------
(DTC Account Number, if applicable)
- ------------------------------------------------------------
- ------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4)
To be completed ONLY if certificates for Old Notes
not exchanged and/or New Notes are to be issued in the name
of and sent to someone other than the person or persons
whose signature(s) appear(s) on this Letter of Transmittal
below.
Mail: New Notes and/or Old Notes to:
Name(s) ................................................
(Please Type or Print)
........................................................
(Please Type or Print)
Address ................................................
........................................................
(Zip Code)
- ------------------------------------------------------------
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE
CERTIFICATES FOR OLD NOTES) AND ALL OTHER REQUIRED DOCUMENTS HEREBY, A BOOK-
ENTRY CONFIRMATION OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9)
Dated: ............................... ..............................., 1998
x ............................. ..............................., 1998
x ............................ ..............................., 1998
Signature(s) of Owner(s) Date
Area Code and Telephone Number .........................................
If a holder is tendering any Old Notes this Letter of Transmittal must
be signed by the registered holder(s) as the name(s) appear(s) on the
certificate(s) of the Old Notes by any person(s) authorized to become registered
holder(s) by endorsements and documents transmitted herewith. If signature is by
a trustee, executor, administrator, guardian, officer or other person acting in
a fiduciary or representative capacity, please set forth full title. See
Instruction 3.
Name(s): ...............................................................
................................................................................
(Please Type or Print)
Capacity: ..............................................................
Address: ...............................................................
................................................................................
(Including Zip Code)
SIGNATURE GUARANTEE
(if requested by Instruction 3)
Signature Guaranteed by an Eligible Institution ........................
................................................................................
(Title)
................................................................................
(Name and Firm)
- --------------------------------------------------------------------------------
-10-
<PAGE>
================================================================================
SUBSTITUTE FORM W-9
================================================================================
To Be Completed by All Tendering Noteholders
(See Instruction 5)
Sign this Substitute Form W-9 in Addition to the Signature(s) Required Above
PAYOR'S NAME: THE BANK OF NEW YORK
================================================================================
SUBSTITUTE
Form W-9
Department of the Treasury
Internal Revenue Service
Payor's Request for
Taxpayer
Identification Number (TIN)
and Certification
===============================================================================
Part 1-Please provide your TIN (either your social security TIN______________
number or employer identification number) in the box to the
right and certify by signing and dating below.
Part 2-Awaiting TIN |_|
SIGN THIS FORM and THE CERTIFICATION OF
AWAITING TAXPAYER IDENTIFICATION NUMBER BELOW.
Part 3-Exempt |_|
See enclosed Guidelines for additional
information and SIGN THIS FORM.
================================================================================
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) the number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me); or
(2) I am not subject to backup withholding because (i) I am exempt from
backup withholding, or (ii) I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (iii) the
IRS has notified me that I am no longer subject to backup withholding;
and
(3) any other information provided on this form is true and correct.
CERTIFICATION INSTRUCTIONS--You must cross out item (iii) in (2) above if you
have been notified by the IRS that you are subject to backup withholding because
of underreporting interest or dividends on your tax return and you have not been
notified by the IRS that you are no longer subject to backup withholding.
================================================================================
SIGNATURE ______________________________________________ DATE ___________
================================================================================
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE
BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
================================================================================
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all payments made to me on account of the New Notes shall be retained until I
provide a taxpayer identification number to the Exchange Agent and that, if I do
not provide my taxpayer identification number within 60 days, such retained
amounts shall be remitted to the Internal Revenue Service as backup withholding
and 31% of all reportable payments made to me thereafter will be withheld and
remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
SIGNATURE: ________________________________________ DATE: _____________
================================================================================
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER FOR ADDITIONAL INFORMATION.
-11-
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN - The Taxpayer Identification Number for most individuals is your
social security number. Refer to the following chart to determine the
appropriate number:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Give the Give the
SOCIAL EMPLOYER
For this type of SECURITY For this type of IDENTIFICATION
account Number of account Number of
- ------------------------- ------------------------------ -------------------------- --------------------
<S> <C> <C> <C>
1. Individual The individual 6. Sole proprietorship The owner(3)
2. Two or more The actual owner of the 7. A valid trust, Legal entity(4)
individuals (joint account or, if combined estate or pension
account) funds, the first individual trust
on the account(1)
8. Corporate The corporation
3. Custodian account The minor(2)
of a minor (Uniform 9. Association, club, The organization
Gift to Minors Act) religious,
charitable,
4. a. The usual The grantor-trustee(1) educational or
revocable other tax-exempt
savings trust organization
(grantor is also
trustee) 10. Partnership The partnership
b. So-called trust The actual owner(1) 11. A broker or The broker or nominee
account that is registered nominee
not a legal or
valid trust under 12. Account with the The public entity
state law Department of
Agriculture
5. Sole proprietorship The owner(3)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or
"doing business as" name. You may use either your Social Security number
or your employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
Note: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
B. Exempt Payees -- The following lists exempt payees. If you are exempt,
you must nonetheless complete the form and provide your TIN in order to
establish that you are exempt. Check the box in Part 3 of the form, sign
and date the form.
For this purpose, Exempt Payees include: (1) a corporation; (2) an
organization exempt from tax under section 501(a), or an individual
retirement plan (IRA) or a custodial account under section 403(b)(7); (3)
the United States or any of its agencies or instrumentalities; (4) a
state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities; (5) a foreign
government or any of its political subdivisions, agencies or
instrumentalities; (6) an international organization or any of its
agencies or instrumentalities; (7) a foreign central bank of issue; (8) a
dealer in securities or commodities required to register in the United
States or a possession of the United States; (9) a real estate investment
trust; (10) an entity registered at all times during the tax year under
the Investment Company Act of 1940; (11) a common trust fund operated by
a bank under section 584(a); and (12) a financial institution.
C. Obtaining a Number
If you do not have a taxpayer identification number or you do not know
your number, obtain Form SS-5, application for a Social Security Number,
or Form SS-4, Application for Employer Identification Number, at the
local office of the Social Security Administration or the Internal
Revenue Service and apply for a number.
D. Privacy Act Notice
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payors who must
report the payments to IRS. IRS uses the numbers for identification
purposes. Payors must be given the numbers whether or not recipients are
required to file tax returns. Payors must generally withhold 31% of
taxable-interest, dividend, and certain other payments to a payee who
does not furnish a taxpayer identification number. Certain penalties may
also apply.
E. Penalties
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payor, you are
subject to a penalty of $50 for each such failure unless your failure is
due to reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail
to include any portion of an includible payment for interest, dividends,
or patronage dividends in gross income, such failure will be treated as
being due to negligence and will be subject to a penalty of 5% on any
portion of an under-payment attributable to that failure unless there is
clear and convincing evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If
you make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
-12-
<PAGE>
EXHIBIT 99.2
COVAD COMMUNICATIONS GROUP, INC.
[FORM OF NOTICE OF GUARANTEED DELIVERY]
This form or one substantially equivalent hereto must be used to accept the
offer for all outstanding 13 1/2% Senior Discount Notes due 2008, Series A (the
"Old Notes") of Covad Communications Group, Inc. (the "Company") in exchange for
the Company's 13 1/2% Senior Discount Notes due 2008, Series B made pursuant to
the prospectus, dated _________, 1998 (the "Prospectus") and the related letter
of transmittal (the "Letter of Transmittal"), if (i) certificates for Old Notes
are not immediately available, (ii) the Old Notes, the Letter of Transmittal and
all other required documents cannot be delivered or transmitted by facsimile
transmission, mail or hand delivery to The Bank of New York (the "Exchange
Agent") as set forth below on or prior to 5:00 P.M., New York City time, on the
Expiration Date, or (iii) the procedures for delivery of the Old Notes through
book-entry transfer into the Exchange Agent's account at The Depository Trust
Company ("DTC") in accordance with DTC's Automated Tender Offer Program cannot
be completed on a timely basis. See "The Exchange Offer--Procedures for
Tendering" section in the Prospectus. Capitalized terms not defined herein are
defined in the Prospectus.
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Registered or Certified Facsimile Transmission By Hand/Overnight Delivery:
Mail: Number:
Attn.: __________ The Bank of New York
The Bank of New York Reorganization Section 101 Barclay Street
101 Barclay Street, Floor 7E (212) 815-____ Corporate Trust Services
New York, New York 10286 Window
Attn.: __________ (For Eligible Institutions Only) Ground Level
Reorganization Section Confirm by Telephone: New York, New York 10286
(212) 815-____ Attn.: _________
Reorganization Section
For Information Call:
(212) 815-____
</TABLE>
Delivery of this instrument to an address other than as set forth above, or
transmission of instructions via facsimile other than as set forth above, will
not constitute a valid delivery.
<PAGE>
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the Letter of
Transmittal, the undersigned hereby tenders to the Company the principal amount
at maturity of Old Notes set forth below, pursuant to the guaranteed delivery
procedures described in "The Exchange Offer--Guaranteed Delivery Procedures"
section of the Prospectus.
Principal Amount At Maturity of Old Notes If Old Notes will be delivered by
Tendered:/1/ book-entry transfer into Exchange
Agent's account with The Depository
Trust Company, provide account
number:
$________________________________________ Account Number_____________________
Certificate Nos. (if available):
_________________________________________
Total Principal Amount at Maturity
Represented by Old Notes Certificate(s):
$________________________________________
________________________________________________________________________________
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
________________________________________________________________________________
/1/Must be in denominations of principal amount at maturity of $1,000 and
any integral multiple thereof.
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<PAGE>
PLEASE SIGN HERE
X_________________________________ ________________________
X_________________________________ ________________________
Signature(s) of Owner(s) or Date
Authorized Signatory
Area Code and Telephone Number: ________________
Must be signed by the holder(s) of the Old Notes as their name(s)
appear(s) on certificates for Old Notes or on a security position listing, or by
person(s) authorized to become registered holder(s) by endorsement and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must set
forth his or her full title below.
Please print name(s) and address(es)
Name(s): _________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Capacity: _________________________________________________________________
Address(es): _________________________________________________________________
_________________________________________________________________
_________________________________________________________________
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<PAGE>
GUARANTEE
The undersigned, an Eligible Institution within the meaning of Rule
17(A)(d)-15 under the Securities Exchange Act of 1934, as amended, hereby
guarantees that (i) the certificates representing the principal amount at
maturity of Old Notes tendered hereby, in proper form for transfer, together
with a properly completed and duly executed Letter of Transmittal (or a manually
signed facsimile thereof), any required signature guarantee and any other
documents required by the Letter of Transmittal, or (ii) timely confirmation of
the book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC pursuant to the procedures set forth in "The Exchange Offer--Book-Entry
Transfer; Delivery and Form" section of the Prospectus, will be received by the
Exchange Agent at the address set forth above, no later than three New York
Stock Exchange trading days after the date of execution hereof.
_________________________________ _________________________________
Name of Firm Authorized Signature
________________________________ _________________________________
Address Title
________________________________ Name:_____________________________
Zip Code (Please Type or Print)
Area Code & Telephone No._______ Dated:____________________________
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
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<PAGE>
EXHIBIT 99.3
[FORM OF EXCHANGE AGENT AGREEMENT]
As of ______, 1998
The Bank of New York
Corporate Trust Trustee Administration
101 Barclay Street, 21st Floor
New York, New York 10286
Ladies and Gentlemen:
Covad Communications Group, Inc. (the "Company") proposes to make an offer
(the "Exchange Offer") to exchange its 13 1/2% Senior Discount Notes due 2008,
Series A (the "Old Securities") for its 13 1/2% Senior Discount Notes due 2008,
Series B (the "New Securities"). The terms and conditions of the Exchange Offer
as currently contemplated are set forth in a prospectus, dated _______, 1998
(the "Prospectus"), proposed to be distributed to all record holders of the Old
Securities.
The Company hereby appoints The Bank of New York to act as exchange agent
(the "Exchange Agent") in connection with the Exchange Offer. References
hereinafter to "you" shall refer to The Bank of New York.
The Exchange Offer is expected to be commenced by the Company on or
promptly after _______, 1998. The Letter of Transmittal accompanying the
Prospectus (the "Letter of Transmittal") or, in the case of book-entry transfer
of the Old Securities into your account at The Depository Trust Company ("DTC"),
DTC's Automated Tender Offer Program, is to be used by the holders of the Old
Securities to accept the Exchange Offer. The Letter of Transmittal contains
instructions with respect to the delivery of certificates for Old Securities
tendered in connection with the Exchange Offer.
The Exchange Offer shall expire at 5:00 P.M., New York City time, on the
date specified in the Prospectus or on such later date or time to which the
Company may extend the Exchange Offer (the "Expiration Date"). Subject to the
terms and conditions set forth in the Prospectus, the Company expressly reserves
the right to extend the Exchange Offer from time to time and may extend the
Exchange Offer by giving oral (confirmed in writing) or written notice to you
before 9:00 A.M., New York City time, on the business day following the
previously scheduled Expiration Date.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Securities not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified in the Prospectus under the caption "The Exchange
Offer--Conditions." The Company will give oral (confirmed in writing) or written
notice of any amendment, termination or nonacceptance to you as promptly as
practicable.
In carrying out your duties as Exchange Agent, you are to act in accordance
with the following instructions:
<PAGE>
1. You will perform such duties and only such duties as are specifically
set forth in the section of the Prospectus captioned "The Exchange Offer", or as
specifically set forth herein; provided, however, that in no way will your
general duty to act in good faith be discharged by the foregoing.
2. You will establish an account with respect to the Old Securities at
DTC for purposes of the Exchange Offer within two business days after the date
of the Prospectus, and any financial institution that is a participant in DTC's
systems may make book-entry delivery of the Old Securities by causing DTC to
transfer such Old Securities into your account in accordance with DTC's
Automated Tender Offer Program procedures for such transfer.
3. You are to examine each of the Letters of Transmittal and certificates
for Old Securities and any other documents delivered or mailed to you by or for
holders of the Old Securities to ascertain whether: (i) the Letters of
Transmittal and any such other documents are duly executed and properly
completed in accordance with instructions set forth therein and (ii) the Old
Securities have otherwise been properly tendered. In each case where the Letter
of Transmittal or any other document has been improperly completed or executed
or any of the certificates for Old Securities are not in proper form for
transfer or some other irregularity in connection with the acceptance of the
Exchange Offer exists, you will endeavor to inform the presenters of the need
for fulfillment of all requirements and to take any other action as may be
necessary or advisable to cause such irregularity to be corrected.
4. With the approval of the President or any Vice President of the
Company (such approval, if given orally, to be confirmed in writing) or any
other party designated by such an officer in writing, you are authorized to
waive any irregularities in connection with any tender of Old Securities
pursuant to the Exchange Offer.
5. Tenders of Old Securities may be made only as set forth in the Letter
of Transmittal and in the section of the Prospectus captioned "The Exchange
Offer", and Old Securities shall be considered properly tendered to you only
when tendered in accordance with the procedures set forth therein.
Notwithstanding the provisions of this paragraph 5, Old Securities which
the President or any Vice President of the Company shall approve as having been
properly tendered shall be considered to be properly tendered (such approval, if
given orally, shall be confirmed in writing).
6. You shall advise the Company with respect to any Old Securities
received subsequent to the Expiration Date and accept its instructions with
respect to disposition of such Old Securities.
7. You shall accept tenders:
(a) in cases where the Old Securities are registered in two or more
names only if signed by all named holders;
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<PAGE>
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only when
proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Old Securities;
provided, that customary transfer requirements, including any applicable
transfer taxes, are fulfilled.
You shall accept partial tenders of Old Securities where so indicated and
as permitted in the Letter of Transmittal and deliver certificates for Old
Securities to the transfer agent for split-up and return any untendered Old
Securities to the holder (or such other person as may be designated in the
Letter of Transmittal) as promptly as practicable after expiration or
termination of the Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will notify you (such notice if given orally, to be confirmed
in writing) of its acceptance, promptly after the Expiration Date, of all Old
Securities properly tendered and you, on behalf of the Company, will exchange
such Old Securities for New Securities and cause such Old Securities to be
canceled. Delivery of New Securities will be made on behalf of the Company by
you at the rate of $1,000 principal amount at maturity of New Securities for
each $1,000 principal amount at maturity of the corresponding series of Old
Securities tendered promptly after notice (such notice if given orally, to be
confirmed in writing) of acceptance of said Old Securities by the Company;
provided, however, that in all cases, Old Securities tendered pursuant to the
Exchange Offer will be exchanged only after timely receipt by you of
certificates for such Old Securities and a properly completed and duly executed
Letter of Transmittal (or facsimile thereof) with any required signature
guarantees and any other required documents, or confirmations from DTC of book-
entry transfers of such Old Securities into your account at DTC, as the case may
be. You shall issue New Securities only in denominations of $1,000 or any
integral multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and upon the conditions set forth in the Prospectus and the
Letter of Transmittal, Old Securities tendered pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date.
10. The Company shall not be required to exchange any Old Securities
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Old Securities
tendered shall be given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Old Securities tendered because of an invalid
tender, the occurrence of certain other events set forth in the Prospectus under
the caption "The Exchange Offer--Conditions" or otherwise, you shall as soon as
practicable after the expiration or termination of the Exchange Offer return
those certificates for unaccepted Old Securities, together with any related
required documents and the
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<PAGE>
Letters of Transmittal relating thereto that are in your possession, to the
persons who deposited them, or effect appropriate book-entry transfer, as the
case may be.
12. All certificates for reissued or unaccepted Old Securities or for New
Securities shall be forwarded by (a) first-class certified mail, return receipt
requested under a blanket surety bond protecting you and the Company from loss
or liability arising out of the non-receipt or non-delivery of such certificates
or (b) by registered mail insured separately for the replacement value of each
of such certificates.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank or other person or
to engage or utilize any person to solicit tenders.
14. As Exchange Agent hereunder you:
(a) shall have no duties or obligations other than those specifically
set forth herein or as may be subsequently agreed in writing by you and the
Company;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness of any of
the certificates or the Old Securities represented thereby deposited with you
pursuant to the Exchange Offer, and will not be required to and will make no
representation as to the validity, value or genuineness of the Exchange Offer;
(c) shall not be obligated to take any legal action hereunder which
might in your reasonable judgment involve any expense or liability, unless you
shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you to be
genuine and to have been signed by the proper party or parties;
(e) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution and
validity and effectiveness of its provisions, but also as to the truth and
accuracy of any information contained therein, which you shall in good faith
believe to be genuine or to have been signed or represented by a proper person
or persons;
(f) may rely on and shall be protected in acting upon written or oral
instructions from any officer of the Company;
(g) may consult with your counsel with respect to any questions
relating to your duties and responsibilities and the advice or opinion of such
counsel shall be full and complete
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<PAGE>
authorization and protection in respect of any action taken, suffered or omitted
to be taken by you hereunder in good faith and in accordance with the advice or
opinion of such counsel; and
(h) shall not advise any person tendering Old Securities pursuant to
the Exchange Offer as to the wisdom of making such tender or as to the market
value or decline or appreciation in market, value of any Old Securities.
15. You shall take such action as may from time to time be requested by
the Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, the Letter of Transmittal and
the Notice of Guaranteed Delivery (as defined in the Prospectus) or such other
forms as may be approved from time to time by the Company, to all persons
requesting such documents and to accept and comply with telephone requests for
information relating to the Exchange Offer; provided, that such information
shall relate only to the procedures for accepting (or withdrawing from) the
Exchange Offer. The Company will furnish you with copies of such documents at
your request. All other requests for information relating to the Exchange Offer
shall be directed to the Company, Attention: Chief Financial Officer.
16. You shall advise by facsimile transmission or telephone, and promptly
thereafter confirm in writing to the Chief Financial Officer of the Company and
such other person or persons as it may request, daily (and more frequently
during the week immediately preceding the Expiration Date and if otherwise
requested) up to and including the Expiration Date, as to the number of Old
Securities which have been tendered pursuant to the Exchange Offer and the items
received by you pursuant to this Agreement, separately reporting and giving
cumulative totals as to items properly received and items improperly received.
In addition, you will also inform, and cooperate in making available to, the
Company or any such other persons, upon oral request made from time to time
prior to the Expiration Date, such other information as such other persons
reasonably request. Such cooperation shall include, without limitation, the
grant by you to the Company, and such persons as the Company may request, of
access to those persons on your staff who are responsible for receiving tenders,
in order to ensure that immediately prior to the Expiration Date the Company
shall have received information in sufficient detail to enable it to decide
whether to extend the Exchange Offer. You shall prepare a final list of all
persons whose tenders were accepted, the aggregate principal amount at maturity
of Old Securities tendered and the aggregate principal amount at maturity of Old
Securities accepted and deliver said list to the Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery shall be
stamped by you as to the date and the time of receipt thereof and shall be
preserved by you for a period of time at least equal to the period of time you
preserve other records pertaining to the transfer of securities. You shall
dispose of unused Letters of Transmittal and other surplus materials by
returning them to the Company.
18. You hereby expressly waive any lien, encumbrance or right of set-off
whatsoever that you may have with respect to funds deposited with you for the
payment of transfer taxes by reason of amounts, if any, borrowed by the Company,
or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder.
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<PAGE>
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter of
Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus and
the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except with
respect to the duties, liabilities and indemnification of you as Exchange Agent,
which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you harmless in
your capacity as Exchange Agent hereunder against any loss, liability, cost or
expense, including reasonable attorneys' fees and expenses, arising out of or in
connection with any act, omission, delay or refusal made by you in reliance upon
any signature, endorsement, assignment, certificate, order, request, notice,
instruction or other instrument or document reasonably believed by you to be
valid, genuine and sufficient and in accepting any tender or effecting any
transfer of Old Securities reasonably believed by you in good faith to be
authorized, and in delaying or refusing in good faith to accept any tenders or
effect any transfer of Old Securities; provided, however, that the Company shall
not be liable for indemnification or otherwise for any loss, liability, cost or
expense to the extent arising out of your gross negligence or willful
misconduct. In no case shall the Company be liable under this indemnity with
respect to any claim against you unless the Company shall be notified by you, by
letter or by facsimile confirmed by letter, of the written assertion of a claim
against you or of any other action commenced against you, promptly after you
shall have received any such written assertion or notice of commencement of
action. The Company shall be entitled to participate at its own expense in the
defense of any such claim or other action, and, if the Company so elects, the
Company shall assume the defense of any suit brought to enforce any such claim.
In the event that the Company shall assume the defense of any such suit, the
Company shall not be liable for the fees and expenses of any additional counsel
thereafter retained by you so long as the Company shall retain counsel
satisfactory to you to defend such suit.
22. You shall arrange to comply with all requirements under the tax laws
of the United States, including those relating to missing Tax Identification
Numbers, and shall file any appropriate reports with the Internal Revenue
Service. The Company understands that you are required to deduct 31% on payments
to holders who have not supplied their correct Taxpayer Identification Number or
required certification. Such funds will be turned over to the Internal Revenue
Service in accordance with applicable regulations.
23. You shall deliver or cause to be delivered, in a timely manner to each
governmental authority to which any transfer taxes are payable in respect of the
exchange of Old Securities, your check in the amount of all transfer taxes so
payable, and the Company shall reimburse you for the amount of any and all
transfer taxes payable in respect of the exchange of Old Securities; provided,
however, that you shall reimburse the Company for amounts refunded to you in
respect of your payment of any such transfer taxes, at such time as such refund
is received by you.
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<PAGE>
24. This Agreement and your appointment as Exchange Agent hereunder shall
be construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such state,
and without regard to conflicts of law principles, and shall inure to the
benefit of, and the obligations created hereby shall be binding upon, the
successors and assigns of each of the parties hereto.
25. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
26. In case any provision of this Agreement 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.
27. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. This Agreement may not be modified orally.
28. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing) and shall be given to such party, addressed to it, at its
address or telecopy number set forth below:
If to the Company:
Covad Communications Group
3560 Bassett Street
Santa Clara, California 95054
Facsimile: (408) 490-4501
Attention: Chief Financial Officer
If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile: (212) 815-
Attention: Corporate Trust Trustee Administration
29. Unless terminated earlier by the parties hereto, this Agreement shall
terminate 90 days following the Expiration Date. Notwithstanding the foregoing,
paragraphs 19, 21 and 23 shall survive the termination of this Agreement. Upon
any termination of this Agreement, you shall
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<PAGE>
promptly deliver to the Company any certificates for Old Securities and New
Securities, funds or property then held by you as Exchange Agent under this
Agreement.
30. This Agreement shall be binding and effective as of the date hereof.
[Remainder of page intentionally left blank.]
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<PAGE>
Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy.
COVAD COMMUNICATIONS GROUP, INC.
By:_________________________________
Name:
Title:
Accepted as of the date
first above written:
THE BANK OF NEW YORK,
as Exchange Agent
By: ___________________________
Name:
Title:
<PAGE>
SCHEDULE I
FEES
