<PAGE>
As filed with the Securities and Exchange Commission on April 9, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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>
<S> <C> <C>
Delaware 4813 77-0461529
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of
incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
2330 Central Expressway, Santa Clara, California 95050 (408) 844-7500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
ROBERT E. KNOWLING, JR. President and Chief Executive Officer Covad
Communications Group, Inc. 2330 Central Expressway, Santa Clara, California
95050 (408) 844-7500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Barry E. Taylor, Esq.
Robert G. O'Connor, Esq.
Charles J. Prober, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G. check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering price Offering Registration
Registered Registered Per Unit(1) Price(1) Fee
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 1/2% Senior Notes due
2009.................. $215,000,000 100% $215,000,000 $59,770
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. this prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities and it is not soliciting an offer to buy these securities in any +
+state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED APRIL 9, 1999
PROSPECTUS
Covad Communications Group, Inc.
Offer to Exchange All Outstanding 12 1/2% Senior Notes due February 15, 2009
for 12 1/2% Senior Notes due February 15, 2009, Which Have Been Registered
Under the Securities Act of 1933
The exchange offer will expire at 5:00 P.M., New York City time, on , 1999,
unless we extend the deadline.
Terms of the New Notes
. The terms of the new notes are substantially identical to those of the old
notes, except for certain transfer restrictions and registration rights
relating to the old notes.
. The new notes will bear interest at a fixed annual rate of 12 1/2%. Interest
on the new notes will be paid every six months on February 15 and August 15,
beginning August 15, 1999.
. We used approximately $74.0 million of the net proceeds from the offering of
the old notes to purchase government securities to secure the payment of the
first six scheduled interest payments on the new notes.
. The new notes will mature on February 15, 2009.
. The new notes will rank equally with all of our existing and future senior
debt. The new notes will rank senior to all of our existing and future
subordinated debt. The new notes will be effectively subordinated to our
subsidiaries' existing and future debt and other liabilities.
. We may redeem the new notes at any time on or after February 15, 2004. See
page 83 for redemption prices. Before February 15, 2002, we may redeem up to
35% of the new notes at 112.50% with the proceeds of public equity offerings.
. No public market currently exists for the new notes. We do not expect that an
active public market in the new notes will develop. We do not intend to list
the new notes on any securities exchange or on the Nasdaq National Market.
Terms of the Exchange Offer
. We will exchange all old notes that are validly tendered and not withdrawn
prior to the expiration of the exchange offer.
. We will not receive any proceeds from the exchange offer.
. We will issue the new notes promptly after the expiration of the exchange
offer.
. You may withdraw tenders of original notes at any time prior to the
expiration of the exchange offer.
. We believe that the exchange of old notes will not be a taxable event for
federal income tax purposes, but you should see "Federal Income Tax
Considerations" on page 116 for more information.
We are mailing this prospectus and the letter of transmittal on , 1999.
See the "Risk Factors" section on page 10 for information that you should
consider before you decide to participate in this exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" beginning on
page 10, carefully.
Overview of Our Business
We are a leading high-speed Internet and network access provider offering
digital subscriber line (DSL) services to Internet service provider and
enterprise customers. Internet service providers purchase our services in order
to provide high-speed Internet access to their business and consumer end-users.
Enterprise customers purchase our services to provide employees with remote
access to the enterprise's local area networks to improve employee productivity
and reduce operating costs. We refer to such services as remote local area
network (RLAN) services.
We believe our services offer a superior value proposition as compared to
currently available high-speed Internet and network access alternatives. Our
services are provided over standard copper telephone lines at speeds of up to
1.5 megabits per second (Mbps), which is over 25 times faster than a 56.6
kilobits per second (Kbps) modem. As of January 31, 1999 we had installed over
4,000 DSL lines and received orders for our services from over 100 Internet
service provider and enterprise customers, including Cisco Systems, Concentric
Network, Epoch Networks, Oracle, PeopleSoft, Stanford University, Verio and
Whole Earth Networks.
We have introduced our services in the following metropolitan areas:
<TABLE>
<CAPTION>
April
December 1997 August 1998 December 1998 March 1999 1999
------------- ----------- ------------- ---------- -----
<S> <C> <C> <C> <C>
San Francisco Bay Area Los Angeles Washington, D.C. Philadelphia Baltimore
New York Seattle Sacramento
Boston
</TABLE>
In March 1998, we raised approximately $135 million through the issuance of
13 1/2% senior discount notes due 2008 to fund the initial deployment of our
networks. As a result of the strong market demand for high-speed Internet and
network access, we plan to build our networks and offer our services in 22
regions nationwide. We estimate that when complete, our networks in these 22
regions will enable us to provide service to over 28 million homes and
businesses in 28 of the top 50 metropolitan statistical areas in the United
States.
In January 1999, we entered into strategic relationships with AT&T Corp.,
NEXTLINK Communications, Inc. and Qwest Communications Corporation. As part of
these strategic relationships, we received equity investments of $25 million
from AT&T's venture capital arm and two affiliated funds, $20 million from
NEXTLINK and $15 million from Qwest. Furthermore, these strategic investors
each entered into commercial agreements with us providing for the purchase,
marketing and resale of our services, the purchase by us of fiber optic
transport bandwidth, and collocation of network equipment.
On January 27, 1999, we completed the initial public offering of 8,970,000
shares of common stock at an initial public offering price of $18.00 per share.
We received net proceeds from the initial public offering of $150.2 million
after deducting underwriting discounts and commissions and estimated offering
expenses.
On February 18, 1999, we completed the offering of 12 1/2% senior notes due
2009 with an aggregate principal amount of $215 million. We received net
proceeds of $205.1 million from this offering, $74.0 million of which was used
to purchase pledged securities to secure the payment of the first six scheduled
interest payments on these notes.
1
<PAGE>
Market Opportunity
We were formed to capitalize on the substantial business opportunity created
by:
. the growing demand for Internet and network access;
. the commercial availability of low cost DSL technology; and
. the passage of the 1996 Telecommunications Act.
There is a growing market demand for high-speed digital communications
services. As businesses increase their use of the Internet, intranets and
extranets, we expect the market size for both small- and medium-sized business
Internet and RLAN access to continue to grow rapidly. According to
International Data Corporation, the number of Internet users worldwide reached
approximately 69 million in 1997 and will grow to approximately 320 million by
2002. International Data Corporation also estimates that the value of goods and
services sold worldwide through the Internet will increase from $12 billion in
1997 to over $400 billion in 2002. High-speed digital connections are becoming
increasingly important to businesses and consumers as more high bandwidth
information and applications become available on the Internet. Industry
analysts also 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%.
DSL is emerging as an inexpensive alternative high-speed digital
communications technology. The full potential of Internet and RLAN applications
cannot be realized without removing the performance bottlenecks of the existing
public switched telephone network. DSL technology removes these performance
bottlenecks by increasing the data carrying capacity of the copper telephone
lines from analog modem speeds of 56.6 Kbps and integrated services digital
network (ISDN) speeds of 128 Kbps to DSL speeds of up to 6 Mbps. Because DSL
technology reuses the existing copper plant, DSL technology is significantly
less expensive to deploy on a broad scale than existing alternative high-speed
digital communications technologies, such as cable modems, wireless data and
satellite data. As a result, a significant portion of the investment in a DSL
network is success-based, which means that such networks require a
comparatively lower initial fixed investment and that the subsequent variable
investments in DSL electronics are directly related to the number of paying
end-users.
The passage of the 1996 Telecommunications Act facilitates competition by
competitive local exchange carriers. The passage of the 1996 Telecommunications
Act created a legal framework for competitive local exchange carriers (CLECs)
to provide local analog and digital communications services in competition with
the incumbent local exchange carriers (ILECs). The 1996 Telecommunications Act
eliminated a substantial barrier to entry for CLECs by enabling them to
leverage the existing infrastructure built by the ILECs, which required a $200
billion investment by ILECs and ILEC ratepayers, rather than constructing a
competing infrastructure at significant cost. The 1996 Telecommunications Act
in particular emphasized the need for competition-driven innovations in the
deployment of advanced telecommunications services, such as our DSL services.
Our Competitive Strengths
We offer higher bandwidth digital connections than alternative services at
similar or lower prices that do not vary with usage. For business Internet
users, our high-end services offer comparable bandwidth to T1 and frame relay
circuits at approximately 25% of the cost. For the RLAN market, our 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. We believe that many of our 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. For consumer Internet
users, we expect that we will offer consumer-grade services at prices
comparable to prices offered by cable modem services.
2
<PAGE>
We provide our customers with a widely available, continuously connected and
secure network. Our strategy of providing blanket coverage in each region we
serve is designed to ensure that our services are available to the vast
majority of our customers' end-users. Our networks provide 24-hour continuous
connectivity, unlike ISDN lines and analog modems which require customers to
dial-up each time for Internet or RLAN access. Also, because we use dedicated
connections from each end-user to the Internet service provider or enterprise
network, our customers can reduce the risk of unauthorized access.
Our management team has extensive industry experience. Our management team
includes individuals with extensive experience in the data communications,
telecommunications and personal computer industries. In July 1998, we hired as
our Chief Executive Officer Robert Knowling, Jr., who formerly served as the
Executive Vice President of Operations and Technologies at U S WEST
Communications and as Vice President of Network Operations at Ameritech. We
also have in place Regional Presidents to cover all 22 of our regions.
Our Business Strategy
The key elements of our strategy are:
. to secure CLEC status and sign interconnection agreements for the top
U.S. markets;
. to enter and roll out our service rapidly in our target regions to
maintain our first-mover advantage;
. to provide blanket coverage in each of our 22 targeted regions;
. to focus on packet-based services;
. to concentrate our sales efforts on Internet service provider and
enterprise customers that can provide a large number of end-users;
. to leverage the success-based economics of DSL technology;
. to establish relationships with leading Internet service providers,
systems integrators, other CLECs and long-distance carriers in order to
expand our distribution channels and accelerate the sale of our services;
and
. to provide a superior and comprehensive product and service solution that
includes line installation, equipment sale and configuration.
3
<PAGE>
The Exchange Offer
Old Notes............... On February 18, 1999, we completed the offering of
$215 million aggregate principal amount of our 12
1/2% senior notes due 2009 to Bear, Stearns & Co.
Inc., BT Alex. Brown Incorporated, Donaldson, Lufkin
& Jenrette Securities Corporation and Goldman, Sachs
& Co., as initial purchasers. The initial purchasers
sold the old notes to "qualified institutional buy-
ers" as defined in Rule 144A under the Securities Act
of 1933. We have filed the registration statement of
which this prospectus is a part to comply with a reg-
istration rights agreement between us and the initial
purchasers.
Exchange Offer.......... We are offering to exchange the old notes for new
notes in the aggregate principal amount of up to $215
million provided that the old notes are properly
tendered and accepted for exchange. We will issue the
new notes promptly after the expiration of the
exchange offer. If you were not prohibited from
participating in the exchange offer and you did not
tender your old notes prior to the completion of the
exchange offer, you will have no further exchange
rights under the registration rights agreement.
Accordingly, such non-tendered old notes will
continue to be subject to restrictions on transfer.
Expiration Date......... The exchange offer will expire at 5:00 p.m., New York
City time, on , 1999, or on a later extended date
and time as we may decide.
Conditions to the
Exchange Offer..........
The exchange offer is subject to certain customary
conditions. The conditions are limited and relate in
general to proceedings or laws that might impair our
ability to proceed with the exchange offer. As of the
date of this prospectus, none of these events had oc-
curred, and we believe their occurrence to be unlike-
ly. If any such conditions do exist prior to the ex-
piration date, we may take the following actions:
. refuse to accept any old notes and return all
previously tendered old notes;
. extend the duration of the exchange offer; or
. waive such conditions.
Procedures for
Tendering Old Notes.....
If you wish to participate in the exchange offer, you
must complete, sign and date the letter of transmit-
tal and send it, together with your old notes to be
exchanged and any other required documentation to The
Bank of New York, as exchange agent, at the address
set forth in the letter of transmittal. Brokers,
dealers, commercial banks, trust companies and other
nominees may tender old notes which they hold as nom-
inee by book-entry transfer. Questions regarding the
tender of the old notes or the exchange offer, gener-
ally, must be directed to the exchange agent.
Special Procedures for
Beneficial Owners.......
If you are the beneficial owner of old notes which
are registered in the name of a broker, dealer,
commercial bank, trust company or other
4
<PAGE>
nominee and you wish to tender the old notes in the
exchange offer, you should contact such registered
holder promptly and instruct such registered holder
to tender the old notes on your behalf. If you wish
to tender on your own behalf, you must, prior to com-
pleting and executing the letter of transmittal and
delivering the old notes, either make appropriate ar-
rangements to register ownership of the old notes in
your own name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time and
it may not be possible to complete prior to the expi-
ration date.
Guaranteed Delivery
Procedures..............
If you wish to tender your old notes and your old
notes are not immediately available or you cannot de-
liver your old notes, the letter of transmittal or
any other documents required by the letter of trans-
mittal to the exchange agent, or you cannot complete
the procedure for book-entry transfer, then prior to
the expiration date you must tender your old notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights....... Tenders of old notes may be withdrawn at any time be-
fore 5:00 p.m., New York City time, on the expiration
date by delivering a written notice of such with-
drawal to the exchange agent in conformity with the
procedures set forth under "The Exchange Offer--With-
drawal of Tenders."
Acceptance of Old Notes
and Delivery of New
Notes................... We will accept for exchange any and all old notes
which are properly tendered in the exchange offer be-
fore 5:00 p.m., New York City time, on the expiration
date. We will deliver the new notes promptly follow-
ing the expiration date. If we do not accept any of
your old notes for exchange we will return them to
you as promptly as practicable after the expiration
or termination of the exchange offer without any ex-
pense to you.
Certain Tax The exchange pursuant to the exchange offer should
Considerations.......... not result in the recognition of income, gain or loss
to you or to us for federal income tax purposes.
Exchange Agent.......... The Bank of New York, the trustee under the inden-
ture, is serving as exchange agent in connection with
the exchange offer.
5
<PAGE>
Consequences of Not Exchanging Old Notes
You may not offer, sell or otherwise transfer the old notes 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 to such securities laws. Old notes that
you do not exchange for new notes in the exchange offer will continue
to bear a legend reflecting such restrictions on transfer. In
addition, upon consummation of the exchange offer, you will not be
entitled to any rights to have old notes registered under the
Securities Act. We do not intend to register under the Securities Act
any old notes which remain outstanding after completion 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 thereof have taken certain actions or exercised certain rights
under the indenture.
Terms of New Notes
The exchange offer applies to up to $215,000,000 aggregate principal amount
of our old notes. The new notes will evidence the same debt as the old notes
and will be entitled to the benefits of the same indenture. The terms of the
new notes are the same as the terms of the old notes in all material respects
except that the new notes:
. have been registered under the Securities Act,
. do not include certain rights to registration under the Secu-
rities Act, and
. do not contain transfer restrictions or terms with respect to
additional interest payments applicable to the old notes.
New Notes Offered....... $215.0 million in aggregate principal amount of 12
1/2% senior notes due 2009.
Maturity................ February 15, 2009.
Interest................ The new notes will bear interest at a fixed annual
rate of 12 1/2%, to be paid in cash every six months
on February 15 and August 15 of each year, beginning
on August 15, 1999.
Ranking................. The new notes are our senior obligations. The new
notes will rank equal in right of payment with all of
our existing and future senior debt and will rank se-
nior in right of payment to any of our future subor-
dinated debt. The new notes will be effectively sub-
ordinated to any of our secured debt and to our sub-
sidiaries' existing and future debt and other liabil-
ities (including our subsidiaries' trade payables).
We and our subsidiaries may incur substantial addi-
tional debt under the indenture, subject to certain
restrictions.
Assuming we had completed the offering of the old
notes on December 31, 1998, the new notes:
. would have ranked equally with $142.3 million of
senior debt; and
. would have ranked junior to $17.4 million of debt
and other liabilities (including trade payables) of
our subsidiaries.
6
<PAGE>
Sinking Fund............ None.
Optional Redemption..... On or after February 15, 2004, we may redeem some or
all of the new notes at any time at the redemption
prices listed in the section "Description of Notes"
under the heading "Optional Redemption." Before
February 15, 2002, we may redeem up to 35% of the new
notes with the proceeds of certain public offerings
of equity in our company at the price listed in the
section "Description of Notes" under the heading
"Optional Redemption."
Mandatory Offer to
Repurchase..............
If we sell certain assets or experience specific
kinds of changes of control, we must offer to repur-
chase the new notes at the prices listed in the sec-
tion "Description of Notes."
Basic Covenants of the
Indenture...............
We will issue the new notes under an indenture with
The Bank of New York. The indenture will, among other
things, restrict our ability and the ability of our
subsidiaries to:
. borrow money;
. pay dividends on stock or purchase stock;
. make investments;
. use assets as security in other transactions; and
. sell certain assets or merge with or into other
companies.
For more details, see the section "Description of the
Notes" under the heading "Certain Covenants."
Registration Rights..... Holders of new notes (other than as set forth below)
are not entitled to any registration rights with
respect to the new notes. Pursuant to the
registration rights agreement among the initial
purchasers of the old notes and us, we agreed to file
an exchange offer registration statement with respect
to an offer to exchange the old notes for the new
notes. The registration statement of which this
prospectus is a part constitutes such exchange offer
registration statement. Under certain circumstances,
certain holders of old notes (including holders of
old notes who may not participate in the exchange
offer) may in certain circumstances require us to
file, and cause to become effective, a shelf
registration statement under the Securities Act which
would cover resales of old notes by such holders.
Use of Proceeds......... We will not receive any proceeds from the exchange
offer.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998
----------- -----------
(dollars in thousands,
except per
share amounts)
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenues............................................ $ 26 $ 5,326
Operating expenses:
Network and product costs......................... 54 4,562
Sales, marketing, general and administrative...... 2,374 31,043
Amortization of deferred compensation............. 295 3,997
Depreciation and amortization..................... 70 3,406
----------- -----------
Total operating expenses........................ 2,793 43,008
----------- -----------
Income (loss) from operations....................... (2,767) (37,682)
Net interest income (expense)..................... 155 (10,439)
----------- -----------
Net income (loss)................................... $ (2,612) $ (48,121)
=========== ===========
Net income (loss) per common share.................. $ (0.80) $ (8.43)
Weighted average shares used in computing net income
(loss) per share................................... 3,271,546 5,708,535
Other Financial Data:
EBITDA(1)........................................... $ (2,402) $ (30,154)
Capital expenditures................................ 2,253 59,503
Deficiency of earnings available to cover fixed
charges (2)........................................ (2,612) (48,121)
Consolidated Cash Flow Data:
Provided by (used in) operating activities.......... $ (1,895) $ (9,054)
Provided by (used in) investing activities.......... (2,494) (61,252)
Provided by (used in) financing activities.......... 8,767 130,378
<CAPTION>
As of December 31,
------------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................... $ 4,378 $ 64,450
Net property and equipment.......................... 3,014 59,145
Total assets........................................ 8,074 139,419
Long-term obligations, including current portion.... 783 142,879
Total stockholders' equity (net capital
deficiency)........................................ 6,498 (24,706)
<CAPTION>
As of December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Other Operating Data:
Homes and businesses passed......................... 278,000 6,023,217
Lines installed..................................... 26 3,922
</TABLE>
- --------
(1) EBITDA consists of net loss excluding net interest, taxes, depreciation and
amortization, non-cash stock based compensation and other non-operating
income or expenses. We have provided EBITDA because it is a measure of
financial performance commonly used in the telecommunications industry as
well as to enhance an understanding of our operating results. EBITDA should
not be construed as either:
. an alternative to operating income (as determined in accordance with
generally accepted accounting principals) as an indicator of our
operating performance, or
. an alternative to cash flows from operating activities (as determined in
accordance with generally accepted accounting principals) as a measure of
liquidity.
8
<PAGE>
EBITDA as calculated by us may be calculated differently than EBITDA for
other companies. See our consolidated financial statements and the related
notes thereto contained elsewhere in this prospectus.
(2) For purposes of determining the deficiency of earnings available to cover
fixed charges, "earnings" included pre-tax loss from operations adjusted
for fixed charges. "Fixed charges" included interest expense, capitalized
interest, amortization of debt discount and financing costs, and that
portion of rent expense which we believe to be representative of interest.
In view of our limited operating history and due to additional interest
charges (including amortization of debt discount and debt issuance costs)
which will result from the issuance of the old notes, the deficiency of
earnings available to cover fixed charges should not be considered
indicative of the deficiency of earnings available to cover fixed charges
in the future.
9
<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, you should carefully
consider the following factors in evaluating an investment in the new notes
offered hereby.
Our leverage is substantial and may increase
We are highly leveraged. As of February 28, 1999, we had approximately
$356.7 million of long-term obligations. In addition, the indentures under
which the 1998 discount notes and the old notes have been issued will permit
us and our subsidiaries to incur substantial additional indebtedness subject
to certain restrictions. The degree to which we are leveraged could have
important consequences to you. For example, it could:
. materially limit or impair our ability to obtain additional financing or
refinancing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes;
. require us to dedicate a substantial portion of our cash flow to the
payment of principal and interest on our indebtedness, which reduces the
availability of cash flow to fund working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes;
. limit our ability to redeem the 1998 discount notes and the new notes in
the event of a change of control; and
. increase our vulnerability to economic downturns, limit our ability to
withstand competitive pressures and reduce our flexibility in responding
to changing business and economic conditions.
We may also incur additional indebtedness to finance the continued
development, commercial deployment and expansion of our networks and for
funding operating losses or to take advantage of unanticipated opportunities.
We will require a significant amount of cash to service our indebtedness; our
ability to generate cash depends on many factors beyond our control
We expect to continue to generate substantial net losses and negative cash
flow for at least the next several years. We may be unable to maintain a level
of cash flow from operations sufficient to permit us to pay the principal,
premium, if any, and interest on our indebtedness, including the 1998 discount
notes and the new notes, and any additional indebtedness we may incur. Because
the 1998 discount notes accrete to $260.0 million through March 2003, we must
begin paying cash interest on those notes in September 2003. In addition, we
must begin paying cash interest on the new notes in August 1999. We expect
that annual interest and amortization charges relating to the 1998 discount
notes will be approximately $36.9 million for the year ending December 31,
2004 and will remain at that level through their maturity in March 2008. We
expect that interest and amortization charges related to the new notes will be
approximately $24.0 million during the year ending December 31, 1999 and will
increase each year until the year ending December 31, 2008 when the interest
and related amortization will be approximately $28.3 million. However, we have
set aside approximately $74.0 million in government securities in a pledge
account to fund the first three years of interest payments on the new notes.
Our ability to make scheduled payments with respect to indebtedness
(including the 1998 discount notes and the new notes) will depend upon, among
other things:
. our ability to achieve significant and sustained growth in cash flow;
. the rate of and successful commercial deployment of our network;
. successful operation of our network;
. the market acceptance, customer demand, rate of utilization and pricing
for our services;
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. our ability to successfully complete development, upgrades and
enhancements of our network; and
. our ability to complete additional financings, as necessary.
Each of these factors is affected by economic, financial, competitive and
other factors, many of which are beyond our control. If we are unable to
generate sufficient cash flow to service our indebtedness, we may have to
reduce or delay network deployments, restructure or refinance our indebtedness
or seek additional equity capital. We may be unable to effect these
strategies. Even if we are able to do so, it is uncertain whether any such
strategy would yield sufficient proceeds to service and repay our
indebtedness. Any failure to satisfy our obligations with respect to the 1998
discount notes or the new notes at or before maturity would be a default under
the related indenture and could cause a default under agreements governing our
other indebtedness. If such defaults occur, the holders of the indebtedness
would have enforcement rights, including the right to accelerate payment of
the entire amount of the debt and the right to commence an involuntary
bankruptcy proceeding against us. In either case, our business, prospects,
operating results, financial condition and our ability to service and repay
our indebtedness, including the new notes, would likely be materially and
adversely affected.
Our business is difficult to evaluate because we have a limited operating
history
We were incorporated in October 1996 and introduced our services
commercially in the San Francisco Bay Area in December 1997. Because of our
limited operating history, you have limited operating and financial data upon
which to base an evaluation of our business. You should consider that we have
the risks of an early stage company in a new and rapidly evolving market. To
overcome these risks, we must:
. rapidly expand the geographic coverage of our services;
. attract and retain customers within our existing and in new regions;
. increase awareness of our services;
. respond to competitive developments;
. continue to attract, retain and motivate qualified persons;
. continue to upgrade our technologies in response to competition and
market factors;
. effectively manage the growth of our operations.
We have a history of losses and expect increasing losses in the future
We have incurred substantial losses and experienced negative cash flow each
fiscal quarter since our inception. As of December 31, 1998, we had an
accumulated deficit of approximately $50.7 million. We intend to increase our
capital expenditures and operating expenses in order to expand our business.
In addition, we expect our net losses to increase in the future due to the
interest and amortization charges related to our 1998 discount notes and the
new notes and the amortization charges related to our issuance of preferred
stock to AT&T's venture capital arm and two affiliated funds ("AT&T
Ventures"), NEXTLINK and Qwest in January 1999. The approximate amount of such
charges and the fiscal year in which such charges will occur are as follows:
. Interest and amortization charges relating to the 1998 discount notes
were approximately $16.0 million during the year ending December 31,
1998. These changes will increase each year until the year ending
December 31, 2004, during which period the interest and amortization
charges will be approximately $36.9 million. Interest and related
amortization will remain at that level through maturity in March 2008.
. Interest and amortization charges relating to the new notes will be
approximately $24.0 million during the year ending December 31, 1999 and
will increase each year until the year ending December 31, 2008 during
which period the interest and related amortization will be approximately
$28.3 million.
. We recorded intangible assets of $28.7 million associated with the
issuance of our preferred stock to AT&T Ventures, NEXTLINK and Qwest.
These amounts will result in an annual amortization charge of
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approximately $8.4 million in each of the years in the three year period
ending December 31, 2001, decreasing to approximately $1.2 million per
year for each subsequent year through the year ending December 31, 2004.
As a result, we expect to incur substantial additional net losses and
substantial negative cash flow for at least the next several years.
Our operating results are likely to fluctuate in future periods
Our annual and quarterly operating results are likely to fluctuate
significantly in the future as a result of numerous factors, many of which are
outside of our control. These factors include:
. the timing and ability of ILECs to provide and construct the required
central office collocation facilities;
. the rate at which customers subscribe to our services;
.decreases in the prices for our services due to competition, volume-based
pricing and other factors;
.Internet service provider and enterprise customer retention and end-user
churn rates;
. the success of our relationships with AT&T, NEXTLINK and Qwest and other
potential third parties in generating significant subscriber demand;
. the ability to deploy on a timely basis our services to adequately
satisfy end-user demand;
. delays in the commencement of operations in new regions and the
generation of revenue because certain network elements have lead times
that are controlled by ILECs and other third parties;
. the mix of line orders between consumer end-users and business end-users
(which typically have higher margins);
.the amount and timing of capital expenditures and other costs relating to
the expansion of our network;
. ability to develop and commercialize new services by us or our
competitors;
. regulatory developments, including interpretations of the 1996
Telecommunications Act;
. successful operation of our network; and
. general economic conditions and economic conditions specific to the
telecommunications industry.
As a result, it is likely that in some future quarters our operating
results will be below the expectations of securities analysts and investors.
If this happens, the trading price of our common stock would likely decline.
We cannot predict our success because our business strategy is unproven
We believe that we were the first packet-based CLEC to provide high-speed
Internet and network access using DSL technology. As a result, our business
strategy is unproven. To be successful, we must develop and market services
that achieve broad commercial acceptance by Internet service providers and
enterprise customers in our targeted regions. Because our business and the
market for high speed digital communications services are in the early stages
of development, we are uncertain of whether our services will achieve broad
commercial acceptance.
We may experience decreasing prices for our services
We may experience decreasing prices for our services due to competition,
volume-based pricing and other factors. Currently, we charge higher prices for
some of our services than some of our competitors do for their similar
services. As a result, we cannot assure you that our customers and their end-
user customers will select our services over those of our competitors. In
addition, prices for digital communications services in general
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have fallen historically, and we expect this trend to continue. We have
provided and expect in the future to provide price discounts to customers that
commit to sell our services to a large number of their end-user customers. We
also expect to reduce prices periodically in the future to respond to
competition and to generate increased sales volume. As a result, we cannot
predict whether demand for our services will materialize at the prices we
expect to charge or whether future pricing levels will be sustainable. If we
fail to achieve or sustain broad commercial acceptance of our services at
adequate pricing levels we may not be able to achieve profitability or
positive cash flow, which would materially and adversely affect our business,
prospects, operating results, financial condition and our ability to service
and repay our indebtedness, including the new notes.
We depend on Internet service providers and other third parties for the
marketing and sale of our services
We market our Internet access services through Internet service providers
for resale to their business and consumer end-users. To date, a limited number
of Internet service providers have accounted for the significant majority of
our revenues. As a result, a significant reduction in the number of end-users
provided by one or more of our key Internet service providers could result in
a material decrease in our revenues for a given period. We expect that our
Internet service provider customers will account for the majority of our
future market penetration and revenue growth. Our agreements with our Internet
service provider customers are non-exclusive. Many of our Internet service
provider customers also resell services offered by our competitors. In
addition, a number of our Internet service provider customers have committed
to provide large numbers of end-users in exchange for price discounts. If our
Internet service provider customers do not meet their volume commitments or
otherwise do not sell our services to as many end users as we expect, our
business, prospects, operating results, financial condition and our ability to
service and repay our indebtedness, including the new notes, would be
materially adversely affected.
In addition, we recently entered into commercial agreements with each of
AT&T, NEXTLINK and Qwest. Our agreements with AT&T, NEXTLINK and Qwest provide
for the purchase, marketing and resale of our services, primarily to their
small business and enterprise customers. We cannot predict:
. the number of line orders that AT&T, NEXTLINK or Qwest will generate, if
any; or
. whether line orders will be below our expectations.
In addition, relationships that we may establish with other third parties
may not improve our business, prospects, operating results, financial
condition or our ability to service and repay our indebtedness, including the
new notes.
We may be unable to manage our growth effectively
Our strategy is to significantly expand our network within our existing
regions and to deploy networks in a total of 22 regions by the end of the
first quarter of the year 2000. The execution of this strategy involves:
. obtaining the required government authorizations (which allow us to
obtain cost-based pricing from the ILECs in each of our target regions);
. identifying, accessing and initiating service in key central offices
within existing and target regions;
. designing and maintaining an adequate operational support system;
. designing and constructing regional data centers;
. obtaining central office collocation facilities; and
. entering into and renewing interconnection agreements with the
appropriate ILECs on satisfactory terms and conditions.
To accomplish this strategy, we must, among other things:
. market to and acquire a substantial number of customers and end-users;
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. continue to implement and improve our operational, financial and
management information systems, including our client ordering,
provisioning, dispatch, trouble ticketing and other operational systems
as well as our billing, accounts receivable and payable tracking, fixed
assets and other financial management systems;
. hire and train additional qualified management and technical personnel;
. establish and maintain relationships with third parties to market and
sell our services, install network equipment and provide field service;
and
. continue to expand and upgrade our network infrastructure.
We may be unable to do these things successfully. Further, we may be unable
to deploy our networks as scheduled or achieve the operational growth
necessary to achieve our business strategy.
Our growth has placed, and is expected to continue to place, significant
demands on our management and operational resources. We expect to continue to
increase significantly our employee base to support the deployment of our
networks. For example, we expect the demands on our network infrastructure and
technical support resources to grow rapidly along with our customer base. If
we are successful in implementing our marketing strategy, we may have
difficulty responding to demand for our services and technical support in a
timely manner and in accordance with our customers' expectations. We expect
these demands to require the addition of new management personnel and the
increased outsourcing of company functions to third parties. We may be unable
to do this successfully. In addition, our networks, procedures and controls
may be inadequate to support our operations.
If we are unable to manage our growth effectively, our business, prospects,
operating results, financial condition and our ability to service and repay
our indebtedness, including the new notes, will be materially adversely
affected.
We depend on ILECs to provide collocation space and unbundled network
elements, both of which are critical to our success
Our success depends significantly on our ability to provide broad service
availability in our target regions. To do this, we must secure space from the
various ILECs for physical collocation of our equipment in the ILECs' central
offices in these regions. We have experienced initial rejections of our
applications to obtain collocation space from Pacific Bell in a significant
number of central offices in Pacific Bell's service areas in California. We
have also experienced similar rejections in certain central offices in the Los
Angeles region from GTE Corporation and in Massachusetts, Virginia and in
other states from Bell Atlantic and other ILECs. We expect that as we proceed
with our deployment, we will face additional rejections for central offices in
our other target regions. The rejection of our applications for collocation
space has in the past resulted, and could in the future result, in delays and
increased expenses in the rollout of our services in our target regions,
including delays and expenses associated with engaging in legal proceedings
with the ILECs. These delays and increased expenses could result in a material
adverse effect on our business, prospects, operating results, financial
condition and our ability to service and repay our indebtedness, including the
new notes.
We also face limitations on the availability of collocation space in high
demand target markets in which other CLECs are seeking or have obtained
collocation space to offer services. In such central offices, we have the
option of virtual collocation (where the ILEC manages and operates our
equipment), which we believe is an unattractive solution due to restrictions
on our ability to maintain the quality of our network. We have also
experienced delays and expect to continue to experience delays where ILECs do
not maintain our position in the queue for central office collocation space.
We are engaged in a variety of negotiations and legal actions to resolve
situations where ILECs assert that certain central offices lack sufficient
space for our physical collocation. We may be unable to resolve these legal
and regulatory disputes successfully. As a result of these challenges, we
expect that we will continue to experience delays in obtaining collocation
spaces and that these delays will
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adversely affect our business, prospects, operating results, financial
condition and our ability to service and repay our indebtedness, including the
new notes.
The Federal Communications Commission (FCC) has been reviewing the
collocation policies and practices of the ILECs with the goal of facilitating
the efforts of CLECs to obtain collocation space more easily and on more
favorable terms. On March 18, 1999, the FCC announced that it was adopting
rules to strengthen collocation requirements and reduce the costs and delays
associated with collocation. In particular, the FCC is requiring ILECs to make
new collocation arrangements, including cageless and shared collocation,
available to competing carriers such as us. The FCC's new rules may not be
implemented in a timely manner and may not enhance our ability to obtain
collocation facilities.
We also depend on ILECs to provide unbundled DSL-capable lines that connect
each end-user to our equipment collocated in the central offices. The 1996
Telecommunications Act generally requires that charges for these unbundled
network elements be cost-based and nondiscriminatory. The nonrecurring and
recurring monthly charges for DSL-capable lines that we require vary greatly.
These rates are subject to the approval of the appropriate state regulatory
commission. The rate approval processes for DSL-capable lines and other
unbundled network elements typically involve a lengthy review of the ILEC-
proposed rates in each state. The ultimate rates approved typically depend
greatly on the ILEC's initial rate proposals and such factors as the policies
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 our management. Consequently, we are
subject to the risk that the non-recurring and recurring charges for DSL-
capable lines and other unbundled network elements will increase based on
rates proposed by the ILECs and approved by state regulatory commissions from
time to time. Increases in these rates in any of our regions could result in a
material adverse effect on our business, prospects, operating results,
financial condition and our ability to service and repay our indebtedness,
including the new notes.
We depend on ILECs to provide transmission facilities and to provision copper
lines
We interconnect with and use ILECs' networks to service our customers.
Accordingly, we depend upon the technology and capabilities of ILECs to meet
certain telecommunications needs of our customers and to maintain our service
standards. We also depend to some extent on cooperation from the ILECs for the
provision and repair of transmission facilities. The ILECs in turn rely
significantly on unionized labor. Labor-related issues and actions on the part
of the ILECs have in the past, and in the future may, adversely affect the
ILEC's provision of services and network components that we order. Our
dependence on the ILECs has caused and could continue to cause us to encounter
delays in establishing our network and providing higher speed DSL services.
These delays could adversely affect our relationships with our customers and
result in harm to our reputation, which would adversely affect our business,
prospects, operating results, financial condition and our ability to service
and repay our indebtedness, including the new notes.
We rely on the ILECs to provision copper lines to our customers and end-
users. We must establish efficient procedures for ordering, provisioning,
maintaining and repairing large volumes of DSL-capable lines from the ILECs.
We must also establish satisfactory billing arrangements with the ILECs. We
may not be able to do these things in a manner that will alow us to retain and
grow our customer and end-user base. Failure to do so could have a material
adverse effect on our business, prospects, operating results, financial
condition and our ability to service and repay our indebtedness, including the
new notes.
Our business will suffer if our interconnection agreements are not renewed or
if they are renewed or modified on unfavorable terms
We are required to enter into and implement interconnection agreements in
each of our target regions with the appropriate ILECs in order to provide
service in those regions. Our interconnection agreements have a maximum term
of three years. Therefore, we will have to renegotiate these agreements with
the ILECs when they expire. We may not succeed in extending or renegotiating
them on favorable terms. Additionally, disputes
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have arisen and will likely arise in the future as a result of differences in
interpretations of the interconnection agreements. For example, we are in
arbitration proceedings with two ILECs under the dispute resolution clauses of
our interconnection agreements. These disputes have delayed our deployment of
our network. They have also adversely affected our service to our customers
and our ability to enter into additional interconnection agreements with the
ILECs in other states. Finally, the interconnection agreements are subject to
state commission, FCC and judicial oversight. These government authorities may
modify the terms of the interconnection agreements in a way that adversely
affects our business, prospects, operating results, financial condition and
our ability to service and repay our indebtedness, including the new notes.
We depend on the ILECs for the quality and availability of the copper lines
that we use
We depend significantly on the quality and availability of the ILECs'
copper lines and the ILECs' maintenance of such lines. We may not be able to
obtain the copper lines and the services we require from the ILECs at
satisfactory quality levels, rates, terms and conditions. Our inability to do
so could delay the expansion of our networks and degrade the quality of our
services to our customers. If these things happen, our business, prospects,
operating results, financial condition and our ability to service and repay
our indebtedness, including the new notes, would be materially adversely
affected.
The market in which we operate is highly competitive, and we may not be able
to compete effectively, especially against established industry competitors
with significantly greater financial resources
The markets for business and consumer Internet access and RLAN access
services are intensely competitive. We expect that these markets will become
increasingly competitive in the future. We face competition from the ILECs,
cable modem service providers, traditional and new national long distance
carriers, Internet service providers, on-line service providers, wireless and
satellite service providers and other CLECs. The principal bases of
competition in our markets include:
. price/performance;
. breadth of service availability;
. reliability of service;
. network security;
. ease of access and use;
. content bundling;
. customer support;
. brand recognition;
. operating experience;
. relationships with Internet service providers and other third parties;
and
. capital resources.
All of the largest ILECs in our target markets have begun offering DSL
services or have announced their intent to provide DSL services in the near
term. As a result, the ILECs represent strong competition in all of our target
service areas, and we expect this competition to intensify. For example, the
ILECs have an established brand name and reputation for high quality in their
service areas, possess sufficient capital to deploy DSL equipment rapidly,
have their own copper lines and can bundle digital data services with their
existing analog voice services to achieve economies of scale in serving
customers. Certain of the ILECs have aggressively priced their consumer DSL
services as low as $30-$40 per month, placing pricing pressure on our
TeleSpeed services. The ILECs are also in a position to offer service to end-
users from certain central offices where we are unable to secure collocation
space and offer service. Accordingly, we may be unable to compete successfully
against the ILECs, and any failure to do so would materially and adversely
affect our business, prospects, operating results, financial condition and our
ability to service and repay our indebtedness, including the new notes.
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Cable modem service providers 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 we provide. They also offer these services at lower price points than our
TeleSpeed services and target residential consumers, as well as business
customers. As a result, competition with the cable modem service providers may
have a significant negative effect on our ability to secure customers and may
create downward pressure on the prices we can charge for our services.
In addition to the ILECs and cable modem service providers, many of our
competitors have longer operating histories, greater name recognition, better
strategic relationships and significantly greater financial, technical and
marketing resources than we do. 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 we can. These
competitors may form new alliances and rapidly acquire significant market
share. These 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. This intense
competition could materially and adversely affect our business, prospects,
operating results, financial condition and our ability to service and repay
our indebtedness, including the new notes.
The digital communications industry is undergoing rapid technological changes,
and new technologies may be superior to the technology we use
The digital communications industry is subject to rapid and significant
technological change, including continuing developments in DSL technology,
which does not presently have widely accepted standards, and alternative
technologies for providing high speed data communications such as cable modem
technology. As a consequence:
. we will rely on third parties, including some of our competitors and
potential competitors, to develop and provide us with access to
communications and networking technology;
. our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
. we expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, our products and
technologies.
If we fail to adapt successfully to technological changes, or obsolescence
or fail to obtain access to important technologies, our business, prospects,
operating results, financial condition and our ability to service and repay
our indebtedness, including the new notes, could be materially adversely
affected.
Our operating results will suffer if our enterprise customers do not roll out
our services following their initial phase of deploying our services
Our practice with respect to our enterprise customers has been to enter
into an arrangement to install our service initially for a small number of
end-users. An enterprise customer decides whether to implement a broad rollout
of our services after evaluating the results of this initial phase of
deployment. Based on our experience to date, we believe that an enterprise
customer's initial phase of deployment and its decision to roll out our
service to additional end-users has taken at least six months, and has
generally taken longer than we originally expected. As of December 31, 1998, a
substantial majority of our enterprise customers had not yet rolled out our
services broadly to their employees, and it is not certain when such rollouts
will occur, if at all. We will not receive significant revenue from enterprise
customers until and unless these rollouts occur. During this lengthy sales
cycle we incur significant expenses in advance of the receipt of revenues.
Therefore, any continued or ongoing failure for any reason of enterprise
customers to roll out our services could have a material adverse effect on our
business, prospects, operating results, financial condition and our ability to
service and repay our indebtedness, including the new notes.
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Our strategy depends on growth in demand for DSL-based services
The markets for high bandwidth Internet and RLAN access are in the early
stages of development. As a result, we cannot predict the rate at which these
markets will grow, if at all, or whether new or increased competition will
result in market saturation. Various providers of high-speed digital
communications services are testing products from various suppliers for
various applications. We do not know whether DSL will offer the same or more
attractive price-performance characteristics. Critical issues concerning
commercial use of DSL for Internet and RLAN access, including security,
reliability, ease and cost of access and quality of service, remain unresolved
and may impact the growth of such services. If the markets for our services
grow more slowly than we anticipate or become saturated with competitors, our
ability to achieve revenue growth and positive cash flow would be impaired.
This could have a material adverse effect on our business, prospects,
operating results, financial condition and our ability to service and repay
our indebtedness, including the new notes.
The scalability and speed of our network remains largely unproven
To date, we have deployed our network in a total of nine of our 22 regions,
most of which have been deployed only in the last several months. As a result,
the ability of our DSL networks and operational support systems to connect and
manage a substantial number of online end-users at high transmission speeds is
still unknown. Consequently, there remains a risk that we may not be able to
scale our network and operational support systems up to our expected end-user
numbers while achieving superior performance. While peak digital data
transmission speeds across our DSL networks are 1.5 Mbps downstream, the
actual data transmission speeds over our networks could be significantly
slower and will depend on a variety of factors, including
. the type of DSL technology deployed;
. the distance an end-user is located from a central office;
. the configuration of the telecommunications line being used;
. quality of the copper lines provisioned by ILECs; and
. our operational support systems which manage our network.
As a result, our networks may be unable to achieve and maintain the highest
possible digital transmission speed.
Our failure to achieve or maintain high-speed digital transmissions would
significantly reduce customer and end-user demand for our services, which
would have a material adverse effect on our business, prospects, operating
results, financial condition and our ability to service and repay our
indebtedness, including the new notes.
Interference in the ILEC's copper plant could degrade the performance of our
services
Certain technical laboratory tests and field experience indicate that some
types of DSL technology may cause interference with and be interfered with by
other signals present in an ILEC's copper plant, usually with lines in close
proximity. If present, this interference could cause degradation of
performance of our services or render us unable to offer our 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 and the procedures to resolve
interference issues between CLECs and an ILEC are still being developed and
may not be effective. Although in the past we have agreed to interference
resolution procedures with certain ILECs, we may be unable to successfully
negotiate similar procedures with other ILECs in future interconnection
agreements or in renewals of existing interconnection agreements. In addition,
the ILECs may not unilaterally take action to resolve interference issues to
the detriment of our services. If our TeleSpeed services cause widespread
network degradation or are perceived to cause that type of interference,
responsive actions by the ILECs or state or federal regulators could have a
material adverse effect on our reputation, brand image, service quality, and
customer satisfaction and retention.
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A system failure could delay or interrupt service to our customers
Our operations depend upon our ability to support our highly complex
network infrastructure and avoid damage from fires, earthquakes, floods, power
losses, excessive sustained or peak user demand, telecommunications failures,
network software flaws, transmission cable cuts and similar events. The
occurrence of a natural disaster or other unanticipated problem at our network
operations center or any of our regional data centers could cause
interruptions in our services. Additionally, failure of an ILEC or other
service provider, such as other CLEC service providers, to provide
communications capacity that we require, as a result of a natural disaster,
operational disruption or any other reason, could cause interruptions in our
services. Any damage or failure that causes interruptions in our operations
could have a material adverse effect on our business, prospects, operating
results, financial condition and our ability to service and repay our
indebtedness, including the new notes.
A breach of network security could delay or interrupt service to our customers
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Internet service providers and corporate networks
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 our customers and the customers' end-users, which might
result in liability to our customers and also might deter potential customers.
Although we intend to implement security measures that are standard within the
telecommunications industry, as well as new developed security measures, we
have not yet done so and we cannot assure you that we will implement such
measures in a timely manner 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
our customers and such customers' end-users, which could have a material
adverse effect on our business, prospects, operating results, financial
condition and our ability to service and repay our indebtedness, including the
new notes.
We depend on a limited number of third parties for equipment supply and
installation
We rely on outside parties to manufacture our network equipment, such as
digital subscriber line access multiplexers, customer premise equipment
modems, network routing and switching hardware, network management software,
systems management software and database management software. As we sign
additional service contracts, we will need to significantly increase the
amount of manufacturing and other services supplied by third parties in order
to meet our contractual commitments. For example, we have a service
arrangement with Lucent Technologies Inc. to increase our ability to order,
install and manage our collocation facilities and associated equipment. We
have in the past experienced supply problems with certain of our vendors and
these vendors may not be able to meet our needs in a satisfactory and timely
manner in the future. In addition, we may not be able to obtain additional
vendors when and if needed. Although we have identified alternative suppliers
for technologies that we consider deems critical, it could take us a
significant period of time to establish relationships with alternative
suppliers for critical technologies and substitute their technologies into our
networks.
Our reliance on third-party vendors 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 our relationships with these suppliers could have a
material adverse effect on our business, prospects, operating results,
financial condition and our ability to service and repay our indebtedness,
including the new notes.
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Our success depends on our retention of certain key personnel and our ability
to hire additional key personnel
We depend on the performance of our executive officers and key employees.
In particular, our senior management has significant experience in the data
communications, telecommunications and personal computer industries, and the
loss of any one of them could have a material adverse effect on our ability to
execute our business strategy. In addition, we depend upon the Regional
Presidents for each of our target regions. Regional Presidents have direct
responsibility for sales, service and market development efforts in their
respective regions, and the loss of one could disrupt significantly the
operations in the region. Additionally, we do not have "key person" life
insurance policies on any of our employees.
Our future success also depends on our continuing ability to identify,
hire, train and retain other highly qualified technical, sales, marketing and
managerial personnel in connection with our expansion within our existing
regions and the deployment and marketing of our network into targeted regions.
Competition for such qualified personnel is intense, particularly in software
development, network engineering and product management. We may be unable to
attract, assimilate or retain other highly qualified technical, sales,
marketing and managerial personnel in the future. The inability to attract the
necessary technical, sales, marketing and managerial personnel could have a
material adverse effect upon our business, prospects, operating results,
financial condition and our ability to service and repay our indebtedness,
including the new notes.
We must comply with Federal and state tax and other surcharges on our
services, the levels of which are uncertain
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 our 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 our payment obligations pursuant to the relevant
surcharges to increase. In addition, pursuant to periodic revisions by state
and federal regulators of the applicable surcharges, we may be subject to
increases in the surcharges and fees currently paid.
Our services are subject to government regulation, and changes in current or
future laws or regulations could adversely affect our business
Our services are subject to federal, state and local government regulation.
The 1996 Telecommunications 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 we operate.
The 1996 Telecommunications 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 Telecommunications 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 unbundled network elements and retail services at wholesale rates.
The FCC's primary rules interpreting the 1996 Telecommunications Act, which
were issued on August 8, 1996, have been reviewed by the U.S. Court of Appeals
for the Eighth Circuit, which has overruled certain of the FCC's pricing,
unbundled network element combination, nondiscrimination and other regulations
and upheld the FCC's definition of unbundled network elements and operational
support systems rules. We have entered into competitive
20
<PAGE>
interconnection agreements using the federal guidelines established in the
FCC's interconnection order, which agreements remain in effect notwithstanding
the Eighth Circuit's decision. While the U.S. Supreme Court overruled the
Eighth Circuit in January of 1999 and upheld the FCC rules, the FCC must now
reconsider the definition of unbundled network elements. Both the FCC and
state telecommunications regulatory commissions will likely review unbundled
network element pricing issues consistent with the U.S. Supreme Court's
decision. Any unfavorable decisions by the FCC or state telecommunications
regulatory commissions could have a material adverse effect on our business,
prospects, operating results, financial condition and our ability to service
and repay our indebtedness, including the new notes.
In August 1998, the FCC proposed new rules that would allow ILECs to
provide their own DSL services free from ILEC regulation through a separate
affiliate. The provision of DSL services by an affiliate of an ILEC not
subject to ILEC regulation could have a material adverse effect on our
business, prospects, operating results, financial condition and our ability to
service and repay our indebtedness, including the new notes.
Changes to current regulations or the adoption of new regulations by the
FCC or state regulatory authorities or legislative initiatives, such as
changes to the 1996 Telecommunications Act, or court decisions could have a
material adverse effect on our business, prospects, operating results,
financial condition and our ability to service and repay our indebtedness,
including the new notes.
Our intellectual property protection may be inadequate to protect our
proprietary rights, and we may be subject to infringement claims
We regard our products, services and technology as proprietary and attempt
to protect them with patents, copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. We cannot assure you that these
methods may not be sufficient to protect our technology. We also generally
enter into confidentiality or license agreements with our employees and
consultants, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products, services or technology without authorization, or to develop similar
technology independently. Currently we have a number of patent applications
and intend to prepare additional applications and to seek patent protection
for our systems and services to the extent possible. We may not obtain any
issued patents. If issued, such patents may not protect our 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. The
global nature of the Internet makes it virtually impossible to control the
ultimate destination of our proprietary information. The steps that we have
taken may not prevent misappropriation or infringement of our technology. In
addition, litigation may be necessary in the future to enforce our
intellectual property rights to protect our 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 our business, prospects, operating results,
financial condition and our ability to service and repay our indebtedness,
including the new notes.
An economic downturn could adversely impact demand for our services
In the last few years the general health of the economy, particularly the
California economy, has been relatively strong and growing, a consequence of
which has been increasing capital spending by individuals and growing
companies to keep pace with rapid technological advances. To the extent the
general economic health of the United States or of California declines from
recent historically high levels, or to the extent individuals or companies
fear such a decline is imminent, such individuals and companies may reduce, in
the near term, expenditures such as those for our services. Any such decline
or concern about an imminent decline could delay decisions among certain of
our customers to roll out our services or could delay decisions by prospective
customers to make initial evaluations of our services. Such delays would have
a material adverse effect on our business, prospects, operating results,
financial condition and our ability to service and repay our indebtedness,
including the new notes.
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<PAGE>
We rely upon distributions from our subsidiaries to service our indebtedness,
and our indebtedness is subordinated to the indebtedness of our subsidiaries
We are a holding company. As such, we conduct substantially all of our
operations through our subsidiaries. As of December 31, 1998, we had
approximately $353.4 million of total pro forma indebtedness (including the
current portion but net of the debt discount and after giving effect to the
issuance of the new notes). Our indentures permit us and our subsidiaries to
incur substantial additional indebtedness in the future. In addition, the new
notes will not be guaranteed by any of our subsidiaries. Consequently, the new
notes will be effectively subordinated in right of payment to all indebtedness
and other liabilities of our subsidiaries, including subordinated indebtedness
and trade payables.
In addition, in the event of any distribution or payment of our assets in
any foreclosure, dissolution, winding-up, liquidation or reorganization,
holders of any secured indebtedness will have a secured claim to our assets
that constitute their collateral, prior to the satisfaction of any unsecured
claim from such assets. Our indentures permit the incurrence of indebtedness
secured by our assets and our subsidiaries' assets. In the event of our
bankruptcy, liquidation or reorganization, holders of the new notes will be
entitled to payment from the remaining assets only after payment of, or
provision for, all secured indebtedness. In any of the foregoing events, we
may not have sufficient assets to pay amounts due on the new notes.
Because we conduct a substantial portion of our operations through direct
subsidiaries, our cash flow and ability to service our indebtedness, including
the new notes, will depend upon the cash flow of our subsidiaries and payments
of funds by those subsidiaries to us in the form of repayment of loans,
dividends or otherwise. These subsidiaries are separate and distinct legal
entities with no legal obligation to pay any amounts due on the new notes or
to make any funds available therefor. In addition, our indentures permit these
subsidiaries to incur indebtedness or become parties to financing
arrangements. In certain circumstances, our indebtedness or financing
arrangements may contain limitations on the ability of our subsidiaries to pay
dividends or to make loans or advances to us. Further, any holders of
indebtedness of subsidiaries including subordinated indebtedness and trade
payables would be entitled to repayment of such indebtedness from the assets
of the affected subsidiaries before such assets could be made available for
distribution to us.
If we are unable to generate sufficient cash flow or are otherwise unable
to obtain funds necessary to meet required payments of principal, premium, if
any, and interest on our indebtedness, including the new notes, we would be in
default under the terms of the agreements governing such indebtedness,
including the indentures. In that case, the holders of such indebtedness could
elect to declare all of the funds borrowed to be due and payable together with
accrued and unpaid interest. If an acceleration occurs and we do not have
sufficient funds to pay the accelerated indebtedness, the holders could
initiate foreclosure or other enforcement action against us. In any such
proceeding, the holders of our senior indebtedness would be entitled to
receive payment of their claims equal in priority with any distributions to
holders of the new notes. In addition, any holders of secured indebtedness of
us and our subsidiaries would have certain rights to repossess, foreclose upon
and sell the assets securing such indebtedness. Any of the foregoing
circumstances would materially adversely affect the market value of the new
notes and our ability to pay principal, premium, if any, and interest on the
new notes.
Fraudulent Conveyance Risks
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, at the time we issued the old
notes or made any payment in respect of the new notes, either:
(1) we received less than reasonably equivalent value or fair consideration
for such issuance; and
. we were insolvent or were rendered insolvent by such issuance; or
. were engaged or about to engage in a business or transaction for
which our assets constituted unreasonably small capital; or
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<PAGE>
. intended to incur, or believed that we would incur, debts beyond our
ability to pay our debts as they matured; or
(2) we issued the new notes or made any payment thereunder with intent to
hinder, defraud or delay any of our creditors,
then our obligations under some or all of the new notes could be voided or
held to be unenforceable by a court or could be subordinated to claims of
other creditors, or the new note holders could be required to return payments
already received.
In particular, if we caused a subsidiary to pay a dividend in order to
enable us to make payments in respect of the new notes, and such transfer were
deemed a fraudulent transfer, the holders of the new notes could be required
to return the payment.
The measure of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, we would be
considered insolvent if:
. the sum of our debts, including contingent liabilities, was greater than
all of our assets at a fair valuation; or
. we had unreasonably small capital to conduct our business; or
. the present fair salable value of our assets were less than the amount
that would be required to pay the probable liability on our existing
debts, including contingent liabilities, as they become absolute and
mature.
We believe that we will not be insolvent at the time of or as a result of
the issuance of the new notes, that we will not engage in a business or
transaction for which its remaining assets constitute unreasonably small
capital and that we did not and do not intend to incur or believe that we will
incur debts beyond our ability to pay such debts as they mature. We cannot
assure you that a court passing on such questions would agree with our
analysis.
Under certain circumstances, our subsidiaries will be required to guarantee
our obligations under the indenture and the new notes. If any subsidiary
enters into such a guarantee and bankruptcy or insolvency proceedings are
initiated by or against that subsidiary within 90 days (or, possibly, one
year) after that subsidiary issued a guarantee or that subsidiary incurred
obligations under its guarantee in anticipation of insolvency, then 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.
Applicable bankruptcy law is likely to impair the trustee's right to foreclose
upon the pledged securities
The right of the trustee under the indenture and the pledge agreement
relating to the new notes to foreclose upon and sell the pledged securities
upon the occurrence of an event of default on the new notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against us or one of our
subsidiaries. Under applicable bankruptcy law, secured creditors such as the
holders of the new notes are prohibited from foreclosing upon or disposing of
a debtor's property without prior bankruptcy court approval.
Consequences of not tendering old notes in the exchange offer
Upon consummation of the exchange offer, we will have no further obligation
to register your old notes. Thereafter, if you do not tender your old notes in
the exchange offer, you will continue to hold restricted securities which may
not be offered, sold or otherwise transferred, pledged or hypothecated except
pursuant to
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<PAGE>
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
us that such an exemption is available. These restrictions would limit the
trading market and price for the old notes.
There is no public market for the new notes
The new notes are being offered to the holders of the old notes. Prior to
this exchange offer, there has been no existing trading market for any of the
old notes and we expect that a trading market will not develop for the new
notes. We do not intend to apply for listing of the new notes on any
securities exchange or on the Nasdaq National Market. The new notes may trade
at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities, our performance and other
factors. In connection with the issuance of the old notes, we were advised by
the initial purchasers that they intended to make a market in the new notes.
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, we cannot assure you that an active market for the new notes will
develop.
Volatility in our stock price could adversely affect the trading price of the
new notes
The trading price of our common stock has been and is likely to continue to
be highly volatile. Our stock price could fluctuate widely in response to
factors such as the following:
. actual or anticipated variations in quarterly operating results;
. announcements of new products or services by us or our competitors or new
competing technologies;
. the addition or loss of Internet service providers or enterprise
customers or end-users;
. changes in financial estimates or recommendations by securities analysts;
. conditions or trends in the telecommunications industry, including
regulatory developments;
. growth of the Internet and online commerce industries;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings or our announcements of such offerings;
. general market and general economic conditions; and
. other events or factors, many of which are beyond our control.
In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for Internet and technology companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
materially and adversely affect our stock price, regardless of our operating
performance. If that happens, the trading price of the new notes could be
adversely affected.
Future sales of our common stock may depress our stock price and the trading
price of the new notes
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares are available for sale, could
adversely affect the market price for our common stock. In turn, a decline in
our stock price could depress the trading price of the new notes. As of March
15, 1999, we had 48,650,643 shares of common stock outstanding (including our
class B common stock). Of such shares, the 8,970,000 shares of common stock
that we sold in our initial public offering are freely tradeable in the public
market without restriction unless held by our affiliates, in which case the
shares are tradeable subject to certain
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<PAGE>
volume limitations. Based on the number of shares of common stock outstanding
as of March 15, 1999, the remaining shares of common stock available for sale
in the public market are limited by restrictions under the securities laws and
lock-up agreements applicable to such shares and will be available for sale in
the public market as follows:
<TABLE>
<CAPTION>
Date of Availability For Sale Number of Shares
----------------------------- ----------------
<S> <C>
July 21, 1999 (181st day after the date of
the prospectus for our initial public
offering).................................. 33,301,466 shares of common stock
January 7, 2000............................ 6,379,177 shares of common stock
issuable upon conversion of our class
B common stock
</TABLE>
In addition, we have 15,520,342 shares of our common stock reserved for
issuance pursuant to options under our 1997 Stock Plan, of which 11,383,597
shares were subject to outstanding options at March 15, 1999. We intend to
register, prior to July 21, 1999, the shares of common stock reserved for
issuance under our 1997 Stock Plan and the 1,000,000 shares of common stock
reserved for issuance under our 1998 Employee Stock Purchase Plan.
Accordingly, shares underlying vested options will be eligible for resale in
the public market beginning on July 21, 1999.
In addition, we have 5,188,764 shares underlying outstanding warrants,
including 5,053,764 shares issuable upon exercise of the warrants issued in
connection with the 1998 discount notes. Beginning on July 21, 1999, these
warrants will be eligible for resale in the public market upon expiration of
their respective one-year holding periods under Rule 144. However, to the
extent that warrant holders effect a "cashless" exercise of their warrants,
the underlying shares will be eligible for sale in the public markets
beginning on July 21, 1999. In addition, these warrant holders and the holders
of 20,075,285 shares of our common stock have certain registration rights with
respect to their shares. These registration rights include the right to
request a registration on or after July 21, 1999. Holders of 6,379,177 shares
of class B common stock also have certain registration rights with respect to
the shares of common stock issuable upon conversion of the class B common
stock. The class B common stock is convertible into common stock beginning
January 2000. If these holders exercise their registration rights and cause a
large number of shares to be registered and sold in the public market, such
sales could have a material adverse effect on the market price for our common
stock.
Bear, Stearns & Co. Inc. may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-
up agreements.
Control by Principal Stockholders and Management
Our executive officers and directors and principal stockholders together
beneficially own over 67.0% of our outstanding common stock. Accordingly,
these stockholders will be able to determine the composition of the our board
of directors, will retain the voting power to approve all matters requiring
stockholder approval and will continue to have significant influence over our
affairs. This concentration of ownership could have the effect of delaying or
preventing a change in control of us or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which in turn could have a
material and adverse effect on the market price of the common stock or prevent
our stockholders from realizing a premium over the market prices for their
shares of common stock.
Our failure and the failure of third parties to be Year 2000 compliant could
negatively impact our business
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need
to distinguish 21st century dates from 20th century dates and, as a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such Year 2000 requirements. We have reviewed
our internally developed information technology systems and programs and
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<PAGE>
believe that our systems are Year 2000 compliant and that we have no
significant Year 2000 issues within our systems or services. We have not
reviewed our non-information technology systems for Year 2000 issues relating
to embedded microprocessors. To the extent that such issues exist, these
systems may need to be replaced or upgraded to become Year 2000 compliant. We
believe that our non-information technology systems will not present any
significant Year 2000 issues, although there can be no assurance in this
regard. In addition, we utilize third-party equipment and software and
interact with ILECs that have equipment and software that may not be Year 2000
compliant. Failure of such third-party or ILEC equipment or software to
operate properly with regard to the year 2000 and thereafter could require us
to incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on our business, prospects, operating results,
financial condition and our ability to service and repay our indebtedness,
including the new notes.
Furthermore, the purchasing patterns of our Internet service provider and
enterprise customers may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000
compliance. These expenditures may result in reduced funds available for our
services, which could have a material adverse effect on our business,
prospects, operating results, financial condition and our ability to service
and repay our indebtedness, including the new notes.
We have not made any assessment of the Year 2000 risks associated with our
third-party or ILEC equipment or software or with our Internet service
provider and enterprise customers, have not determined the risks associated
with the reasonably likely worst-case scenario and have not made any
contingency plans to address such risks. However, we intend to devise a Year
2000 contingency plan prior to December 1999.
Certain provisions of our charter and bylaws and Delaware law could delay or
prevent a change of control of Covad
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock. Our
charter and bylaws provide for:
.a classified board of directors,
. limitations on the ability of stockholders to call special meetings and
act by written consent,
. the lack of cumulative voting for directors, and
. procedures for advance notification of stockholder nominations and
proposals.
These provisions, as well as Section 203 under the Delaware General
Corporation Law, could discourage potential acquisition proposals and could
delay or prevent a change of control. The indentures relating to the 1998
discount notes and the new notes provide that, in the event of certain changes
in control, each holder of the notes will have the right to require us to
repurchase such holder's notes at a premium over the aggregate principal
amount or the accreted value, as the case may be, of such debt. The provisions
in the charter, bylaws and indentures could have the effect of discouraging
others from making tender offers for our shares and, as a consequence, they
also may inhibit increases in the market price of our shares that could result
from actual or rumored takeover attempts. Such provisions also may have the
effect of preventing changes in our management.
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USE OF PROCEEDS
We 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, we
will receive an equivalent principal amount of old notes. 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 our indebtedness.
Our net proceeds from the issuance of the old notes were approximately
$205.1 million after deducting discounts, commissions and expenses of the
issuance. We used approximately $74.0 million of such proceeds to fund the
purchase of the pledged securities, which are government securities pledged as
collateral for the first six interest payments under the new notes. We
anticipate that the remaining net proceeds of the issuance of the old notes,
together with the aggregate proceeds from our initial public offering and the
investments by AT&T Ventures, NEXTLINK and Qwest, will be used
. to fund capital expenditures to be incurred in the deployment of our
networks in existing and new regions,
. for expenses associated with continued development and sales and
marketing activities,
. to fund operating losses, and
. for working capital and other general corporate purposes.
The amounts that we actually expend will vary depending upon a number of
factors, including future revenue growth, capital expenditures and the amount
of cash generated by our operations. Additionally, if we determine it would be
in our best interest, we may increase or decrease the number, selection and
timing of entry of our targeted regions. Accordingly, our management will
retain broad discretion in the allocation of such net proceeds. Although we
may use a portion of the net proceeds of the issuance of the old notes to
pursue possible acquisitions of businesses, technologies or products
complementary to ours in the future, we presently have no understandings,
commitments or agreements with respect to any acquisitions. Pending use of
such net proceeds for the above purposes, we intend to invest such funds in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have not paid any dividends since our inception (other than dividends on
our preferred stock that converted into our common stock upon the closing of
our initial public offering) and do not intend to pay any dividends on our
capital stock in the foreseeable future. In addition, the terms of the
indentures relating to the 1998 discount notes and the new notes restrict our
ability to pay dividends on our capital stock.
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<PAGE>
CAPITALIZATION
The following table sets forth:
(A) our capitalization as of December 31, 1998, and
(B) our pro forma capitalization as of December 31, 1998 after giving
effect to:
. the automatic conversion of all shares of preferred stock outstanding
as of December 31, 1998 into common stock upon the closing of our
initial public offering,
. the exercise of warrants to purchase 1,799,751 shares of common stock
prior to the closing of our initial public offering,
. the issuance of preferred stock to AT&T Ventures, NEXTLINK and Qwest,
and the automatic conversion of such shares into class B common stock
upon the closing of our initial public offering,
. the receipt of the net proceeds from the sale of 8,970,000 shares of
common stock in our initial public offering, and
. the receipt of the net proceeds from the issuance of the old notes
after deducting discounts, commissions and expenses payable by us.
<TABLE>
<CAPTION>
As of December 31,
1998
-------------------
(A) (B)
Actual Pro Forma
-------- ---------
(dollars in
thousands)
<S> <C> <C>
Cash and cash equivalents................................. $ 64,450 $405,721
Pledged Securities(1)..................................... -- 74,018
-------- --------
Total cash, cash equivalents and Pledged Securities..... $ 64,450 $479,739
======== ========
Long-term obligations:
Capital lease obligations (including current portion)..... $ 579 $ 579
13 1/2% Senior Discount Notes due 2008, net(2)............ 142,300 142,300
12 1/2% Senior Notes Due 2009, net(3)..................... -- 210,530
-------- --------
Total long-term obligations (including current
portion)............................................... 142,879 353,409
Stockholders' equity (net capital deficiency):
Preferred Stock, $0.001 par value; no shares authorized,
issued and outstanding (A) actual; 5,000,000 shares
authorized, no shares issued and outstanding (B) pro
forma.................................................... -- --
Convertible Preferred Stock, $0.001 par value; 30,000,000
shares authorized, 18,246,162 shares issued and
outstanding (A) actual; no shares authorized, issued and
outstanding (B) pro forma................................ 18 --
Common Stock, $0.001 par value; 65,000,000 shares
authorized, 11,773,997 shares issued and outstanding (A)
actual; 190,000,000 shares authorized, 40,789,910 shares
issued and outstanding (B) pro forma (4)................. 12 41
Class B-Common Stock, $0.001 par value; no shares
authorized, issued and outstanding (A) actual; 10,000,000
shares authorized, 6,379,177 shares issued and
outstanding (B) pro forma................................ -- 6
Additional paid-in capital(5)............................. 30,685 269,583
Deferred compensation..................................... (4,688) (4,688)
Accumulated deficit....................................... (50,733) (50,733)
-------- --------
Total stockholders' equity (net capital deficiency)..... (24,706) 214,209
-------- --------
Total capitalization................................... $118,173 $567,618
======== ========
</TABLE>
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- --------
(1) Represents the portion of the net proceeds from the issuance of the old
notes used to purchase government securities to be held in the pledge
account. See "Description of Notes--Pledged Securities; Interest Reserve."
(2) The 13 1/2% senior discount notes due 2008 are presented net of additional
debt discount of approximately $8.2 million, which represents the value
ascribed to the warrants issued in connection with the 1998 discount
notes. The debt discount will accrete in value through March 15, 2003 at a
rate of 13 1/2% per annum, compounded semi-annually. No cash interest will
be payable on the 1998 discount notes prior to that date.
(3) The old notes are presented net of additional debt discount of
approximately $4.5 million, which represents the additional original issue
discount.
(4) Excludes:
. an aggregate of 15,520,342 shares of common stock reserved for issuance
under the our 1997 Stock Plan, of which 11,383,597 shares were subject to
outstanding options at March 15, 1999 at a weighted average exercise
price of $3.41 per share,
. an aggregate of 1,000,000 shares of common stock reserved for issuance
under the our 1998 Employee Stock Purchase Plan,
. 5,053,764 shares of common stock issuable upon exercise of a warrant
issued in connection with the 1998 discount notes on December 31, 1998 at
an exercise price of $.0033 per share,
. 135,000 shares of common stock issuable upon exercise of a warrant issued
to a consultant at December 31, 1998 at an exercise price of $1.00 per
share and
. 59,372 shares of common stock issued as cumulated but unpaid dividends on
preferred stock upon the closing of our initial public offering.
(5) The amounts under (B) pro forma include the effect of recording intangible
assets of $28.7 million associated with the issuance of preferred stock to
AT&T Ventures, NEXTLINK and Qwest. Such amounts will be amortized over a
period of three to six years.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
December 31, 1997 and December 31, 1998 has been derived from our audited
consolidated financial statements and the related notes, which are included
elsewhere in this prospectus. You should read the following selected
consolidated financial data together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998
--------- ---------
(dollars in
thousands, except
per share amounts)
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenues................................................ $ 26 $ 5,326
Operating expenses:
Network and product costs............................. 54 4,562
Sales, marketing, general and administrative.......... 2,374 31,043
Amortization of deferred compensation................. 295 3,997
Depreciation and amortization......................... 70 3,406
--------- ---------
Total operating expenses............................ 2,793 43,008
--------- ---------
Income (loss) from operations........................... (2,767) (37,682)
Net interest income (expense)......................... 155 (10,439)
--------- ---------
Net income (loss)....................................... $ (2,612) $ (48,121)
========= =========
Net income (loss) per common share...................... $ (0.80) $ (8.43)
Weighted average shares used in computing net income
(loss) per share....................................... 3,271,546 5,708,535
Other Financial Data:
EBITDA(1)............................................... $ (2,402) $ (30,154)
Capital expenditures.................................... 2,253 59,503
Deficiency of earnings available to cover fixed charges
(2).................................................... (2,612) (48,121)
Consolidated Cash Flow Data:
Provided by (used in) operating activities.............. $ (1,895) $ (9,054)
Provided by (used in) investing activities.............. (2,494) (61,252)
Provided by (used in) financing activities.............. 8,767 130,378
<CAPTION>
As of December 31,
--------------------
1997 1998
--------- ---------
(dollars in
thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $ 4,378 $ 64,450
Net property and equipment.............................. 3,014 59,145
Total assets............................................ 8,074 139,419
Long-term obligations, including current portion........ 783 142,879
Total stockholders' equity (net capital deficiency)..... 6,498 (24,706)
<CAPTION>
As of December 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Other Operating Data:
Homes and businesses passed............................. 278,000 6,023,217
Lines installed......................................... 26 3,922
</TABLE>
30
<PAGE>
- --------
(1) EBITDA consists of net loss excluding net interest, taxes, depreciation
and amortization, non-cash stock based compensation and other non-
operating income or expenses. We have provided EBITDA because it is a
measure of financial performance commonly used in the telecommunications
industry as well as to enhance an understanding of our operating results.
EBITDA should not be construed as either:
. an alternative to operating income (as determined in accordance with
generally accepted accounting principals) as an indicator of our
operating performance, or
. an alternative to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity.
EBITDA as calculated by us may be calculated differently than EBITDA for
other companies. See our consolidated financial statements and the related
notes thereto contained elsewhere in this prospectus.
(2) For purposes of determining the deficiency of earnings available to cover
fixed charges, "earnings" included pre-tax loss from operations adjusted
for fixed charges. "Fixed charges" included interest expense, capitalized
interest, amortization of debt discount and financing costs, and that
portion of rent expense which we believe to be representative of interest.
In view of our limited operating history and due to additional interest
charges (including amortization of debt discount and debt issuance costs)
which will result from the issuance of the old notes, the deficiency of
earnings available to cover fixed charges should not be considered
indicative of the deficiency of earnings available to cover fixed charges
in the future.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations 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 the accuracy
of which involves risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements for many
reasons including, but not limited to, those discussed in "Risk Factors" and
elsewhere in this prospectus. We disclaim any obligation to update information
contained in any forward-looking statement. See "--Forward Looking
Statements."
Overview
We are a leading high-speed Internet and network access provider offering
DSL services to Internet service provider and enterprise customers. We
introduced our services in the San Francisco Bay Area in December 1997. We
launched our services in the Los Angeles, New York and Boston metropolitan
areas in August 1998, in the Washington, D.C. and Seattle metropolitan areas
in December 1998, in the Philadelphia and Sacramento metropolitan areas in
March 1999 and in the Baltimore metropolitan area in April 1999. In March
1998, we raised approximately $135 million through the issuance of the 1998
discount notes to fund the deployment of our networks in our first six
regions. As a result of the strong market demand for high-speed digital
communications services, we plan to build a network and offer our services to
22 regions nationwide.
During 1998, we expanded our network in the San Francisco Bay Area and
increased our sales and marketing efforts in that region, which resulted in
higher revenue in each successive month in 1998. As of January 31, 1999, our
networks passed over 6.0 million homes and businesses, including over 1.8
million in the San Francisco Bay Area, and we had installed over 4,000 lines.
In connection with our expansion within existing regions and into new
regions, we expect to significantly increase our capital expenditures, as well
as our sales and marketing expenditures, to deploy our networks and support
additional end-users in those regions. Accordingly, we expect to incur
substantial and increasing net losses for at least the next several years.
For each region, we have targeted three market segments: business Internet,
business RLAN and consumer Internet. A key determinant of our revenues will be
our service penetration into the addressable portion of these market segments.
Using the approach described below, we have estimated the size of the
addressable portion of these market segments in our existing and targeted
regions.
To determine the overall potential market, we specifically identified each
service area in which we plan to offer service and each central office within
these service areas. This determination was based primarily upon both business
and population demographics as well as our desire to be in most central
offices in order to provide blanket coverage in a region. To estimate the
addressable market for each market segment from the overall potential market,
we analyzed the demographics in the following manner:
. Business Internet Addressable Market: Based on an estimate of the number
of small businesses served by the local central office and a third party
estimate of the number of small businesses expected to be online and the
percentage of such small businesses that will purchase high-speed
connectivity.
. RLAN Addressable Market: Based on an estimate of the number of households
served by the local central office with employees working for large
enterprises and a third party estimate for the entire U.S. of the
percentage of households that will purchase high-speed connectivity.
. Consumer Internet Addressable Market: Based on an estimate of the number
of online households (excluding RLAN households) served by the local
central office that will be heavy online users and an estimate of the
percentage of such households that will purchase high-speed connectivity.
32
<PAGE>
We derive revenue from:
. monthly recurring service charges for connections from the end-user to
our facilities and for backhaul services from our facilities to the
Internet service provider or enterprise customer,
. service order administration and other non-recurring charges, and
. the sale of customer premise equipment that we provide to our customers
due to the general unavailability of customer premise equipment through
retail channels.
We expect prices for the major components of both recurring and non-
recurring revenues to decrease each year in part due to the effects of
competitive pricing and future volume discounts. We intend to sell customer
premise equipment at prices that will provide us with positive margins on such
sales. We believe our revenues from the sale of customer premise equipment
will decline over time as customer premise equipment becomes more generally
available. We expect that the prices we charge to customers for customer
premise equipment will decrease each year. See "Risk Factors--We may
experience decreasing prices for our services."
The following factors comprise our network and service costs:
. Monthly non-recurring and recurring circuit fees. We pay ILECs and other
CLECs non-recurring and recurring fees for services including
installation, activation, monthly line costs, maintenance and repair of
circuits between and among our digital subscriber line access
multiplexers and our regional data centers, customer backhaul, and end-
user lines. As our end-user base grows, we expect that the largest
element of network and product cost will be the ILECs' charges for our
leased copper lines.
. Other costs. Other costs that we incur include those for materials in
installation and the servicing of customers and end-users, and the cost
of customer premise equipment.
The development and expansion of our business will require significant
expenditures. The principal capital expenditures incurred during the buildup
phase of any region involve the procurement, design and construction of our
central office collocation cages, end-user DSL line cards, and expenditures
for other elements of our network design, which includes a regional data
center in each region. We expect that the average capital cost to deploy our
facilities in a central office, excluding subscriber line cards, will be
approximately $85,000 per central office collocation facility. Following the
buildout of our collocation facilities, the major portion of our capital
expenditures is the purchase of DSL line cards to support incremental
subscribers. We expect that the average cost of such line cards will decline
over the next several years. Network expenditures will continue to increase
with the number of end-users. However, once an operating region is fully built
out, a substantial majority of the regional capital expenditures will be tied
to incremental customer and end-user growth. In addition to developing our
network, we will use our capital for marketing our services, acquiring
Internet service provider and enterprise customers, and funding our customer
care and field service operations.
Recent Developments
We recently entered into strategic relationships with AT&T, NEXTLINK and
Qwest. As part of these strategic relationships, we received equity
investments of $25 million from AT&T Ventures, $20 million from NEXTLINK and
$15 million from Qwest. Furthermore, AT&T, NEXTLINK and Qwest each entered
into commercial agreements with us providing for the purchase, marketing and
resale of our services, our purchase of fiber optic transport bandwidth, and
collocation of network equipment. As a result, we expect that in the future
AT&T, NEXTLINK, Qwest and other potential third parties, if any, will
increasingly account for a significant portion of new line orders. See "Risk
Factors--We depend on Internet service providers and other third parties for
the marketing and sale of our services."
On January 27, 1999, we completed our initial public offering of 8,970,000
shares of our common stock at an initial public offering price of $18.00 per
share. Net proceeds to us from this initial public offering were approximately
$150.2 million after deducting underwriting discounts and commissions and
estimated offering
33
<PAGE>
expenses. On February 18, 1999, we completed the issuance of the old notes
with an aggregate principal amount of $215.0 million. Net proceeds from the
issuance of the old notes were approximately $205.1 million. At closing of the
old note issuance, we used a portion of the net proceeds to purchase
government securities, which were pledged as collateral for the payment of the
first six scheduled interest payments on the new notes.
Results of Operations
Our operations from inception in October 1996 to December 1997 were limited
primarily to the development of the technology and activities related to
commencing our business operations. Therefore, our revenues and expenditures
during this period is not indicative of revenues which may be attained or
expenditures which may be incurred by us in future periods. In particular, our
expenditure levels during the year ended December 31, 1997 do not reflect the
issuance of the 1998 discount notes in March 1998 and the related interest and
amortization charges, which were $16.0 million during the year ending December
31, 1998.
Revenues
We recorded revenues of approximately $26,000 for the year ended December
31, 1997 and approximately $5.3 million for the year ended December 31, 1998.
This increase is attributable to growth in the number of customers and end-
users resulting from our increased sales and marketing efforts and the
expansion of our network in the San Francisco Bay Area and to a lesser extent
in the Los Angeles, New York and Boston metropolitan areas. As of December 31,
1998, we had an installed base of over 3,900 end-user lines with a network
that passed approximately 6.0 million homes and businesses. We expect revenues
to increase in future periods as we expand our network within our existing
regions, deploy networks in new regions and increase our sales and marketing
efforts in all of our target regions.
Network and Product Costs
We recorded network and product costs of approximately $54,000 for the year
ended December 31, 1997 and approximately $4.6 million for the year ended
December 31, 1998. This increase is attributable to the expansion of our
network and increased orders resulting from our sales and marketing efforts.
We expect network and product costs to increase significantly in future
periods due to increased sales activity and expected revenue growth.
Sales, Marketing, General and Administrative Expenses
Sales, marketing, general and administrative expenses consist primarily of
salaries, expenses for the development of our business, the development of
corporate identification, promotional and advertising materials, expenses for
the establishment of our management team, and sales commissions. These
expenses increased from $2.4 million for the year ended December 31, 1997 to
$31.0 million for the year ended December 31, 1998. This increase is
attributable to growth in headcount in all areas of our company as we expanded
our sales and marketing efforts, expanded the deployment of our networks and
built our operating infrastructure. Sales, marketing, general and
administrative expenses are expected to increase significantly as we continue
to expand our business.
Deferred Compensation and Intangible Asset Amortization
Through December 31, 1998, we recorded a total of approximately $9.0
million of deferred compensation, with an unamortized balance of approximately
$4.7 million on our December 31, 1998 balance sheet. This deferred
compensation is a result of us granting stock options to our employees with
exercise prices per share subsequently determined to be below the fair values
per share for accounting purposes of our common stock at the dates of grant.
We are amortizing the deferred compensation over the vesting period of the
applicable option.
34
<PAGE>
Amortization of deferred compensation was $295,000 during the year ended
December 31, 1997 and $4.0 million during the year ended December 31, 1998.
In January, 1999, we recorded intangible assets of $28.7 million from the
issuance of preferred stock to AT&T Ventures, NEXTLINK and Qwest. Annual
amortization of this asset will be approximately $8.4 million in each of the
three years ending December 31, 2001, decreasing to approximately $1.2 million
per year through the year ending December 31, 2004.
Depreciation and Amortization
Depreciation and amortization includes: (i) depreciation of network costs
and related equipment, (ii) depreciation of information systems, furniture and
fixtures, (iii) amortization of improvements to central offices, regional data
centers and network operations center facilities and corporate facilities and
(iv) amortization of capitalized software costs. Depreciation and amortization
was approximately $70,000 for the year ended December 31, 1997 and
approximately $3.4 million for the year ended December 31, 1998. The increase
was due to the increase in equipment and facilities placed in service
throughout the period. We expect depreciation and amortization to increase
significantly as we increase our capital expenditures to expand our network.
Net Interest Income and Expense
Net interest income and expense consists primarily of interest income on
our cash balance and interest expense associated with our debt. For the year
ended December 31, 1997, net interest income was approximately $155,000, and
was primarily attributable to the interest income earned from the proceeds
raised in the our preferred stock financing in July 1997. Interest income was
approximately $4.8 million for the year ending December 31, 1998. This
interest income was earned primarily from the investment of the proceeds
raised in the issuance of our 1998 discount notes in March 1998. Interest
expense for the year ended December 31, 1998 was approximately $15.2 million
and consisted primarily of interest on the 1998 discount notes and capital
lease obligations. We expect interest expense to increase significantly
because the 1998 discount notes accrete to $260 million by March 15, 2003 and
we issued the old notes in February 1999.
Income Taxes
Income taxes consist of federal, state and local taxes, when applicable. We
expect significant consolidated net losses for the foreseeable future which
should generate net operating loss carryforwards. However, our ability to use
net operating losses may be subject to annual limitations. In addition, income
taxes may be payable during this time due to operating income in certain tax
jurisdictions. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have expired, we may experience
significant tax expense. We recognized no provision for taxes because we
operated at a loss throughout 1997 and 1998.
Liquidity and Capital Resources
Our operations have required significant capital investment for the
procurement, design and construction of our central office collocation cages,
the purchase of telecommunications equipment and the design and development of
our networks. Capital expenditures were approximately $59.5 million for the
year ending December 31, 1998. We expect that our capital expenditures will be
substantially higher in future periods in connection with the purchase of
infrastructure equipment necessary for the development and expansion of our
network and the development of new regions.
From our inception through December 31, 1998, we financed our operations
primarily through private placements of $10.3 million of equity securities,
$865,000 of lease financings and $129.3 million in net proceeds raised from
the issuance of the 1998 discount notes. As of December 31, 1998, we had an
accumulated deficit of $50.7 million, and cash and cash equivalents of $64.5
million.
35
<PAGE>
Net cash used in our operating activities was approximately $1.9 million
and $9.1 million for the year ended December 31, 1997 and 1998, respectively.
The net cash used for operating activities during these periods was primarily
due to net losses and increases in current assets, offset by non-cash
expenses, increases in accounts payable and other accrued liabilities. Net
cash used in our investing activities was $2.5 million and $61.3 million for
the year ended December 31, 1997 and 1998, respectively. Net cash provided by
financing activities for the year ended December 31, 1997 was $8.8 million and
related to the issuance of common and preferred stock. Net cash provided by
financing activities for the year ended December 31, 1998 was $130.4 million
which primarily related to the issuance of the 1998 discount notes and series
C preferred stock.
In January 1999, we received equity investments of $25 million from AT&T
Ventures, $20 million from NEXTLINK and $15 million from Qwest, representing
an aggregate equity investment of $60 million.
On January 27, 1999, we completed an initial public offering of 8,970,000
shares of our common stock at an initial public offering price of $18.00 per
share. Our net proceeds from the initial public offering were $150.2 million
after deducting underwriting discounts and commissions and estimated offering
expenses.
On February 18, 1999, we completed the issuance of the old notes with an
aggregate principal amount of $215.0 million. Net proceeds from the old notes
were approximately $205.1 million. At the closing of the issuance of the old
notes, we used a portion of the net proceeds to purchase government securities
which were pledged as collateral for the payment of the first six scheduled
interest payments on the new notes.
We expect to experience substantial negative cash flow from operating
activities and negative cash flow before financing activities for at least the
next several years due to continued development, commercial deployment and
expansion of our networks. Our future cash requirements for developing,
deploying and enhancing our networks and operating our business, as well as
our revenues, will depend on a number of factors including:
. the number of regions entered and the timing of entry and services
offered;
. network deployment schedules and associated costs due to issues including
the physical requirements of the central office collocation process;
. the rate at which customers and end-users purchase our services and the
pricing of such services;
. the level of marketing required to acquire and retain customers and to
attain a competitive position in the marketplace;
. the rate at which we invest in engineering and development and
intellectual property with respect to existing and future technology; and
. unanticipated opportunities.
Accordingly, we cannot predict when or to what extent it may be required to
raise additional capital for developing, deploying and enhancing our networks
and operating our business. We may incur additional indebtedness if such
indebtedness becomes available on favorable terms to finance the continued
development, commercial deployment and expansion of our network and for
funding operating losses or to take advantage of unanticipated opportunities.
If we are unable to obtain required additional capital or are required to
obtain it on terms less satisfactory than we desire, we may be required to
delay the expansion of our business or take or forego actions, any or all of
which could materially adversely affect our business, prospects, operating
results, financial condition and our ability to service and repay our
indebtedness, including the new notes.
In addition, we may wish to selectively pursue possible acquisitions of
businesses, technologies or products complementary to ours in the future in
order to expand our geographic presence and achieve operating efficiencies.
There can be no assurance that we will have sufficient liquidity, or be able
to obtain additional debt
36
<PAGE>
or equity financing on favorable terms or at all, in order to finance such an
acquisition. However, no acquisitions are currently contemplated.
Year 2000 Issues
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need
to distinguish 21st century dates from 20th century dates and, as a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such Year 2000 requirements. We have reviewed
our internally developed information technology systems and programs and
believe that our systems are Year 2000 compliant and that there are no
significant Year 2000 issues within our systems or services. We have not
reviewed our non-information technology systems for Year 2000 issues relating
to embedded microprocessors. To the extent that such issues exist, these
systems may need to be replaced or upgraded to become Year 2000 compliant. We
believe that our non-information technology systems will not present any
significant Year 2000 issues, although there can be no assurance in this
regard. In addition, we utilize third-party equipment and software and
interact with ILECs that have equipment and software that may not be Year 2000
compliant. Failure of such third-party or ILEC equipment or software to
operate properly with regard to the year 2000 and thereafter could require us
to incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on our business, prospects, operating results and
financial condition.
Furthermore, the purchasing patterns of our Internet service provider and
enterprise customers may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000
compliance. These expenditures may result in reduced funds available for our
services, which could have a material adverse effect on the our business,
prospects, operating results, and financial condition.
We have not made any assessment of the Year 2000 risks associated with our
third-party or ILEC equipment or software or with our Internet service
provider and enterprise customers. We have not determined the risks associated
with the reasonably likely worst-case scenario and have not made any
contingency plans to address such risks. However, we intend to devise a Year
2000 contingency plan prior to December 31, 1999. See "Risk Factors--Our
failure and the failure of third parties to be Year 2000 compliant could
negatively impact our business."
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. Examples of such
forward-looking statements include:
. our plans to expand our existing network or to commence service in new
regions;
. the market opportunity presented by our target regions;
. estimates regarding the timing of launching our service in new regions;
. expectations regarding the extent to which enterprise customers roll out
our service;
. expectations regarding our relationships with AT&T, NEXTLINK, Qwest and
other potential third parties;
. expectations as to pricing for our services in the future;
. statements regarding development of our business;
. the estimate of market sizes and addressable markets for our services and
products;
37
<PAGE>
. the estimates of future operating results;
. our anticipated capital expenditures;
. the effect of regulatory reform and regulatory litigation; and
. other statements contained in this prospectus regarding matters that are
not historical facts.
These statements are only estimates or predictions and cannot be relied
upon. We can give you no assurance that future results will be achieved.
Actual events or results may differ materially as a result of risks facing us
or actual results differing from the assumptions underlying such statements.
Such risks and assumptions that could cause actual results to vary materially
from the future results indicated, expressed or implied in such forward-
looking statements include our ability to:
. successfully market our services to current and new customers;
. generate customer demand for our services in the particular regions where
we plan to market services;
. achieve favorable pricing for our services;
. respond to increasing competition;
. manage growth of our operations;
. access regions and negotiate suitable interconnection agreements with the
ILECs, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions consistent with regulatory, legislative and judicial
developments.
All written and oral forward-looking statements made in connection with
this prospectus which are attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the "Risk Factors" and other
cautionary statements included in this prospectus. We disclaim any obligation
to update information contained in any forward-looking statement.
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio and outstanding debt obligations. We typically do not attempt to
reduce or eliminate our market exposure on our investment securities because a
substantial majority of our investments are in fixed-rate, short-term
securities. We do not have any derivative instruments. The fair value of our
investment portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to
the fixed-rate, short-term nature of the substantial majority of our
investment portfolio. In addition, substantially all of our outstanding
indebtedness at December 31, 1998, including our 1998 discount notes, is
fixed-rate debt.
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<PAGE>
BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. 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. We disclaim any obligation to update information contained
in any forward-looking statement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Forward Looking Statements."
Overview
We are a leading high-speed Internet and network access provider offering
DSL services to Internet subscriber provider and enterprise customers. Internet
service providers purchase our services in order to provide high-speed Internet
access to their business and consumer end-users. Enterprise customers purchase
our services to provide employees with remote access to the enterprise's local
area networks to improve employee productivity and reduce operating costs. We
refer to such services as remote local area network (RLAN) services.
We believe our services offer a superior value proposition as compared to
currently available high-speed Internet and network access alternatives. Our
services are provided over standard copper telephone lines at speeds of up to
1.5 Mbps, over 25 times the speed available through a 56.6 Kbps modem. As of
January 31, 1999 we had installed over 4,000 DSL lines and received orders for
our services from over 100 Internet service provider and enterprise customers,
including Cisco Systems, Concentric Network, Epoch Networks, Oracle,
PeopleSoft, Stanford University, Verio and Whole Earth Networks.
We have introduced our services in the following metropolitan areas:
<TABLE>
<CAPTION>
December 1997 August 1998 December 1998 March 1999 April 1999
------------- ----------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
San Francisco Bay Area Los Angeles Washington, D.C. Philadelphia Baltimore
New York Seattle Sacramento
Boston
</TABLE>
In March 1998, we raised approximately $135 million through the issuance of
the 1998 discount notes to fund the initial deployment of our networks. As a
result of the strong market demand for high-speed Internet and network access,
we plan to build our networks and offer our services in 22 regions nationwide.
We estimate that when complete, our networks in these 22 regions will enable us
to provide service to over 28 million homes and businesses in 28 of the top 50
metropolitan statistical areas in the United States.
In January 1999, we entered into strategic relationships with AT&T Corp.,
NEXTLINK Communications, Inc. and Qwest Communications Corporation. As part of
these strategic relationships, we received equity investments of $25 million
from AT&T Ventures, $20 million from NEXTLINK and $15 million from Qwest.
Furthermore, these strategic investors each entered into commercial agreements
with us providing for the purchase, marketing and resale of our services, the
purchase by us of fiber optic transport bandwidth, and collocation of network
equipment.
On January 27, 1999, we completed the initial public offering of 8,970,000
shares of common stock at an initial public offering price of $18.00 per share.
We received net proceeds from the initial public offering of $150.2 million
after deducting underwriting discounts and commissions and estimated offering
expenses.
On February 18, 1999, we completed the offering of the old notes with an
aggregate principal amount of $215 million. We received net proceeds of $205.1
million from this offering, $74.0 million of which was used to purchase pledged
securities to secure the payment of the first six scheduled interest payments
on the new notes.
We believe that our business model offers attractive economics. Through our
use of DSL technology, we can effectively leverage the existing telephone
network copper infrastructure to deploy service more quickly and
39
<PAGE>
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
Growing Market Demand for High-Speed Digital Communications Bandwidth
High-speed connectivity has become important to small- and medium-sized
businesses due to the dramatic increase in Internet usage. According to
International Data Corporation, the number of Internet users worldwide reached
approximately 69 million in 1997 and is forecasted to grow to approximately
320 million by 2002. The popularity of the Internet with consumers has driven
the rapid proliferation of the Internet as a commercial medium. Businesses are
increasingly establishing Web sites and corporate intranets and extranets to
expand their customer reach and improve their communications efficiency.
International Data Corporation also estimates that the value of goods and
services sold worldwide through the Internet will increase from $12 billion in
1997 to over $400 billion in 2002. Accordingly, to remain competitive, small-
and medium-sized businesses increasingly need high-speed Internet connections
to maintain complex Web sites, access critical business information and
communicate more effectively with employees, customers and business partners.
High-speed digital connections are also becoming increasingly important to
businesses and consumers as more high bandwidth information and applications
become available on the Internet.
The demand for high-speed digital communications services for RLAN access
is also growing rapidly. Over the past ten years, high-speed local area
networks have become increasingly important to enterprises to enable employees
to share information, send e-mail, search databases and conduct business. We
believe that a large majority of personal computers used in enterprises are
connected to local area networks. Enterprises are now seeking to extend this
same high-speed connectivity to employees accessing the local area networks
from home to improve employee productivity and reduce operating costs.
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%.
As businesses continue to increase their use of the Internet, intranets and
extranets, we expect the market size for both small- and medium-sized business
Internet and RLAN access to continue to grow rapidly causing the demand for
high-speed digital communications services to also grow rapidly. However, the
full potential of Internet and local area network applications cannot be
realized without removing the performance bottlenecks of the existing public
switched telephone network. Increases in telecommunications bandwidth have
significantly lagged improvements in microprocessor performance over the last
ten years. Since 1988, microprocessor performance has improved nearly 80-fold,
while the fastest consumer modem connection has improved from 9.6 Kbps to 56.6
Kbps, a factor of six. According to industry analysts, there are nearly 40
million personal computers in U.S. homes today, and most of them can only
connect to the Internet or their corporate local area network by low-speed
analog lines. Higher speed connections are available, including:
. Integrated Services Digital Networks (ISDNs)--An ISDN provides standard
interfaces for digital communication networks and is capable of carrying
data, voice, and video over digital circuits. ISDN protocols are used
worldwide for connections to public ISDN networks or to attach ISDN
devices to ISDN-capable PBX systems.
. T1 Line--This is a Bell system term for a digital transmission link with
a capacity of 1.544 Mbps.
. Frame Relay--A high-speed packet-switched data communications protocol.
While these services have recently experienced dramatic growth in the U.S.,
they are expensive and complex to order, install and maintain.
Emergence of DSL Technology
DSL technology emerged in 1990 and is commercially available today to
address the performance bottlenecks of the public switched telephone network.
DSL equipment, when deployed at each end of standard
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copper telephone lines, increases the data carrying capacity of these lines
from analog modem speeds of 56.6 Kbps and ISDN speeds of 128 Kbps to DSL
speeds of up to 6 Mbps depending on the length and condition of the copper
line. Also, recent advances in semiconductor technology and digital signal
processing algorithms and falling equipment prices have made the deployment of
DSL technology on a widespread basis more economical. We anticipate that
equipment prices will continue to fall as a result of continued advances in
semiconductor technologies and increases in equipment production volumes.
Because DSL technology reuses the existing copper plant, it is
significantly less expensive to deploy on a broad scale than alternative
technologies, such as cable modems, wireless data and satellite data. As a
result, a significant portion of the investment in a DSL network is success-
based, requiring a comparatively lower initial fixed investment. Subsequent
variable investments in DSL technology are directly related to the number of
paying customers.
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 Asymmetrical Digital Subscriber Line Working Group
(UAWG). The goal of UAWG is to publish a standard specification for a low-
cost, consumer oriented asymmetric DSL hardware and software solution. Since
we are a purchaser of asymmetric DSL equipment and a service provider, we have
joined the UAWG and support its objectives. We believe that the efforts of the
UAWG will lead to lower cost and more standardized asymmetric DSL hardware and
software products. An initial draft of the specification was approved in June
1998 and a draft standard was adopted in October 1998. Aimed at consumers, the
so-called G.lite specification has a maximum data throughput rate of 1.5 Mbps
incoming and 512 Kbps outgoing.
Impact of the Telecommunications Act of 1996
The passage of the 1996 Telecommunications Act created a legal framework
for CLECs to provide local analog and digital communications services in
competition with the ILECs. The 1996 Telecommunications Act eliminated a
substantial barrier to entry for CLECs by enabling them to leverage the
existing infrastructure built by the ILECs, which required a $200 billion
investment by ILECs and ILEC ratepayers, rather than constructing a competing
infrastructure at significant cost. The 1996 Telecommunications Act requires
ILECs, among other things,
. to allow CLECs to lease copper lines on a line by line basis;
. to collocate DSL and other equipment in the ILECs' central offices to
connect to the leased copper lines;
. to lease access on the ILECs' inter-central office fiber backbone to link
the CLECs' equipment; and
. to use the ILECs' own operational support systems to place orders and
access the ILECs' databases.
The 1996 Telecommunications Act in particular emphasized the need for
competition-driven innovations in the deployment of advanced
telecommunications services, such as our DSL services.
Our Competitive Strengths
We were formed to capitalize on the substantial business opportunity
created by the growing demand for Internet and network access, the commercial
availability of low cost DSL technology and the passage of the 1996
Telecommunications Act. Key aspects of our solution to provide high-speed
digital communications services include:
. an attractive value proposition that provides high-speed connections at
similar or lower prices than alternative high-speed technologies
currently available to customers;
. a widely available, continuously connected, secure network that
facilitates deployment of Internet and intranet applications; and
. a management team experienced in the data communications,
telecommunications and personal computer industries.
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Attractive Value Proposition. We offer higher bandwidth digital connections
than alternative services at similar or lower prices that do not vary with
usage. For business Internet users, our high-end services offer comparable
bandwidth to T1 and frame relay circuits at approximately 25% of the cost. For
the RLAN market, our 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. We believe that many of
our 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. For consumer Internet users, we expect that our future
consumer services will be comparably priced to current cable modem services.
Widely Available, Always-Connected, Secure Network. Our strategy of
providing blanket coverage in each region we serve is designed to ensure that
our services are available to the vast majority of our customers' end-users.
Our network provides 24-hour, always-on connectivity, unlike ISDN lines and
analog modems which require customers to dial-up each time for Internet or
RLAN access. Also, because we use dedicated connections from each end-user to
the Internet service provider or enterprise network, our customers can reduce
the risk of unauthorized access.
Experienced Management Team. Our management team includes individuals with
extensive experience in the data communications, telecommunications and
personal computer industries, including Robert Knowling, Jr., President and
Chief Executive Officer (former Executive Vice President of Operations and
Technology at U S WEST Communications), founders Charles McMinn, Chairman of
the Board, Charles Haas, Executive Vice President of Sales, and Dhruv Khanna,
Executive Vice President, General Counsel and Secretary (all of whom worked at
Intel), Timothy Laehy, Chief Financial Officer and Vice President, Finance
(former Vice President of Corporate Finance and Treasurer of Leasing
Solutions, Inc.), Rex Cardinale, Chief Technology Officer and Vice President
of Engineering (former General Manager of the cc:Mail division of Lotus
Development Corporation), Catherine Hemmer, President of Operations (former
Vice President, Network Reliability and Operations at U S WEST Communications,
Inc., former General Manager, Network Provisioning at Ameritech Corporation
and former Vice President, Network Services at MFS), Robert Roblin, Executive
Vice President of Marketing (former Executive Vice President of Marketing at
Adobe Systems, Inc. and former Vice President and General Manager of
Marketing, Consumer Division at IBM Corporation), and Robert Davenport, III,
Executive Vice President, Business Development (former Senior Vice President
and Chief Operating Officer of Tele-Communication, Inc.'s Internet Services
subsidiary TCI.NET). We also have in place Regional Presidents to cover all 22
of our regions.
Business Strategy
Our objective is to become the leading high-speed Internet and network
access provider offering DSL services in each region we enter. We introduced
our services in the San Francisco Bay Area in December 1997, in the Los
Angeles, New York and Boston metropolitan areas in August 1998, in the
Washington, D.C. and Seattle metropolitan areas in December 1998, in the
Philadelphia and Sacramento metropolitan areas in March 1999 and the Baltimore
metropolitan area in April 1999. We plan to increase our network to 22
regions. The key elements of our strategy are as follows:
Secure CLEC Status and Sign Interconnection Agreements in the Top U.S.
Markets. We obtain CLEC status in each state that we enter and sign
interconnection agreements with the relevant ILECs. As of January 31, 1999, we
were authorized under state law to operate as a CLEC in 19 states, had pending
applications in seven additional states and had entered into interconnection
agreements with six different major ILECs in the majority of the states
covering our 22 target markets. We intend to obtain authorization in the other
states necessary to cover our 22 target regions and we are negotiating
interconnection agreements with ILECs in the remaining states. In the
aggregate, our 22 existing and target regions represent over 40% of the U.S.
population. We believe we have gained a competitive advantage by rapidly
securing CLEC status and signing interconnection agreements in multiple
regions.
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Enter and Roll Out Service Rapidly in These Markets. We seek to be the
first CLEC to enter and roll out service broadly in our target regions in
order to:
. secure central office collocation space prior to our competitors;
. secure and retain customers before significant DSL competition arises;
. maintain advantages over competitors through superior coverage and high
customer satisfaction; and
. build the largest volume and market share in order to allow us to reduce
the costs and prices of our services and, where we are first to market,
maintain our leadership position.
Provide Pervasive Coverage. We are pursuing a blanket coverage strategy of
providing service in a substantial majority of the central offices in each
region that we enter since our Internet service provider customers desire to
market their Internet access services on a region-wide basis. Blanket coverage
is also important to our enterprise customers since the typical enterprise
customer desires to offer RLAN access to all employees regardless of where
they reside in the region. In addition, we believe our presence in 22 markets
will allow us to better serve our Internet service provider and enterprise
customers which are increasingly seeking a single supplier in multiple
metropolitan areas.
Focus on Packet Data Services. Although we are authorized to provide both
data and voice services, we are presently focusing on packet data services. We
believe that we can provide a superior digital service while avoiding the
significant investment that would be required to compete in the analog voice
market.
Sell Directly to Internet Service Providers and Enterprises that Can
Provide a Large Number of End-Users. We target Internet service providers that
can offer their end-users cost and performance advantages for Internet access
using our services. Over 100 Internet service providers currently resell our
services. Our direct sales force also specifically targets enterprises that we
estimate to have over 500 existing ISDN or analog modem-based RLAN users. We
believe that we offer these customers higher performance and dedicated
services at similar or lower prices than those of alternative technologies.
Leverage the Success-Based Economics of DSL. Because we use DSL technology,
a significant portion of our capital expenditures are success-based. We
estimate that approximately 50% of our cumulative capital expenditures over
the next five years will be for DSL equipment that is directly related to our
end-user subscription rate.
Establish Relationships with Internet Service Providers and Other Industry
Participants. We do not provide Internet access directly to any of our
customers. Instead, we provide connections to Internet service providers,
which in turn offer high-speed Internet access using our network. In this way,
we:
. carry the traffic of multiple Internet service providers in any region,
increasing our volume and reducing our costs;
. leverage our selling efforts through the sales and support staff of these
Internet service providers;
. offer Internet service providers a non-competitive transport alternative,
since the ILEC typically provides its own Internet access services in
competition with Internet service providers; and
. provide Internet service providers a high-speed service offering to
compete with cable-based Internet access.
We are developing a service offering that we believe will also be
increasingly attractive to the interexchange carriers (IXCs) and other CLECs.
As we roll out our network in 22 markets nationwide, we can increasingly serve
as a single packet-based service provider to other telecommunications service
companies who seek to offer packet based services to their customers. Also, we
can carry the traffic of multiple IXCs and CLECs and potentially provide these
services at price points that are more attractive than any one other company
can provide for itself. These companies are also seeking an alternative to
dealing with each ILEC in every region in which
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they would like to offer service. Finally, since our networks serve
predominately small business and residential end-users, these networks are
complementary to the large business focused networks of these IXCs and other
CLECs. We believe that these are some of the reasons AT&T, NEXTLINK and Qwest
have entered into relationships with us. We are currently discussing
relationships with other IXCs and other CLECs and intend to continue these
discussions as our networks are deployed in our 22 target markets.
Provide a Superior Product and Service Solution. We believe that we can
build a significant competitive position by providing a comprehensive product
and service solution to our customers. We undertake to provide all of the
necessary product and service elements required to establish and maintain
digital services in our target markets including:
. managing the ILEC's delivery and testing of copper lines used for our
service;
. performing any in-building wiring required to initiate service;
. selling and configuring the DSL modem required at each end-user site;
. providing 24 hours, seven days a week (24x7) monitoring of each end-user
line; and
. designing and provisioning an enterprise's overall RLAN network including
equipment selection, programming and troubleshooting.
Our Product and Service Offerings
As of December 31, 1998, we offered six flat rate digital services under
the TeleSpeed brand to connect our customers' end-users to our regional data
centers. In addition, Internet service provider and enterprise customers may
purchase backhaul services from us to connect their facilities to our regional
data centers.
TeleSpeed Services
Our TeleSpeed services connect individual end-users on conventional copper
lines to our DSL equipment in their serving central office and from there to
our packet-based digital network serving that metropolitan area. An ILEC's
infrastructure consists of numerous central offices which are connected by a
fiber optic backbone to a regional office that routes local and long distance
traffic. Each central office collects the individual copper lines from end-
users' premises in the neighborhood.
The TeleSpeed services are TeleSpeed 144, TeleSpeed 192, TeleSpeed 384,
TeleSpeed 768, TeleSpeed 1.1, TeleSpeed 1.5 and TeleSpeed Remote. The chart
below compares the performance and markets for each of our end-user services
as of December 31, 1998. The particular TeleSpeed service available to an end-
user depends on the user's distance to the central office. We believe that
substantially all of our potential end-users in our target markets can be
served with one of our services. We estimate that approximately 70% of end-
users are within 18,000 feet of a central office and can be served by at least
our TeleSpeed 384 service. We also believe at least a majority of potential
end-users will be able to obtain our highest speed service offering. However,
the specific number of potential end-users for the higher speeds will vary by
central office and by region and will be affected by line quality.
<TABLE>
<CAPTION>
Speed To Speed From Range*
Service End-User End-User (feet) Market/Usage
------- -------- ---------- ------ ------------------------------------
<S> <C> <C> <C> <C>
TeleSpeed 144........... 144 Kbps 144 Kbps 35,000 ISDN replacement, non-standard lines
TeleSpeed 192........... 192 Kbps 192 Kbps 18,000 RLAN, business Internet
TeleSpeed 384........... 384 Kbps 384 Kbps 18,000 RLAN, business Internet
TeleSpeed 768........... 768 Kbps 768 Kbps 13,500 Business Internet
TeleSpeed 1.1........... 1.1 Mbps 1.1 Mbps 12,000 Business Internet
TeleSpeed 1.5........... 1.5 Mbps 384 Kbps 15,000 High-speed Web access
</TABLE>
- --------
* Estimated maximum distance from the end-user to the central office.
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Prices for our end-user services may vary depending upon the performance
level of the service. For example, our TeleSpeed 144 and 192 services are our
lowest priced end-user services and our TeleSpeed 1.1 and 1.5 services are our
highest priced end-user services. Our prices also vary across regions and for
high volume customers that are eligible for volume discounts. See "Risk
Factors--We may experience decreasing prices for our services" for a
discussion of the risks associated with our ability to sustain current price
levels in the future.
TeleSpeed 144. Our 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 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 we offer on copper lines that are either too long to carry
our higher speed services or are served by digital loop carrier systems or
similar equipment where a continuous copper connection is not available from
the end-user site to the central office.
TeleSpeed 192. This service provides one and a half to three times the
performance of ISDN at similar or lower price points to heavily-used ISDN
lines.
TeleSpeed 384. This service provides three to six times the performance of
ISDN at similar price points to heavily-used ISDN lines.
TeleSpeed 768. This service provides one-half the bandwidth of a T1 data
circuit at substantially less than one-half of the monthly price that we
estimate is typical for T1 service. The target market for the TeleSpeed 768
service is small businesses needing moderate speed access to the Internet but
who have previously been unable to afford the price of such service. The
service also competes favorably from a price/performance standpoint with
traditional fractional T1 and frame relay services for these same customers.
TeleSpeed 1.1. This service provides over two-thirds the bandwidth of a T1
data circuit at substantially less than one-half of the monthly price that we
estimate is typical for T1 service. The target market for the TeleSpeed 1.1
service is small businesses needing T1-level access to the Internet which have
previously been unable to afford the price of such service. The service also
competes favorably from a price/performance standpoint with traditional
fractional T1 and frame relay services for these same customers.
TeleSpeed 1.5. TeleSpeed 1.5 is our 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.
TeleSpeed Remote. This nationwide high-speed access service provides secure
interconnection between corporations, remote branch offices and teleworkers in
geographically distant locations. This service is targeted at small and mid-
sized businesses who want high-speed remote office connections at a cost lower
than ISDN or frame relay services.
Backhaul Services
We provide two backhaul services from our regional network to an Internet
service provider or enterprise customer site. These services include the
aggregation of all individual end-users in a metropolitan area and
transmission of the packet information to the customer on a single high-speed
line. The services, prices and suggested maximum aggregation of end-user
traffic are as follows:
Covad DS1. Our DS1 backhaul service is intended for the small business with
up to 50 RLAN end-users. The service operates at 1.5 Mbps and implements a
frame relay protocol compatible with most low-end and mid-range routers. As of
December 31, 1998, the price for such service was $975 per month.
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Covad DS3. Our DS3 backhaul service is targeted to large Internet service
providers and enterprises with up to 1,000 end-users. The service utilizes an
asynchronous transfer mode protocol that efficiently handles the high data
rates involved and operates at up to 45 Mbps. As of December 31, 1998, the
price for such service was $4,000 per month.
Non-Recurring Charges
In addition to monthly service charges, as of December 31, 1998, we impose
non-recurring order administration charges of $325 for Internet service
provider and RLAN end-users, $2,500 for a DS1 backhaul and $7,500 for a DS3
backhaul. Customers must also have purchased a DSL modem (priced from $399 to
$600), from us or a third party for each end-user of our services.
Our Regional Rollout
As part of our strategy to become a leading provider of DSL high-speed
digital communications services in the U.S., we intend to build networks and
offer services in 22 regions. We introduced our services in the San Francisco
Bay Area in December 1997, in the Los Angeles, New York and Boston
metropolitan areas in August 1998, in the Washington, D.C. and Seattle
metropolitan areas in December 1998, in the Philadelphia and Sacramento
metropolitan areas in March 1999 and in the Baltimore metropolitan area in
April 1999. As a result of the strong market demand for high-speed digital
communications services, we have increased our target markets to the following
22 regions:
<TABLE>
<CAPTION>
West Central South East
------------- ----------- ------- ----------------
<S> <C> <C> <C>
Los Angeles Chicago Atlanta Baltimore
Portland Denver Austin Boston
Sacramento Detroit Dallas New York
San Diego Minneapolis Houston Philadelphia
San Francisco Phoenix Miami Washington, D.C.
Seattle Raleigh
</TABLE>
Customers
We offer our services to Internet service providers and enterprises.
According to Claritas, Inc., a leading provider of diagnostic databases, there
are over 169,000 businesses in the U.S. with over 100 employees, of which we
estimate that 34,000 are in the six metropolitan areas that we initially
targeted and approximately 71,000 are in all of our 22 targeted regions. As of
January 31, 1999, we had entered into service agreements, had over 4,000 end-
user lines in operation and were in the initial stages of provisioning
backhaul service and end-user lines to over 100 additional Internet service
provider and enterprise customers. The following is a list of selected
Internet service provider and enterprise customers:
<TABLE>
<CAPTION>
Selected Internet Service Provider
Customers Selected Enterprise Customers
---------------------------------- -----------------------------
<C> <S>
Bay Junction Technology Apple Computer
Brainstorm Networks Cisco Systems
Concentric Network Corporation E*Trade Group
Direct Network Access, Ltd.
(DNAI) Fireman's Fund Insurance
DSL Networks Inc. Inktomi
Epoch Networks Intel
Flashcom, Inc. Oracle Corporation
Globix Corporation PeopleSoft
Lan Minds, Inc. Spelling Entertainment
Prodigy Stanford University
Slip.Net, Inc. Sun Microsystems
Verio Inc. Tandem Computers
Whole Earth Networks WebTV
</TABLE>
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Our agreements with Internet service providers generally have terms of one
year and are nonexclusive. We do not require the Internet service providers to
generate a minimum number of end-users and generally grant volume discounts
based on order volume. See "Risk Factors--We depend on Internet service
providers and other third parties for the marketing and sale of our services."
Our practice with respect to our enterprise customers has been to enter
into an arrangement for a negotiated price to install the service initially to
a small number of end-users. An enterprise customer decides whether to
implement a broad rollout of our services after evaluating the results of this
initial phase of deployment. To date, an enterprise customer's initial phase
of deployment and its decision to roll out our service to additional end users
has taken at least six months, and has generally taken longer than we
originally expected. As of December 31, 1998, a substantial majority of our
enterprise customers had not yet rolled out our services broadly to their
employees. We will not receive significant revenue from an enterprise customer
until and unless these rollouts occur. During the lengthy sales cycle for an
enterprise customer, we incur significant expenses in advance of the receipt
of revenues.
Sales and Marketing
Business and Consumer Internet. For the business and consumer Internet
access markets, we sell our service to Internet service providers that combine
our lines with their Internet access services and resell the combination to
their existing and new end-users. We address these markets through sales and
marketing personnel dedicated to the Internet service providers sales channel.
We supplement our sales efforts to Internet service providers through training
programs and marketing programs that include promotions and sales incentives
designed to encourage the Internet service providers to sell our services
instead of those of its competitors. As of December 31, 1998, we had more than
100 Internet service providers customers with their own sales personnel
marketing Internet services. See "Risk Factors--We depend on Internet service
providers and other third parties for the marketing and sale of our services."
Remote Local Area Network. We market our RLAN services to businesses
through a direct sales force, augmented by marketing programs with value added
resellers and IXCs. The direct sales force is organized by region, each
managed by a regional sales director who is responsible for lead generation
and sales and marketing efforts to RLAN customers. The sales force is directed
to deal directly with the chief information officer and the telecommunications
manager responsible for remote access within an enterprise. We augment our
sales efforts to RLAN customers through partnerships with value added
resellers, including systems integrators that can offer our TeleSpeed service
as part of a complete work-at-home solution to businesses.
Third Party Relationships. A key element of our strategy is to enter into
relationships with leading telecommunications companies, including CLECs and
IXCs, in which those companies resell our TeleSpeed services to their
customers. For example, we recently entered into commercial agreements with
each of AT&T, NEXTLINK and Qwest providing for the purchase, marketing and
resale of our services, primarily to their small business and enterprise
customers. We believe that these indirect sales channels will enable us to
penetrate our target markets more rapidly and eventually will generate the
majority of sales of our services. See "Risk Factors--We depend on Internet
service providers and other third parties for the marketing and sale of our
services."
We are also pursuing several types of joint marketing arrangements with our
Internet service providers and enterprise customers. In addition, certain of
our equipment suppliers have promoted our services through seminars to
corporate communications managers in the San Francisco Bay Area. We also
support our sales efforts with marketing efforts that include advertising
programs through radio and other popular media, attendance at trade shows and
presentations at industry conferences.
Service Deployment and Operations
Internet service providers and corporate communications managers typically
have had to assemble their digital communications connections using multiple
service and equipment suppliers. This leads to additional
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work, cost and coordination problems. With our TeleSpeed service, we emphasize
a one-stop service solution for our customers. This service solution includes:
. extending our network to customers and end-users;
. end-user premises wiring and modem configuration;
. ongoing network monitoring, customer reporting; and
. customer service and technical support.
Extending our Network to Customers and End-Users. We work with our
Internet service provider and enterprise customers to extend our network to
each customer premise and each end-user premise by ordering circuits from the
ILEC or a CLEC, interconnecting the customers and end-users to our network,
testing the circuits, configuring customer routers or switches and end-user
routers and monitoring the circuits from the network operations center.
End-User Premises Wiring. We use our own and subcontracted field service
crews and trucks to perform any required inside wiring at each end-user site.
Network Monitoring. We monitor our network from the network operations
center on a continuous basis, which often enables the correction of potential
network problems before a customer or end-user is affected. We have also
developed network capability to provide Internet service provider and
enterprise customers direct monitoring access of their end-users for more
efficient monitoring of their own network performance.
Customer Reporting. We communicate regularly with our customers about the
status of their end-users. We also operate a toll-free customer care help
line. Additionally, we provide Web-based tools to allow individual Internet
service providers and enterprise communications managers to monitor their end-
users directly, to place orders for new end-users, to enter trouble tickets on
end-user lines and to communicate with us on an ongoing basis.
Customer Service and Technical Support. We provide 24x7 service and
technical support to our Internet service provider customers and enterprise
communications managers. The Internet service provider and communications
manager serve as the initial contact for service and technical support, and we
provide the second level of support. By avoiding the higher cost of providing
direct end-user support, we believe we can grow our customer base more rapidly
with lower customer support costs.
Network Architecture and Technology
The key design principles of our 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. Our network is designed to provide
enhanced security to ensure secure availability of all internal applications
and information for remote locations. Our 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
our customers to safely transmit sensitive information and applications over
our TeleSpeed lines.
Consistent and Scalable Performance. We believe that eventually public
packet networks will evolve to replace over 40 million modems currently
connected to circuit switched networks that have been deployed in the U.S. As
such, we designed our network for scalability and consistent performance to
all users as the network grows. We have designed a "star topology" network
similar to the most popular local area network networking architecture
currently used in high performance enterprise networks. In this model, new
capacity is added
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automatically as each new user receives a new line. We also use ATM equipment
in our networks that implement packet switching directly in silicon circuits
rather than slower router-based designs that implement switching in router
software.
Intelligent End-to-End Network Management. Because the customers' and end-
users' lines are continuously connected they can also always be monitored. We
have visibility from the Internet service provider or enterprise site across
the network and into the end-user's home or business. Because our network is
centrally managed, we can identify and dynamically enhance network quality,
service and performance and address network problems promptly.
The primary components of our network are the network operations center,
regional data centers, our high-speed private metropolitan networks, central
office collocation spaces, including digital subscriber line access
multiplexers (DSLAMs), copper telephone lines and DSL modems.
Network Operations Center. Our entire network is managed from the network
operations center. We provide end-to-end network management using advanced
network management tools on a 24x7 basis, which enhances our ability to
address performance or connectivity issues before they affect the end-user
experience. From the network operations center, we can monitor the equipment
and circuits in each metropolitan network (including the ATM equipment), each
central office (including DSLAMs) and individual end-user lines (including the
DSL modems). Currently, the network operations center is collocated with our
San Francisco Bay Area regional data center. See "Risk Factors--A system
failure could delay or interrupt service to our customers."
Regional Data Centers. The regional data centers act as service hubs for
each metropolitan area that we enter. Data and network management traffic from
each central office is collected at the regional data center and switched to
our network operations center. We design the regional data centers for high
availability including battery backup power, redundant equipment and active
network monitoring.
Private Metropolitan Network. We operate our own private metropolitan
network in each region that we enter. The network consists of high-speed ATM
communications circuits that we lease to connect our regional data centers,
our equipment in individual central offices and our enterprise and Internet
service provider customers. This network operates at a speed of 45 to 155
Mbps.
Collocation Spaces. Through our interconnection agreements with the ILECs,
we seek to secure collocation space in every central office where we desire to
offer service. These collocation spaces are designed to offer the same high
reliability and availability standards as the ILEC's other central office
space. We require access to these collocation spaces for our equipment and for
persons employed by, or under contract with, us. We place DSLAMs in our
collocation spaces to provide the high-speed DSL signals on each copper line
to our end-users. We expect to deploy 40 to 250 central office spaces in any
metropolitan area that we enter. As of January 31, 1999, we had over 165
central office spaces operational. In addition, we have a significant number
of additional spaces under construction as well as other spaces on order from
various ILECs. In December 1998, we entered into a professional service
arrangement with Lucent Technologies to augment and accelerate its ability to
deploy its collocation facilities.
Copper Telephone Lines. We lease the copper telephone lines running to end-
users from the ILEC under terms specified in our interconnection agreements.
We lease lines that, in numerous cases, must be specially conditioned by the
ILEC to carry digital signals, usually at an additional charge relative to
that for voice grade copper lines. The price we are obligated to pay for these
lines currently varies from $4 to $43 per month per line with additional one-
time charges in some cases for installation, modification or removal of lines.
DSL Modems and On-Site Connectivity. We buy our DSL modems from our
suppliers for resale to our Internet service provider or enterprise customers
for use by their end-users. We configure and install 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
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services, except the equipment used in our TeleSpeed 144 services, since there
are not yet interoperability standards for the equipment used in our higher-
speed services.
We are also pursuing a program of ongoing network development. Our 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 our network and to facilitate the development of network
applications by third parties that will increase the use of our network. See
"Risk Factors--The scalability and speed of our network remains largely
unproven."
Competition
The markets for business and consumer Internet access and RLAN access
services are intensely competitive. We expect that these markets will become
increasingly competitive in the future. We face competition from ILECs, cable
modem service providers, traditional and new national long distance carriers,
Internet service providers, on-line service providers, wireless and satellite
service providers and other CLECs. The principal bases of competition in our
markets include:
. price/performance;
. breadth of service availability;
. reliability of service;
. network security;
. ease of access and use;
. content bundling;
. customer support;
. brand recognition;
. operating experience;
. relationships with Internet service providers and other third parties;
and
. capital resources.
Many of our competitors including the ILECs have, among other things,
greater brand recognition, operating experience, strategic relationships, and
capital resources. Therefore, we cannot assure you that we will be able to
compete effectively in our target markets.
Incumbent Local Exchange Carriers. All of the largest ILECs present in our
target markets have begun offering DSL services or have announced their intent
to provide DSL services in the near term.As a result, the ILECs represent
strong competition in all of our target service areas, and we expect this
competition to intensify. For example, the ILECs have an established brand
name and reputation for high quality in their service areas, possess
sufficient capital to deploy DSL equipment rapidly, have their own copper
lines and can bundle digital data services with their existing analog voice
services to achieve economies of scale in serving customers. Certain of the
ILECs have aggressively priced their consumer DSL services as low as $30-$40
per month, placing pricing pressure on our TeleSpeed services. The ILECs are
also in a position to offer service from central offices where we are unable
to secure collocation space and offer service because of asserted or actual
space restrictions. Accordingly, we may be unable to compete successfully
against the ILECs.
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Cable Modem Service Providers. Cable modem service providers such as @Home
Network and MediaOne (and their respective cable partners) are deploying high-
speed Internet access services over hybrid fiber coaxial cable networks.
Hybrid fiber coaxial cable is a combination of fiber optic coaxial cable,
which has become the primary architecture utilized by cable operators in
recent and ongoing upgrades of their systems. Where deployed, these networks
provide similar and in some cases higher-speed Internet access and RLAN access
than we provide. They also offer these services at lower price points than our
TeleSpeed services and target residential consumers, as well as business
customers. We believe the cable modem service providers face a number of
challenges that providers of DSL services do not face. For example, different
regions within a metropolitan area may be served by different cable modem
service providers, making it more difficult to offer the blanket coverage
required by potential business and RLAN access customers. Also, much of the
current cable infrastructure in the U.S. must be upgraded to support cable
modems, a process which we believe is significantly more expensive and time-
consuming than the deployment of DSL-based networks. Notwithstanding these
challenges, actual or prospective competition with cable modem service
providers may have a significant negative effect on our ability to secure
customers and may create downward pressure on the prices we can charge for our
services.
National Long Distance Carriers. IXCs, such as AT&T, Sprint, MCI WorldCom
(acquired by MCI WorldCom) and Qwest, have deployed large-scale Internet
access networks and ATM networks, sell connectivity to businesses and
residential customers, and have high brand recognition. They also have
interconnection agreements with many of the ILECs and a number of collocation
spaces from which they are currently offering or could begin to offer
competitive DSL services.
Fiber-Based CLECs. Companies such as Teleport Communications Group, Inc.
(acquired by AT&T), Brooks Fiber Properties, Inc. (acquired by MCI WorldCom)
and MFS (acquired by MCI WorldCom) have extensive fiber networks in many
metropolitan areas primarily providing high-speed digital and voice circuits
to large corporations. They also have interconnection agreements with the
ILECs pursuant to which they have acquired collocation space in many markets
targeted by us. These companies are modifying or 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. Internet service providers such as BBN
(acquired by GTE), UUNET Technologies (acquired by MCI WorldCom), Earthlink
Networks, Concentric Network, Mindspring Enterprises, Netcom On-Line
Communication Services and PSINet provide Internet access to residential and
business customers, generally using the existing public switched telephone
network at ISDN speeds or below. Some Internet service providers such as UUNET
Technologies in California and New York, HarvardNet Inc. and InterAccess have
begun offering DSL-based services. To the extent we are not able to recruit
Internet service providers as customers for our service, Internet service
providers could become competitive DSL service providers.
On-line Service Providers. On-line service providers include companies such
as AOL, Excite, Inc. (recently acquired by @Home), Compuserve (acquired by
AOL), MSN (a subsidiary of Microsoft Corp.) 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 on-line service providers
have developed their own access networks for modem connections. If these on-
line service providers were to extend their access networks to DSL or other
high-speed service technologies (such as through the recent merger of Excite
and @Home), they would become competitors of ours.
Wireless and Satellite Date. Wireless and satellite data service providers
are developing wireless and satellite-based Internet connectivity. We may face
competition from terrestrial wireless services, including two
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Gigahertz (Ghz) and 28 Ghz wireless cable systems (Multi-channel Microwave
Distribution System (MMDS) and Local Multi-channel Distribution System
(LMDS)), and 18 Ghz and 39 Ghz point-to-point microwave systems. For example,
the FCC is currently considering new rules to permit MMDS licensees to use
their systems to offer two-way services, including high-speed data, rather
than solely to provide one-way video services. The FCC also recently auctioned
spectrum for LMDS services in all markets. This spectrum is expected to be
used for wireless cable and telephony services, including high-speed digital
services. In addition, companies such as Teligent Inc., Advanced Radio Telecom
Corp. and WinStar Communications, Inc., hold point-to-point microwave licenses
to provide fixed wireless services such as voice, data and videoconferencing.
We also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Communications (a subsidiary of General Motors
Corporation), Teledesic and others have filed applications with the FCC for
global satellite networks which can be used to provide broadband voice and
data services, and the FCC has authorized several of these applicants to
operate their proposed networks.
Other CLECs. Other companies such as Rhythms NetConnections and NorthPoint
Communications offer high-speed digital services using a business strategy
similar to ours. The 1996 Telecommunications Act specifically grants any and
all CLECs the right to negotiate interconnection agreements with the ILEC.
Further, the 1996 Telecommunications Act allows CLECs to enter into
interconnection agreements which are identical in all respects to ours. We
have already had an interconnection agreement copied in this manner.
As a first mover in selected markets that we enter, we seek the following
strategic benefits: (i) securing and retaining customers before the same high-
speed services are available from others, (ii) engendering end-user loyalty
through superior coverage and high customer satisfaction and (iii) capturing
the largest customer base and thereby achieving economies of scale sufficient
to drive down prices and develop a leadership position. We may not be able to
achieve these benefits if substantial competition from any of the foregoing
competitors exists or develops in our markets.
Interconnection Agreements with ILECs
A critical aspect of our business is our interconnection agreements with
the ILECs. These agreements cover a number of aspects including:
. the price we pay to lease access to the ILEC's copper lines;
. the special conditioning the ILEC provides on certain of these lines to
enable the transmission of DSL signals;
. the price and terms for collocation of our equipment in the ILEC's
central offices;
. the price we pay and access we have to the ILEC's transport facilities;
. our ability to access conduits and other rights of way the ILEC has to
construct our own network facilities;
. the operational support systems and interfaces that we can use to place
orders and trouble reports and monitor the ILEC's response to our
requests;
. the dispute resolution process that we use to resolve disagreements on
the terms of the interconnection contract; and
. the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of the ILEC
relationship.
As of January 31, 1999, we have entered into interconnection agreements
with six different major ILECs in the majority of the states covering our
target markets. ILECs do not in many cases agree to our requested provisions
in interconnection agreements and we have not consistently prevailed in
obtaining all of our desired provisions in such agreements either voluntarily
or through the interconnection arbitration process. We cannot be sure that we
will be able to continue to sign interconnection agreements with existing or
other ILECs. We are
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currently negotiating agreements with several ILECs in our 22 announced
regions which are necessary before we can expand our services into these
metropolitan areas served by such ILECs. The ILECs are also permitting CLECs
to adopt previously signed interconnection agreements. In certain instances,
we have adopted the interconnection agreement of another CLEC. Other CLECs
have also adopted the same or modified versions of our interconnection
agreements, and may continue to do so in the future.
Our interconnection agreements have a maximum term of three years.
Therefore, we will have to renegotiate our existing agreements when they
expire. Although we expect to renew our interconnection agreements and believe
the 1996 Telecommunications Act limits the ability of ILECs not to renew such
agreements, we may not succeed in extending or renegotiating our
interconnection agreements on favorable terms. Additionally, disputes have
arisen and will likely arise in the future as a result of differences in
interpretations of the interconnection agreements. For example, we are in
arbitration proceedings with two ILECs under the dispute resolution clauses of
our interconnection agreements. These disputes have delayed our deployment of
our network. They have also adversely affected our service to our customers
and our ability to enter into additional interconnection agreements with the
ILECs in other states. Finally, the interconnection agreements are subject to
state commission, FCC and judicial oversight. These government authorities may
modify the terms of the interconnection agreements in a way that adversely
affects our business, prospects, operating results, financial condition and
our ability to service and repay our indebtedness, including the new notes.
Government Regulation
Overview. Our services are subject to a variety of federal regulations.
With respect to certain activities and for certain purposes, we have submitted
our operations to the jurisdiction of state and local authorities who may also
assert more extensive jurisdiction over our facilities and services. The FCC
has jurisdiction over all of our services and facilities to the extent that we
provide interstate and international services. To the extent we provide
identifiable intrastate services, our services and facilities are subject to
state regulations. In addition, local municipal government authorities also
assert jurisdiction over our facilities and operations. The jurisdictional
reach of the various federal, state and local authorities is subject to
ongoing controversy and judicial review, and we cannot predict the outcome of
such review.
Federal Regulation. We must comply with the requirements of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, as
well as the FCC's regulations under the statute. The 1996 Telecommunications
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 Telecommunications Act.
Among other things, the 1996 Telecommunications Act removes barriers to
entry in the local telecommunications market. It does this by preempting state
and local laws that are barriers to competition and by requiring ILECs to
provide nondiscriminatory access and interconnection to potential competitors,
such as cable operators, wireless telecommunications providers, IXCs and CLECs
such as us.
Regulations promulgated by the FCC under the 1996 Telecommunications Act
specify in greater detail the requirements of the 1996 Telecommunications Act
imposed on the ILECs to open their networks to competition by providing
competitors interconnection, collocation space, access to unbundled network
elements, retail services at wholesale rates and nondiscriminatory access to
telephone poles, ducts, conduits, and rights-of-way. The requirements enable
companies such as us 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 our TeleSpeed services. The U.S.
Supreme Court has recently ruled on challenges to the FCC regulations.
Although the U.S. Supreme Court upheld most of the FCC's authority and its
regulations, the FCC must now reexamine and redefine which unbundled networks
elements the ILECs must offer. There can be no guarantee that the FCC will not
issue new regulations that have a material adverse impact on our ability to
compete.
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The 1996 Telecommunications Act also allows the regional bell operating
companies (RBOCs), which are the ILECs created by AT&T's divestiture of its
local exchange business, to enter the long distance market within their own
local service regions upon meeting certain requirements. The remaining RBOCs
include BellSouth, Bell Atlantic Corporation, Ameritech Corporation, U S WEST
Communications, Inc. and SBC Communications, Inc. 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 we receive from
each of the RBOCs.
In addition, the 1996 Telecommunications Act provides relief from the
earnings restrictions and price controls that have governed the local
telephone business for many years. ILEC tariff filings at the FCC have been
subjected to increasingly less regulatory review. However, precisely when and
to what extent the ILECs will secure pricing flexibility or other regulatory
freedom for their services is uncertain. For example, under the 1996
Telecommunications Act, the FCC is considering eliminating certain regulations
that apply to the ILEC's provision of services that are competitive with ours.
The timing and the extent of regulatory freedom and pricing flexibility and
regulatory freedom granted to the ILECs will affect the competition we face
from the ILECs' competitive services.
Further, the 1996 Telecommunications Act provides the FCC with the
authority to forbear from regulating entities such as us who are classified as
"non-dominant" carriers. The FCC has exercised its forbearance authority. As a
result, we are not obligated to obtain prior certificate approval from the FCC
for our interstate services or file tariffs for such services. We have
determined not to file tariffs for our interstate services. We provide our
interstate services to our customers on the basis of contracts rather than
tariffs. We believe that it is unlikely that the FCC will require us to file
tariffs for our interstate services in the future.
On March 18, 1999, the FCC announced that it was adopting rules to
strengthen collocation requirements and reduce the costs and delays associated
with collocation. In particular, the FCC is requiring ILECs to make new
collocation arrangements, including cageless and shared collocation, available
to competing carriers. New entrants will be able to locate all equipment
necessary for interconnection, whether or not such equipment has a switching
function. The FCC's rules may not be successfully implemented. In the same
announcement, the FCC provided notice of proposed rule-making technical
feasibility of two different carriers to share a single line to provide voice
service and advanced services. The notice will seek comments on the
operational, pricing, legal and policy ramifications of mandating such line
sharing at the federal level. If adopted, these rules could materially lower
the price we pay to lease access to the ILEC's copper lines. While we believe
that these rules would be advantageous to us, the FCC may decide not to
implement such rules.
Any changes in applicable federal law and regulations, in particular,
changes in its interconnection agreements with ILECs, the prospective entry of
the RBOCs into the in-region long distance business and grant of regulatory
freedom and pricing flexibility to the ILECs, could have a material adverse
impact on our business prospects, operating results, financial condition and
our ability to service and repay our indebtedness, including the new notes.
State Regulation. To the extent we provide identifiable intrastate services
or have otherwise submitted ourselves to the jurisdiction of the relevant
state telecommunications regulatory commissions, we are 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 Telecommunications Act. As of
December 31, 1998, we were authorized under state law to operate as a CLEC in
19 states, have pending applications in seven additional states, and intend to
obtain authorization in the other states necessary to cover our 22 target
regions. We have pending arbitration proceedings in different states for
interconnection arrangements with the relevant ILECs. We have concluded
arbitration proceedings in a number of states by entering into interconnection
agreements with the relevant ILECs. We have filed tariffs in certain states
for intrastate services as required by state law or regulation. We are also
subject to periodic financial and other reporting requirements of these states
with respect to our intrastate services.
The different state commissions have various proceedings to determine the
rates, charges and terms and conditions for unbundled network elements
(unbundled network elements are the various portions of an ILEC's
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network that a CLEC can lease for purposes of building a facilities-based
competitive network, including copper lines, central office collocation space,
inter-office transport, operational support systems, local switching and
rights of way), as well as the discount for wholesale services that we
purchase from the relevant ILEC. The rates set forth in our 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 unbundled network elements as unbundled loops and
interoffice transport. We have participated in unbundled network element rate
proceedings in the states of California and Washington in an effort to reduce
these rates. Any state commission rate determinations to increase unbundled
network element rates could have a material adverse effect on our business,
prospects, operating results, financial condition and our ability to service
and repay our indebtedness, including the new notes.
The applicability of the various state regulations on our business and
compliance requirements will be further affected to the extent to which our
services are determined to be intrastate services. Jurisdictional
determinations of our services as intrastate services could have a material
adverse effect on our business, prospects, operating results, financial
condition and our ability to service and repay our indebtedness, including the
new notes.
Local Government Regulation. We may be required to obtain various permits
and authorizations from municipalities in which we operate our own facilities.
The issue of whether actions of local governments over the activities of
telecommunications carriers, 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 we rely primarily on the
unbundled network elements of the ILECs, in certain instances we deploy our
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 our business,
prospects, operating results, financial condition and our ability to service
and repay our indebtedness, including the new 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 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 Telecommunications Act or any
final regulations adopted pursuant to the 1996 Telecommunications Act or our
business cannot be determined at this time but may well be adverse to our
interests. We cannot predict the impact, if any, that future regulation or
regulatory changes may have on our business and we can give you no assurance
that such future regulation or regulatory changes will not have a material
adverse effect on our business, prospects, operating results, financial
condition and our ability to service and repay our indebtedness, including the
new notes. See "Risk Factors--We depend on ILECs to provide collocation space
and unbundled network elements, both of which are critical to our success" and
"--Our services are subject to government regulation, and changes in current
or future laws or regulations could adversely affect our business."
Intellectual Property
We regard our products, services and technology as proprietary and attempt
to protect them with patents, copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. These methods may not be
sufficient to protect our technology. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, services or
technology without authorization, or to develop similar technology
independently. Currently we have a number of patent applications and intend to
prepare additional applications and to seek patent protection for our systems
and services to the extent possible. We may not obtain any issued patents or
that, if issued, any such patents would protect our intellectual property from
competition which could
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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. The global nature of the Internet makes
it virtually impossible to control the ultimate destination of our proprietary
information. Steps taken by us may not prevent misappropriation or
infringement of our technology. In addition, litigation may be necessary in
the future to enforce our intellectual property rights to protect our 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 our business, prospects,
operating results, financial condition and our ability to service and repay
our indebtedness, including the new notes.
Employees
As of December 31, 1998, we had 335 employees (excluding temporary
personnel and consultants), employed in engineering, sales, marketing,
customer support, and general and administrative functions. None of our
employees are represented by a labor union, and we considers our relations
with our employees to be good. Our ability to achieve our financial and
operational objectives depends in large part upon the continued service of our
senior management and key technical, sales, marketing and managerial
personnel, and our continuing ability to attract and retain highly qualified
technical, sales, marketing and managerial personnel. Competition for such
qualified personnel is intense, particularly in software development, network
engineering and product management.
Board of Advisors
We maintain a board of advisors and conduct meetings of this advisory group
for two days each quarter. The board of advisors gives us guidance on issues
such as developments in communications equipment technology, network design
strategy, regulatory matters, the competitive landscape, marketing of our
services, identification of potential employees, financial strategy, and
introductions to potential strategic partners and alliances. The board of
advisors serves in an advisory capacity and does not have any managerial
control over us. Below is a list of our board of advisors as of December 31,
1998 and their backgrounds.
Robert Berger is a founder of InterNex Information Services, an ISDN and
high bandwidth services-focused Internet service provider in California.
Duncan Davidson is one of our founders and is currently Senior Vice
President of InterTrust Technologies Corporation, a leading provider of trust
management systems for electronic commerce and digital rights management. He
previously served as Managing Partner of Regis McKenna's consulting company.
Dave Farber is a chaired telecommunications professor at the University of
Pennsylvania and currently serves as a member of the Presidential Advisory
Committee on Information Technology.
Robert Hawk is a member of our board of directors. For a description of his
professional background, see "Management--Directors and Executive Officers."
William Lane is the former Chief Financial Officer at Intuit Inc. and is a
board member of MetaCreations Corporation, Quarterdeck Corporation, Expert
Software Inc., Storm Technology Inc. and several private companies.
Daniel Lynch is a member of our board of directors. For a description of
his professional background, see "Management--Directors and Executive
Officers."
Frank Marshall is a member of our board of directors. For a description of
his professional background, see "Management--Directors and Executive
Officers."
Kim Maxwell is the former Chairperson of the ADSL Forum and founder of
Racal Vadic and Amati.
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Sharon Nelson is the former Chairperson of the Washington State Public
Utilities Commission.
David Piscitello is the President of Core Competence, Inc., program
chairman for U.S. (domestic) Networld and Interop Conferences, and co-producer
of the Internet Security Conference.
David Strom is the president of David Strom, Inc. and was the founding
editor-in-chief of Network Computing Magazine.
Properties
We are headquartered in Santa Clara, California in facilities consisting of
approximately 62,000 square feet pursuant to a lease that will expire on or
before July 14, 2002. We also lease office space in each of the regions in
which we have begun operations. We are in the process of acquiring office
space for regional headquarters for each of our additional target regions. In
addition, our San Francisco Bay Area regional data center consists of
approximately 2,000 square feet and is located in San Jose, California, which
we occupy under a ten-year lease with two five-year renewal options.
Currently, and until a permanent location is secured, we utilize a portion of
the San Francisco Bay Area regional data center space to operate our network
operations center. We also lease collocation space in central offices from the
ILEC in each region that we operate or plan to operate under the terms of our
interconnection agreements and obligations imposed by state public utilities
commissions and the FCC. While the terms of these leases are perpetual, the
productive use of our collocation facilities are subject to the terms of our
interconnection agreements which expire on or before March 2001. We will
increase our collocation space as we expand our network in the San Francisco
Bay Area and other regions.
Legal Proceedings
We are engaged in a variety of negotiations, arbitrations and regulatory
and court proceedings with multiple ILECs. These negotiations, arbitrations
and proceedings concern the ILECs' denial of physical collocation space to us
in certain central offices, the cost and delivery of collocation spaces, the
delivery of transmission facilities and telephone lines, billing issues and
other operational issues. For example, we are currently involved in commercial
arbitration proceedings with Pacific Bell over these issues. We have also
filed a lawsuit against Pacific Bell in the Federal District Court in the
Northern District of California. We are pursuing a variety of contract, tort,
antitrust and other claims, such as violations of the Telecommunications Act
in these proceedings. In November 1998, we prevailed in our commercial
arbitration proceeding against Pacific Bell. The arbitration panel found that
Pacific Bell breached its interconnection agreement with us and failed to act
in good faith on multiple counts. The arbitration panel ruled in favor of
awarding us direct damages, as well as attorneys fees and costs of the
arbitration. Pacific Bell is currently attempting to have the decision
vacated. Failure to resolve the various legal disputes and controversies
between us and the various ILECs without excessive delay and cost and in a
manner that is favorable to us could have a material adverse effect on our
business, prospects, operating results and financial condition.
We are not currently engaged in any other legal proceedings that we believe
could have a material adverse effect on our business, prospects, operating
results and financial condition. We are, however, subject to state commission,
FCC and court decisions as they relate to the interpretation and
implementation of the 1996 Telecommunications Act, the interpretation of CLEC
interconnection agreements in general and our interconnection agreements in
particular. In some cases, we 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 our agreements. The results of
any of these proceedings could have a material adverse effect on our business,
prospects, operating results, financial condition and our ability to service
and repay our indebtedness, including the new notes.
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MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, and their respective ages as of March
15, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert Knowling, Jr..... 43 President, Chief Executive Officer and Director
Charles McMinn.......... 47 Chairman, Board of Directors
Timothy Laehy........... 42 Chief Financial Officer and Vice President, Finance
Rex Cardinale........... 46 Chief Technology Officer and Vice President, Engineering
Robert Davenport, III... 39 Executive Vice President, Business Development
Charles Haas............ 39 Executive Vice President, Sales
Catherine Hemmer........ 40 President, Operations
Dhruv Khanna............ 39 Executive Vice President, General Counsel and Secretary
Robert Roblin........... 46 Executive Vice President, Marketing
Robert Hawk............. 59 Director
Henry Kressel........... 65 Director
Joseph Landy............ 37 Director
Daniel Lynch............ 57 Director
Frank Marshall.......... 52 Director
Rich Shapero............ 51 Director
</TABLE>
Robert Knowling, Jr. has been our President, Chief Executive Officer and a
member of our board of directors since July 1998. From October 1997 through
July 1998, Mr. Knowling served as the Executive Vice President of Operations
and Technologies at U S WEST Communications, Inc. In this capacity, Mr.
Knowling was responsible for planning, delivering and maintaining high-quality
telecommunications services for more than 25 million customers in 14 western
and midwestern states. From March 1996 through September 1997, he served as
Vice President of Network Operations at U S WEST Communications, Inc. From
November 1994 through March 1996, he served as Vice President of Network
Operations for Ameritech Corporation. Mr. Knowling began his career in 1977 at
Indiana Bell where he progressed through a variety of assignments in
operations, engineering and marketing. When Indiana Bell became a part of
Ameritech Corporation, Mr. Knowling assumed positions of increasing
responsibility in marketing, product development, large business marketing and
network operations, including service on Ameritech Corporation's re-
engineering breakthrough development team. As lead architect of the Ameritech
Corporation transformation, Mr. Knowling reported directly to the Chairman.
Mr. Knowling currently serves on the board of directors of Shell Oil Company.
Charles McMinn is one of our founders and has been the Chairman of our
board of directors since July 1998. He served as our President and Chief
Executive Officer and as a member of our board of directors from October 1996
to July 1998. Mr. McMinn has over 20 years of experience in creating,
financing, operating and advising high technology companies. From July 1995 to
October 1996, and from August 1993 to June 1994, Mr. McMinn managed his own
consulting firm, Cefac Consulting, which focused on strategic development for
information technology and communications businesses. From June 1994 to
November 1995, he served as Principal, Strategy Discipline, at Gemini
Consulting. From August 1992 to June 1993, he served as President and Chief
Executive Officer of Visioneer Communications, Inc. and from October 1985 to
June 1992 was a general partner at InterWest Partners, a venture capital firm.
Mr. McMinn began his Silicon Valley career as the product manager for the 8086
microprocessor at Intel.
Timothy Laehy joined us in August 1997. He served as our Chief Financial
Officer, Treasurer and Vice President, Finance until February 1999 and has
served as our Chief Financial Officer and Vice President, Finance since that
date. Prior to joining us, 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 to 1991, Mr. Laehy
served as a senior associate with Recovery Equity Partners, a private venture
capital
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investment fund. From 1985 to 1990, he served in various capacities at
Guarantee Acceptance Capital Corporation, an investment bank, Liberty Mutual
Insurance Company and Union Carbide Corporation.
Rex Cardinale joined us in June 1997. He served as our Vice President,
Engineering until February 1999 and has served as our Chief Technology Officer
and Vice President, Engineering since that date. 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 capacities at Rolm Corporation.
Robert R. Davenport, III joined us in January 1999. He served as our Vice
President, Business Development until February 1999 and has served as our
Executive Vice President, Business Development since that date. Prior to
joining us, Mr. Davenport was Senior Vice President and Chief Operating
Officer at Tele-Communications, Inc.'s Internet Services subsidiary, TCI.NET
from 1997 to 1999. Between 1995 and 1997, Mr. Davenport was with Tele-
Communications, Inc., as Vice President, Finance and Development for the
Telephony Services subsidiary. From 1992 to 1995, he was Managing Partner of
RD Partners, LLC, a private investment firm focused on leveraged equity
investments.
Charles Haas is one of our founders. He served as our Vice President, Sales
and Marketing from May 1997 until November 1998 and as our Vice President,
Sales from November 1998 until February 1999. Since February 1999, Mr. Haas
has served as our Executive Vice President Sales. Mr. Haas has over fourteen
years of sales and business development experience with Intel where he held
various positions from July 1982 to April 1997. At Intel, Mr. Haas served as
manager of corporate business development, focusing on opportunities in the
broadband computer communications area, and played a principal role in the
development of our Residential Broadband strategy for telephone and satellite
companies (DSL, Fiber-to-the-Curb and satellite modems).
Catherine Hemmer joined us in August 1998. She served as our Vice
President, Operations until February 1999 and has served as our President,
Operations since that date. From 1996 to August 1998, she was Vice President,
Network Reliability and Operations at U S WEST Communications, Inc. From 1995
to 1996, she served as General Manager, Network provisioning at Ameritech
Services, Inc., a telecommunications company. From 1987 to 1995, she served in
various capacities, including Vice President, Network Services, at MFS
Telecom, Inc. From 1987 to 1988, she served as Senior Manager, Management
Information Systems at Chicago Fiber Optic Corporation d/b/a Metropolitan
Fiber Systems of Chicago, Inc., a start-up venture developing a market niche
for fiber optic local access networks.
Dhruv Khanna is one of our founders. He served as our Vice President,
General Counsel and Secretary from October 1996 until February 1999 and has
served as our Executive Vice President, General Counsel and Secretary since
that date. He was an in-house counsel for Intel's communications products
division and its Senior Telecommunications Attorney between 1993 and 1996.
Between 1987 and 1993, Mr. Khanna was an associate at Morrison & Foerster
where his clients included Teleport Communications Group (now AT&T), McCaw
Cellular Communications, Inc. (now AT&T Wireless), and Southern Pacific
Telecom (now Qwest). Mr. Khanna has extensive experience with regulatory
matters, litigation 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.
Robert Roblin joined us in November 1998. He served as our Vice President,
Marketing until February 1999 and has served as our Executive Vice President,
Marketing since that date. Prior to joining us, he was Executive Vice
President of Marketing at Adobe Systems, Inc. from 1996 to November 1998. From
1994 to 1996, Mr. Roblin served as Vice President and General Manager of
Marketing of the Consumer Division of IBM
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<PAGE>
Corporation. Between 1992 and 1994, Mr. Roblin was the Vice President of
Marketing of Pensoft, a start-up pen-based software company that produced a
database-driven personal information manager.
Robert Hawk has served as a member of our board of directors since April
1998. Mr. Hawk is President of Hawk Communications and recently retired as
President and Chief Executive Officer of U S WEST Multimedia Communications,
Inc., where he headed the cable, data and telephony communications business
from May 1996 to April 1997. He was president of the Carrier Division of U S
West Communications, a regional telecommunications service provider, from
September 1990 to May 1996. Prior to that time, Mr. Hawk was Vice President of
Marketing and Strategic Planning for CXC Corporation. Prior to joining CXC
Corporation, Mr. Hawk was director of Advanced Systems Development for
AT&T/American Bell. He currently serves on the boards of Xylan Corporation,
PairGain Technologies, Inc., Premisys Communications, Concord Communications
and Radcom.
Henry Kressel has served as a member of our board of directors since July
1997. Dr. Kressel has been with E.M. Warburg, Pincus & Co., LLC since 1983 and
is currently a managing director of the firm. He is also a partner of Warburg,
Pincus & Co., the general partner of Warburg, Pincus Investors, L.P. Prior to
that time, he served as Staff Vice President of the RCA Corporation
responsible for research and development of optoelectronics, semiconductors
and related software and technologies. Dr. Kressel serves as a director of
Earthweb, Inc., Level One Communications, Inc., IA Corporation, NOVA
Corporation, Inc. and several privately held companies.
Joseph Landy has served as a member of our 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 of the firm. Throughout his career at E.M.
Warburg, Pincus & Co., LLC, Mr. Landy has focused primarily on investments in
information technology and specialty semiconductors. Mr. Landy is a director
of two publicly traded companies, Indus International, Inc. and Level One
Communications, Inc., and of several privately held companies.
Daniel Lynch has served as a member of our board of directors since April
1997. Mr. Lynch is also a founder of CyberCash, Inc. and has served as
chairman of its board of directors since August 1994. From December 1990 to
December 1995, he served as Chairman of the board of directors of Softbank
Forums, a provider of education and conference services for the information
technology industry. Mr. Lynch founded Interop Company in 1986, which is now a
division of ZD Comdex and Forums. Mr. Lynch is a member of the Association for
Computing Machinery and the Internet Society. He is also a member of the Board
of Trustees of the Santa Fe Institute, the Bionomics Institute and
CommerceNet. He previously served as Director of the Information Processing
Division for the Information Sciences Institute in Marina del Rey, where he
led the Arpanet team that made the transition from the original NCP protocols
to the current TCP/IP based protocols. He has served as a director of Exodus
Communications since January 1998. Mr. Lynch previously served as a member of
the board of directors at UUNET Technologies from April 1994 until August
1996.
Frank Marshall has served as a member of our board of directors since
October 1997. Mr. Marshall currently serves on the board of directors of PMC-
Sierra Inc. and several private companies. Mr. Marshall also serves on the
technical advisory board of several high technology private companies. He is a
member of the InterWest Partners Advisory Committee and a Venture Partner at
Sequoia Capital. From 1992 to 1997, Mr. Marshall served as Vice President of
Engineering and Vice President and General Manager, Core Business Unit of
Cisco Systems Inc. From 1982 to 1992, he served as Senior Vice President,
Engineering at Convex Computer Corporation.
Rich Shapero has served as a member of our board of directors since July
1997. Mr. Shapero has been a general partner of Crosspoint Venture Partners,
L.P., a venture capital investment firm, since April 1993. From January 1991
to June 1992, he served as Chief Operating Officer of Shiva Corporation, a
computer network company. Previously, he was a Vice President of Sun
Microsystems, Senior Director of Marketing at AST, and held marketing and
sales positions at Informatics General Corporation and UNIVAC's Communications
Division. Mr. Shapero serves as a member of the board of directors of
Powerwave Corporation.
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<PAGE>
Classified Board
The board of directors is divided into three classes. The term of office
and directors consisting of each class is as follows:
<TABLE>
<CAPTION>
Class Directors Term of Office
----- --------- --------------
<C> <C> <S>
Class I . expires at the annual meeting of
Daniel Lynch stockholders in 2000 and at each third
Rich Shapero succeeding annual meeting thereafter
Class II Henry Kressel . expires at the annual meeting of
Frank Marshall stockholders in 2001 and at each third
Charles McMinn succeeding annual meeting thereafter
Class III Robert Hawk . expires at the annual meeting of
Robert Knowling, Jr. stockholders in 2002 and at each third
Joseph Landy succeeding annual meeting thereafter
</TABLE>
The classification of directors has the effect of making it more difficult
to change the composition of the board of directors.
Board Committees
In April 1998, our board of directors established an audit committee and a
compensation committee. The audit committee consists of two of our outside
directors, Messrs. Landy and Lynch. The audit committee's primary
responsibilities include:
. conducting a post-audit review of the financial statements and audit
findings;
. reviewing our independent auditors proposed audit scope and approach; and
. reviewing on a continuous basis the adequacy of our system of internal
accounting controls.
The compensation committee also consists of two of our outside directors,
Dr. Kressel and Mr. Shapero. The primary responsibilities of the compensation
committee include:
. reviewing and determining the compensation policy for our executive
officers and directors, and other employees as directed by the board of
directors;
. reviewing and determining all forms of compensation to be provided to our
executive officers; and
. reviewing and making recommendations to our board of directors regarding
general compensation goals and guidelines for our employees and the
criteria by which bonuses to our employees are determined.
Compensation Committee Interlocks and Insider Participation
No member of our board of directors or of its compensation committee serves
as an executive officer of any entity that has one or more of our executive
officers serving as members of its board of directors or board of directors
compensation committee. No such interlocking relationship has existed in the
past. See "Certain Relationships and Related Transactions" for a description
of transactions between us and entities affiliated with members of our
compensation committee.
Director Compensation
Except for grants of stock options subject to vesting and restricted stock
subject to repurchase, our directors generally do not receive compensation for
services provided as a director. We do not pay additional amounts for
committee participation or special assignments of our board of directors,
except for reimbursement of expenses in attending board of directors and
committee meetings.
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<PAGE>
Executive Compensation
The following table sets forth certain information with respect to
compensation awarded to, earned by or paid to each person who served as our
Chief Executive Officer or was one of our four other most highly compensated
executive officers (collectively, the "Named Executive Officers") during the
fiscal years ended December 31, 1997 and December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual
Compensation
-------------------- Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options/SARs Compensation(1)
- ------------------ ---- -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Robert Knowling, Jr. ... 1998 $180,768(4) $750,000 2,100,000 $196
President and Chief 1997 -- -- -- --
Executive Officer(2)
Charles McMinn ......... 1998 $167,019 $ 15,764 -- $286
Chairman, Board of 1997 87,500(4) -- -- 126
Directors(3)
Rex Cardinale .......... 1998 $144,451 $ 15,764 -- $281
Vice President, 1997 73,233(4) -- -- 126
Engineering
Charles Haas............ 1998 $133,615 $ 15,962 -- $269
Vice President, Sales 1997 70,000(4) -- -- 126
Dhruv Khanna............ 1998 $133,615 $ 15,943 -- $269
Vice President, General 1997 70,000(4) -- -- 126
Counsel and Secretary
Timothy Laehy........... 1998 $129,327 $ 16,189 -- $269
Chief Financial 1997 45,000(4) -- -- 126
Officer, Treasurer and
Vice President, Finance
</TABLE>
- --------
(1) The dollar amount in this column represents premium payments we made for
life insurance policies.
(2) Mr. Knowling assumed the offices of President and Chief Executive Officer
in July 1998.
(3) Mr. McMinn stepped down as our President and Chief Executive Officer and
assumed the position of Chairman of our board of directors in July 1998.
(4) Based on annual salaries of $150,000 and $140,000 for Messrs. McMinn and
Cardinale, respectively, and $120,000 for Messrs. Haas, Khanna and Laehy.
Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options granted
during the fiscal year ended December 31, 1998 to Robert Knowling, Jr., our
President and Chief Executive Officer. Stock options were not granted to any
other Named Executive Officer during 1998.
Option Grants in 1998
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
Number of Percent of Total Price Appreciation
Securities Options Granted Exercise for Option Term($)(3)
Underlying Options to Employees in Price Per Expiration ---------------------
Name Granted(#)(1) Fiscal 1998(%)(2) Share($) Date 5% 10%
- ---- ------------------ ----------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Knowling, Jr..... 2,100,000 22.45% $1.00 7/7/2006 $1,002,656 $2,401,537
</TABLE>
- --------
(1) These options become exercisable over a four-year period, with 12.5% of
the option shares vesting on the six month anniversary of the grant date
and the remainder vesting in 42 equal monthly installments. All the
options have a term of eight years, subject to earlier termination in
certain situations related to termination of employment. See "1997 Stock
Plan."
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<PAGE>
(2) Based on an aggregate of 9,352,978 options we granted during 1998 pursuant
to our 1997 Stock Plan.
(3) These amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the option term. The potential
realizable values are calculated by assuming that our common stock
appreciates at the annual rate shown, compounded annually, from the date
of grant until expiration of the granted options. The assumed 5% and 10%
rates of stock price appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of future stock price growth.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth the number and value of shares of our common
stock underlying the unexercised options held by Robert Knowling, Jr., our
President and Chief Executive Officer. As of December 31, 1998, no stock
options have been granted to any other Named Executive Officer.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at December 31, 1998 December 31, 1998(1)
--------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Knowling, Jr..... -- 2,100,000 -- $35,700,000
</TABLE>
- --------
(1) The value is calculated on the basis of $18.00 per share, our initial
public offering price, less the aggregate exercise price.
Employment Agreements and Change in Control Arrangements
We have entered into a written employment agreement with Robert Knowling,
Jr., our President and Chief Executive Officer. The agreement provides that
Mr. Knowling will receive compensation in the form of a $400,000 annual base
salary and a $250,000 minimum annual bonus. Mr. Knowling received (i) a
signing bonus of $1,500,000, one half of which was paid when he began working
for us, and the remaining half of which will be paid once he has worked for us
for one full year (July 1999) or, before then, upon a change of control (as
that term is defined in the agreement), and (ii) stock options to purchase
2,100,000 shares of our common stock at an exercise price of $1.00 per share.
If we terminate Mr. Knowling's employment relationship without cause (as that
term is defined in the agreement), or if Mr. Knowling resigns for good reason
(as that term is defined in the agreement), we must continue to pay Mr.
Knowling's annual salary and targeted bonus for a period of two years after
the date of termination so long as Mr. Knowling does not become employed by
one of our direct competitors. Mr. Knowling has agreed to be bound by
customary confidentiality provisions during the term of his employment. As
provided in the agreement, in August 1998 we loaned Mr. Knowling $500,000
pursuant to a secured promissory note that bears no interest during his
employment. The loan has provisions for forgiveness based on continued
employment and matures in four years, subject to acceleration in certain
events. See "Certain Relationships and Related Transactions--Employee Loans."
We have entered into written employment agreements with Dhruv Khanna and
Rex Cardinale whereby we have agreed to hire each employee for a two-year
term. Pursuant to the employment agreements, Messrs. Khanna and Cardinale
currently receive compensation in the form of annual base salaries of $160,000
and bonuses to be determined by our board of directors or our compensation
committee. The employment commencement date for both Messrs. Khanna and
Cardinale was July 15, 1997. During the two-year term, these employees can
only be terminated for cause (as that term is defined in their agreements), at
which time they will only be eligible for benefits in accordance with our
established policies. After the two-year term, the employment relationship may
be terminated by us or the employee with or without cause. If we terminate Mr.
Khanna's or Mr. Cardinale's employment relationship without cause, we must
continue to pay such employee's salary and benefits as he received immediately
before termination for a period of six months after the date of termination.
Under the employment agreements, Messrs. Khanna and Cardinale have agreed,
during the terms of their employment with us, not to (i) open or operate a
business which is then in competition with ours, (ii) act as an employee,
agent, advisor or consultant of any of our then existing competitors, or (iii)
take any action to divert our business or
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<PAGE>
influence any of our existing customers to cease doing business with us or to
alter its then existing business relationship with us.
With respect to all options granted under our 1997 Stock Plan, in the event
that we merge with or into another corporation resulting in a change of
control involving a shift in 50% or more of the voting power of our capital
stock, or the sale of all or substantially all of our assets, 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."
We have also entered into restricted stock purchase agreements with certain
of our officers and directors. The shares of our common stock issued pursuant
to these restricted stock purchase agreements are subject to our right of
repurchase which lapses in accordance with the vesting schedule of the
agreements. The agreements also include similar provisions to the stock
options, providing for accelerated vesting in the event of a change of
control. See "Certain Relationships and Related Transactions--Issuance of
Common Stock."
1997 Stock Plan
Our 1997 Stock Plan was adopted by our board of directors and the
stockholders in July 1997. The number of shares of our common stock which are
reserved for issuance under the 1997 Stock Plan is 15,520,342 shares, plus an
annual increase beginning in January 2000, equal to the lesser of (i) 3% of
the outstanding shares on such date or (ii) an amount determined by our board
of directors. The annual increase is subject to adjustment upon changes in our
capitalization. The 1997 Stock Plan provides for the granting to employees
(including officers and directors) of qualified "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and for the granting to employees (including officers
and directors) and consultants of nonstatutory stock options. The 1997 Stock
Plan also provides for the granting of stock purchase rights ("SPRs"). As of
March 15, 1999, options to purchase an aggregate of 11,383,597 shares were
outstanding and 2,502,837 shares remained available for future grants.
The 1997 Stock Plan is administered by our board of directors or a
committee appointed by the board of directors. The administrator of the 1997
Stock Plan has the power to determine the terms of the options or SPRs
granted, including the exercise price of the option or SPR, the number of
shares subject to each option or SPR, the exercisability thereof, and the form
of consideration payable upon such exercise. In addition, the administrator
has the authority to amend, suspend or terminate the 1997 Stock Plan, provided
that no such action may affect any shares of our common stock previously
issued and sold or any option previously granted under the 1997 Stock Plan. We
may grant each optionee a maximum of 2,000,000 shares covered by option during
a fiscal year and an additional 2,000,000 shares covered by option in
connection with an optionee's initial employment. Options generally vest at a
rate of 12.5% of the shares subject to the option on the date six months
following the grant date and 1/48th of the shares subject to the option at the
end of each one-month period thereafter and generally expire eight years from
the date of grant.
Options and SPRs granted under the 1997 Stock Plan generally are not
transferable by the optionee, and each option and SPR is exercisable during
the lifetime of the optionee only by such optionee. Options granted under the
1997 Stock Plan generally must be exercised within thirty days after the end
of optionee's status as our employee, director or consultant, or within twelve
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's term.
In the case of SPRs, unless the administrator determines otherwise,
restricted stock purchase agreements must grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service for any reason, including death or disability. The purchase price for
shares repurchased pursuant to the restricted stock purchase agreements will
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness owed to us by the purchaser. Repurchase options lapse at a
rate determined by the administrator.
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<PAGE>
The exercise price of all incentive stock options granted under the 1997
Stock Plan must be at least equal to the fair market value of our common stock
on the date of grant. The exercise price of nonstatutory stock options and
SPRs granted under the 1997 Stock Plan is determined by the administrator, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must be at least equal to the fair market value of
our common stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must be at least equal to 110% of the fair market value on the grant
date and the term of such incentive stock option must not exceed five years.
The term of all other options granted under the 1997 Stock Plan may not exceed
ten years.
All stock options and restricted stock grants to officers, employees,
directors and consultants provide that in the event we merge with or into
another corporation resulting in a change of control involving a shift in 50%
or more of the voting power of our capital stock, or the sale of all or
substantially all of our assets, the options will fully vest and become
exercisable one year after the change of control. In the event the individual
is constructively terminated or terminated without cause or in the event that
the successor corporation refuses to assume or substitute the options, the
options will fully vest and become exercisable at that time.
1998 Employee Stock Purchase Plan
Our 1998 Employee Stock Purchase Plan was adopted by our board of directors
in December 1998, and approved by the stockholders in January 1999. A total of
1,000,000 shares of our common stock have been reserved for issuance under
this plan, plus annual increases equal to the lesser of (i) 2% of the
outstanding shares on such date or (ii) an amount determined by the board of
directors. To date, no shares have been issued under the 1998 Employee Stock
Purchase Plan, however, a significant number of employees have enrolled as
participants in this plan.
The 1998 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Code, contains consecutive, overlapping, twenty-four month
offering periods. Each offering period includes four six-month purchase
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first offering period
which commenced on the first trading day after our initial public offering
(January 22, 1999) and ends on the last trading day on or before October 31,
2000.
Employees are eligible to participate if they are customarily employed by
us or any of our participating subsidiaries for at least 20 hours per week and
more than five months in any calendar year. However, no employee may be
granted a right to purchase stock under the 1998 Employee Stock Purchase Plan
(i) to the extent that, immediately after the grant of the right to purchase
stock, the employee would own stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or (ii) to
the extent that his or her rights to purchase stock under all our employee
stock purchase plans accrues at a rate which exceeds $25,000 worth of stock
for each calendar year. The 1998 Employee Stock Purchase Plan permits
participants to purchase our common stock through payroll deductions of up to
12% of the participant's "compensation." Compensation is defined as the
participant's base straight time gross earnings and commissions but excludes
payments for overtime, shift premium, incentive compensation, incentive
payments, bonuses and other compensation. The maximum number of shares a
participant may purchase during a single purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each purchase period. The price of
stock purchased under the 1998 Employee Stock Purchase Plan is generally 85%
of the lower of the fair market value of our common stock (i) at the beginning
of the offering period or (ii) at the end of the purchase period. In the event
the fair market value at the end of a purchase period is less than the fair
market value at the beginning of the offering period, the participants will be
withdrawn from the current offering period following exercise and
automatically re-enrolled in a new offering period. The new offering period
will use the lower fair market value as of the first date of the new offering
period to determine the purchase price for future purchase periods.
Participants may end their participation at any time during an
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<PAGE>
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment.
Rights to purchase stock granted under the 1998 Employee Stock Purchase
Plan are not transferable by a participant other than by will, the laws of
descent and distribution, or as otherwise provided under the plan. The 1998
Employee Stock Purchase Plan provides that, in the event we merge with or into
another corporation or sell substantially all of our assets, each outstanding
right to purchase stock may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding rights to purchase stock, the offering period then in progress
will be shortened and a new exercise date will be set.
Our board of directors has the authority to amend or terminate the 1998
Employee Stock Purchase Plan, except that no such action may adversely affect
any outstanding rights to purchase stock under the plan. Our board of
directors may terminate an offering period on any exercise date if it
determines that the termination of the plan is in our best interests and the
best interest of our stockholders. The board of directors may in its sole
discretion amend the plan to the extent necessary and desirable to avoid
unfavorable financial accounting consequences by altering the purchase price
for any offering period, shortening any offering period or allocating
remaining shares among the participants. Unless sooner terminated by our board
of directors, the plan will automatically terminate ten years from the
effective date of our initial public offering.
Management Bonus Plan
On July 22, 1998, our board of directors approved its Executive Bonus
Performance Plan. Under this plan, each of our officers receives a cash bonus
up to a designated percentage of their annual base salary depending upon the
extent to which specific performance metrics are achieved.
Limitation on Liability and Indemnification Matters
Our Amended and Restated Certificate of Incorporation limits the liability
of our directors to the maximum extent permitted by Delaware law, and our
Bylaws provide that we will indemnify our directors and officers and may
indemnify our other employees and agents to the fullest extent permitted by
law. We have also entered into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
Bylaws. We believe 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 of our directors,
officers, employees or agents in which indemnification will be required or
permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for such indemnification. We have been informed that,
in the opinion of the Securities and Exchange Commission, the indemnification
of directors, officers or persons that control us for liabilities arising
under the Securities Act pursuant to the above mentioned provisions is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Series C Preferred Stock and Warrant Subscription Agreement
On February 20, 1998, we entered into a Series C Preferred Stock and
Warrant Subscription Agreement (the "Subscription Agreement") with Warburg and
Crosspoint. Under this agreement, Warburg and Crosspoint unconditionally
agreed to purchase an aggregate of 5,764,143 shares of our series C preferred
stock and warrants to purchase an aggregate of 4,729,500 shares of our series
C preferred stock for an aggregate purchase price of $16.0 million at a date
that we were to determine but, in any event, not later than March 11, 1999. We
agreed to either call this commitment or complete an alternate equity
financing of at least $16.0 million by March 11, 1999. A proposed alternate
equity financing providing for a price per share greater than or equal to
$2.7767 and including securities that are equal in right with, or more
favorable to us than, our series C preferred stock as set forth in our Amended
and Restated Certificate of Incorporation required approval by a majority of
our disinterested directors. A proposed alternate equity financing providing
for a price per share of less than $2.7767 or involving securities whose terms
are less favorable to us than our series C preferred stock required unanimous
approval by our entire board of directors. In consideration of this
commitment, we issued to Warburg and Crosspoint warrants to purchase an
aggregate of 1,694,148 shares of our common stock at a purchase price of
$0.0033 per share. The parties have agreed that the stock purchases by AT&T
Ventures and NEXTLINK constitute an alternate equity financing. As a result,
we did not issue and sell our series C preferred stock and warrants to
purchase series C preferred stock to Warburg and Crosspoint. Dr. Henry Kressel
and Mr. Joseph Landy, two of our directors, are affiliated with Warburg, and
Mr. Shapero, also one of our directors is affiliated with Crosspoint.
On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement to which we were a party along with
Warburg, Crosspoint and Mr. Hawk. By the terms of this agreement, Warburg and
Crosspoint assigned to Mr. Hawk their obligation to purchase 36,015 shares of
our series C preferred stock and 29,559 warrants to purchase series C
preferred stock for an aggregate purchase price of $100,001.65. On the same
date, Mr. Hawk purchased 36,015 shares of our series C preferred stock at a
price per share of $2.7767. As a result of this amendment, the aggregate
obligation of Warburg and Crosspoint to purchase our series C preferred stock
and warrants to purchase series C preferred stock was reduced from 5,764,143
shares to 5,728,128 shares and from 4,729,500 shares to 4,699,941 shares,
respectively, for an aggregate purchase price of $15.9 million (reduced from
$16.0 million). On the same date, the Amended and Restated Stockholder Rights
Agreement dated March 11, 1998 was amended to add Mr. Hawk as a party.
The warrants to purchase our common stock issued upon the signing of the
Subscription Agreement had five-year terms (but had to be exercised prior to
the closing of our initial public offering), had purchase prices of $0.0033
per share were immediately exercisable and contained net exercise provisions.
Prior to our initial public offering, Warburg and Crosspoint exercised their
warrants to purchase series C preferred stock for 1,355,070 and 338,829 shares
of our common stock.
On March 11, 1998, we amended the Stockholder Rights Agreement, to extend
the rights held by Warburg, Crosspoint and Intel to our warrants to purchase
common stock, series C preferred stock and warrants to purchase series C
preferred stock issued or issuable to Warburg, Crosspoint and Intel pursuant
to the Subscription Agreement.
The Intel Stock Purchase
As provided in the Subscription Agreement, Intel purchased 360,144 shares
of our series C preferred stock and warrants to purchase 295,500 shares of our
series C preferred stock for an aggregate purchase price of $1.0 million
concurrently with the closing of the issuance of the 1998 discount notes in
March 1998. We did not have any obligation to issue the warrants to purchase
series C preferred stock to Intel until such time as Warburg and Crosspoint
funded their respective commitments under the Subscription Agreement. The
parties agreed that our initial public offering constituted an alternate
equity financing and, therefore, we will not issue the warrants
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to purchase series C preferred stock to Intel. In connection with its
agreement to purchase such series C preferred stock and warrants to purchase
series C preferred stock, we issued to Intel warrants to purchase an aggregate
of 105,852 shares of our common stock at a purchase price of $0.0033 per
share. Prior to our initial public offering, Intel exercised their warrants
for 105,852 shares of our common stock.
Transactions in Connection with the Formation of the Delaware Holding Company
We were originally incorporated in California as Covad Communication
Company ("Covad California") in October 1996. In July 1997, we were
incorporated in Delaware as part of our strategy to operate through a holding
company structure and to conduct substantially all of our operations through
subsidiaries. To effect the holding company structure, in July 1997 we 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 our common and preferred stock, so
that after giving effect to the exchange Covad California became our wholly-
owned subsidiary. In addition, we entered into an Assumption Agreement
pursuant to which we assumed certain outstanding obligations of Covad
California, including a $500,000 demand note issued to Warburg and certain
commitments to issue stock options to two of our consultants.
In connection with the Exchange Agreement, three of our officers, Messrs.
McMinn, Khanna and Haas, each exchanged 3,000,000 shares of common stock of
Covad California, originally purchased for $0.0042 per share, for a like
number of our shares of common stock pursuant to restricted stock purchase
agreements. In addition, Mr. Lynch, one of our directors, exchanged 144,000
shares of common stock of Covad California, originally purchased for $0.0333
per share, for a like number of our shares of common stock pursuant to a
restricted stock purchase agreement. The common stock issued to Messrs.
McMinn, Khanna, Haas and Lynch are generally subject to vesting over a period
of four years. This vesting is subject to acceleration upon a change of
control involving a merger, sale of all or substantially all our assets or a
shift in 50% or more of the voting power of our capital stock. Our repurchase
rights lapse one year after the change of control or earlier in the event the
individual is constructively terminated or terminated without cause, or in the
event the successor corporation refuses to assume the agreements.
Issuance of Common Stock
On July 15, 1997, we issued 1,125,000 shares of our common stock to Mr.
Cardinale, one of our officers, for a purchase price of $0.0333 per share. On
August 30, 1997, we issued 345,000 shares of our common stock to Mr. Laehy,
one of our officers, for $0.05 per share. On October 14, 1997, we issued
144,000 shares of our common stock to Mr. Marshall, one of our directors, for
a purchase price of $0.05 per share. On April 24, 1998, we issued 96,000
shares of our common stock to Mr. Hawk, one of our directors, for a purchase
price of $0.6667 per share. On August 28, 1998, we issued 40,000 shares of our
common stock to Mr. Hawk for a purchase price of $5.75 per share. The shares
of our common stock issued to Messrs. Cardinale, Laehy, Marshall and Hawk were
issued pursuant to restricted stock purchase agreements which contain vesting
and change of control provisions similar to those contained in the above-
described restricted stock purchase agreements of Messrs. McMinn, Khanna, Haas
and Lynch.
Issuance of Series A Preferred Stock
On June 30, 1997 Covad California issued 150,000 shares of series A
preferred stock to each of Messrs. McMinn, Khanna and Haas and 300,000 shares
of series A preferred stock to Mr. Lynch for a purchase price of $0.3333 per
share. In July 1997, these shares were exchanged for a like number of our
shares of series A preferred stock pursuant to the Exchange Agreement.
Issuance of Series B Preferred Stock
In July 1997, we sold an aggregate of 17,000,001 shares of our series B
preferred stock, of which 12,000,000 shares were sold to Warburg, 3,000,000
shares were sold to Crosspoint and 2,000,001 shares were
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sold to Intel. The purchase price of our series B preferred stock was $0.50
per share. A portion of the purchase price of the series B preferred stock 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 our
board of directors, are affiliated with Warburg. Mr. Shapero, who currently
serves on our board of directors, is affiliated with Crosspoint.
On February 12, 1998, we sold an additional 100,002 shares of series B
preferred stock at a purchase price of $1.00 per share to Mr. Marshall, one of
our directors.
The Strategic Investments and Relationships
In January 1999, we received equity investments from AT&T Ventures,
NEXTLINK and Qwest. AT&T Ventures purchased an aggregate of 1,500,583 shares
of our series C-1 preferred stock at $2.7767 per share and an aggregate of
1,157,408 shares of our series D-1 preferred stock at $18.00 per share. These
purchases represent an aggregate investment of $25 million, of which $11
million was invested by AT&T Venture Fund II, LP and $14 million was invested
by the two affiliated funds. NEXTLINK purchased 1,200,466 shares of our series
C-1 preferred stock at $2.7767 per share and 925,926 shares of our series D-1
preferred stock at $18.00 per share, representing an investment of $20
million. Qwest purchased 900,349 shares of our series C-1 preferred stock at
$2.7767 per share and 694,445 shares of our series D-1 preferred stock at
$18.00 per share, representing an aggregate investment of $15 million. At the
completion of our initial public offering, our series C-1 preferred stock
converted into our class B common stock on a one-for-one basis. The series D-1
preferred stock also converted into our class B common stock at that time on a
one-for-one basis. These strategic investors have each agreed not to transfer
any of our series C-1 preferred stock, series D-1 preferred stock or class B
common stock to any non-affiliated third party until January 2000. They have
also each agreed not to acquire more than 10% of our voting stock without our
consent until January 2002. In addition, until January 2002, they have agreed
to vote any voting securities it holds as recommended by our board of
directors.
Concurrently with these strategic equity investments, we entered into
commercial agreements with AT&T, NEXTLINK and Qwest. These agreements provide
for the purchase, marketing and resale of our services at volume discounts,
our purchase of fiber optic transport bandwidth at volume discounts,
collocation of network equipment and development of new DSL services. These
agreements have terms ranging from six months to several years subject to
earlier termination in certain circumstances. We cannot predict the number of
line orders that AT&T, NEXTLINK or Qwest will generate, if any, whether line
orders will be below our expectations or the expectations of, AT&T, NEXTLINK
or Qwest or whether AT&T, NEXTLINK or Qwest will discontinue selling our
services entirely.
Equipment Lease Financing
Through December 31, 1998, we have incurred a total of $860,000 of
equipment lease financing obligations (including principal and interest)
through a sale lease-back transaction with Charter Financial, Inc.. Through
December 31, 1998, we have made total payments of approximately $331,000 to
Charter Financial on these obligations. Warburg, one of our principal
stockholders, owns a majority of the capital stock of Charter Financial. We
believe that the terms of the lease financing with Charter Financial were
completed at rates similar to those available from alternative providers. Our
belief that the terms of the sale lease-back arrangement are similar to those
available from alternative providers is based on the advice of our officers
who reviewed at least two alternative proposals and who reviewed and
negotiated the terms of the arrangement with Charter Financial.
Vendor Relationship
Crosspoint, one of our principal stockholders, owns approximately 12% of
the capital stock of Diamond Lane, one of our vendors. Our payments to Diamond
Lane through December 31, 1998 totaled approximately
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$5,844,000. We believe that the terms of its transactions with Diamond Lane
were completed at rates similar to those available from alternative vendors.
This belief is based on our management team's experience in obtaining vendors
and the fact that we sought competitive bidders before entering into the
relationship with Diamond Lane.
Registration Rights
Certain holders of our common stock are entitled to registration rights.
Pursuant to the Stockholder Rights Agreement holders of 20,075,285 shares of
common stock and holders of 6,379,177 shares of class B common stock
(collectively, the "Rights Holders") are entitled to certain rights with
respect to the registration under the Securities Act of the shares of common
stock held by them or issuable upon conversion of the class B common stock.
The class B common stock may be converted into common stock at the election of
the holder commencing January 2000. The Rights Holders are entitled to demand,
"piggy-back" and S-3 registration rights, subject to certain limitations and
conditions. The number of securities requested to be included in a
registration involving the exercise of demand and "piggy-back" rights are
subject to a pro rata reduction based on the number of shares of common stock
held by each Rights Holder and any other security holders exercising their
respective registration rights to the extent that the managing underwriter
advises 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) three years after our initial the offering made hereby or (ii)
such time as such Rights Holder may sell under Rule 144 in a three month
period all registrable securities then held by such Rights Holder.
Pursuant to the Warrant Registration Rights Agreement dated March 11, 1998,
between us and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated,
holders of the warrants that were issued in connection with our senior
discount note offering in March 1998 are entitled to certain registration
rights with respect to the shares of common stock issuable upon exercise of
such warrants. The warrant holders are entitled to demand and "piggy-back"
registration rights, subject to certain limitations and conditions. Like the
Rights Holders, the number of securities that a warrant holder may request to
be included in a registration involving an exercise of its demand or "piggy-
back" rights is subject to a pro rata reduction. Such a reduction will be
based upon the number of shares held by each warrant holder and any other
security holders exercising their respective registration rights to the extent
that the managing underwriter advises us 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.
Employment Agreements
We have entered into employment agreements with certain of our officers.
See "Executive Compensation--Employment Agreements and Change in Control
Arrangements."
Employee Loans
In August 1998, we loaned Robert Knowling, Jr., our President and Chief
Executive Officer, the principal amount of $500,000 pursuant to a Note Secured
by Deed of Trust, which was secured by certain real property of Mr. Knowling.
The entire principal balance of this note becomes due and payable in one lump
sum on August 14, 2002. No interest is charged on the note. This note has
provisions for forgiveness based on continued employment and is subject to
acceleration in certain events.
In October 1998, we loaned Catherine Hemmer, our Vice President,
Operations, and her husband, one of our employees, the principal amount of
$600,000 pursuant to a Note Secured By Deed of Trust, which was secured by
certain real property of the Hemmers. The outstanding principal balance of
this note becomes due in four equal annual installments commencing August 10,
1999, with the last installment due on August 10, 2002. No interest is charged
on the note. This note has provisions for forgiveness based upon continued
employment of each of the Hemmers and is subject to acceleration in certain
events.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding ownership of
our common stock as of March 15, 1999 by:
(i)each Named Executive Officer,
(ii)each of our directors,
(iii)all of our executive officers and directors as a group, and
(iv)all persons who directly own 5% or more of our common stock.
Share ownership in each case includes shares issuable upon exercise of
outstanding options and warrants that are exercisable within 60 days of March
15, 1999 as described in the footnotes below. Percentage ownership is
calculated pursuant to SEC Rule 13d-3(d)(1). Except as otherwise indicated,
the address of each of the persons in this table is as follows: c/o Covad
Communications Group, Inc., 2330 Central Expressway, Santa Clara, CA 95050.
<TABLE>
<CAPTION>
Number of
Shares Percentage
Beneficially Beneficially
Beneficial Owner Owned(1) Owned(1)
- ---------------- ------------ ------------
<S> <C> <C>
Robert Knowling Jr.(2).. 432,500 1.0%
Charles McMinn(3)....... 3,027,052 7.2
Robert Hawk(4).......... 178,015 *
Henry Kressel(5)........ 13,366,056 31.6
Joseph Landy(5)......... 13,366,056 31.6
Daniel Lynch(6)......... 462,439 1.1
Frank Marshall(6)....... 262,215 *
Rich Shapero(7)......... 3,349,075 7.9
Rex Cardinale........... 1,125,000 2.7
Charles Haas(8)......... 3,027,052 7.2
Dhruv Khanna(9)......... 3,027,053 7.2
Timothy Laehy(10)....... 345,000 *
All executive officers
and directors as a
group(11).............. 28,650,796 67.0
Warburg, Pincus
Ventures, L.P. (12).... 13,366,056 31.6
Crosspoint Venture
Partners 1996 (13)..... 3,349,075 7.9
Intel Corporation (14).. 2,472,828 5.9
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of our outstanding voting
stock.
(1) The percentages are based on 42,271,466 outstanding shares of common stock
as of March 15, 1999. Not included in this table are 6,379,177 outstanding
shares of our class B common stock which are non-voting. These shares are
held by certain strategic investors. See "Certain Relationships and
Related Transactions--The Strategic Investments and Relationships."
(2) Consists of 432,500 shares of common stock subject to options exercisable
within 60 days of March 15, 1999.
(3) Includes 475,000 shares of common stock held by a trust for the benefit of
two members of Mr. McMinn's immediate family, who also serve as co-
trustees. Mr. McMinn disclaims beneficial ownership of the shares of
common stock held by such trust.
(4) Includes 6,000 shares of common stock subject to options exercisable
within 60 days of March 15, 1999.
(5) All of the shares indicated are owned of record by Warburg and are
included because of Dr. Kressel's and Mr. Landy's affiliation with
Warburg. Dr. Kressel and Mr. Landy disclaim beneficial ownership of these
shares within the meaning of Rule 13d-3 under the Exchange Act. The
address of Dr. Kressel and Mr. Landy is c/o E.M. Warburg, Pincus & Co.,
LLC, 466 Lexington Avenue, New York, NY 10017-3147.
(6) Includes 18,000 shares of common stock subject to options exercisable
within 60 days of March 15, 1999.
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(7) All of the shares indicated are owned of record by Crosspoint and are
included because of Mr. Shapero's affiliation with Crosspoint. Mr.
Shapero disclaims beneficial ownership of these shares within the meaning
of Rule 13d-3 under the Exchange Act. The address of Mr. Shapero is c/o
Crosspoint Venture Partners, The Pioneer Hotel Building, 2925 Woodside
Road, Woodside, CA 94062.
(8) Includes 120,000 shares of common stock held by a limited partnership of
which Mr. Haas is a general partner and a limited partner. Mr. Haas
disclaims beneficial ownership of the shares of common stock held by such
limited partnership except to the extent of his pecuniary interest
therein.
(9) Includes 375,000 shares of common stock held by a limited partnership of
which Mr. Khanna is a general partner and a limited partner. Mr. Khanna
disclaims beneficial ownership of the shares of common stock held by such
limited partnership except to the extent of his pecuniary interest
therein.
(10) Includes a total of 30,000 shares of common stock held by three trusts
for the benefit of three members of Mr. Laehy's immediate family. Mr.
Laehy disclaims beneficial ownership of the shares of common stock held
by such trusts.
(11) Includes 523,839 shares of common stock subject to options exercisable
within 60 days of March 15, 1999.
(12) The sole general partner of Warburg, Pincus Ventures, L.P. is Warburg,
Pincus & Co., a New York general partnership ("WP"). E.M. Warburg, Pincus
& Co., LLC, a New York limited liability company ("EMW LLC"), manages
Warburg. The members of EMW LLC are substantially the same as the
partners of WP. Lionel I. Pincus is the managing partner of WP and the
managing member of EMW LLC and may be deemed to control both WP and EMW
LLC. WP has a 15% interest in the profits of Warburg as a general partner
and also owns approximately 1.3% of the limited partnership interests in
Warburg. Dr. Kressel and Mr. Landy, two of our directors, are Managing
Directors and members of EMW LLC and partners of WP and as such may be
deemed to have an indirect pecuniary interest (within the meaning of Rule
16a-1 under the Exchange Act) in an indeterminate portion of the shares
beneficially owned by Warburg. See Note 5 above. The address of Warburg
is c/o E.M. Warburg, Pincus & Co., LLC, 466 Lexington Avenue, New York,
NY 10017-3147.
(13) Mr. Shapero, one of our directors, is affiliated with Crosspoint and as
such may be deemed to have an indirect pecuniary interest (within the
meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion
of the shares beneficially owned by Crosspoint. See Note 7 above. The
address of Crosspoint is The Pioneer Hotel Building, 2925 Woodside Road,
Woodside, CA 94062.
(14) The address of Intel is 2200 Mission College Boulevard, Mail Stop SC4-
210, Santa Clara, CA 95052-8199.
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THE EXCHANGE OFFER
Purposes of the Exchange Offer
We sold the old notes to the initial purchasers. The initial purchasers
resold the old notes to "qualified institutional buyers" (as defined in Rule
144A under the Securities Act). In issuing the old notes, we agreed to use our
reasonable best efforts to cause to become effective within the time period
specified in the registration rights agreement dated February 18, 1999, a
registration statement with respect to the exchange offer (the "Exchange Offer
Registration Statement"). We will file with the SEC a shelf registration
statement (the "Shelf Registration Statement") if:
(1) we are 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
(2) any holder of old notes notifies us prior to the 20th day following the
consummation of the exchange offer that:
(a) it is prohibited by law or SEC policy from participating in the
exchange offer; or
(b) it may not resell the new notes it acquired 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) it is a broker-dealer and owns old notes acquired directly from us or
one of our affiliates.
The Shelf Registration Statement will cover resales of old notes by holders
who have provided certain information required by us in connection with the
Shelf Registration Statement.
We are making the exchange offer to satisfy our obligations under the
registration rights agreement. Once the exchange offer is complete, we will
have no further obligation to register any of the old notes not tendered by
the holders for exchange. See "Risk Factors--Consequences of not tendering old
notes in the exchange offer." We filed a copy of the Registration Rights
Agreement as an exhibit to the registration statement of which this prospectus
is a part.
We believe that new notes issued in the exchange offer in exchange for old
notes may be offered for resale, resold and otherwise transferred by their
holders without compliance with the registration and prospectus delivery
provisions of the Securities Act. Our belief is 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. Any holder who is an "affiliate" of ours or who intends to
participate in the exchange offer for the purpose of distributing the new
notes:
(1) cannot rely on the interpretation by the staff of the SEC set forth in the
above referenced no-action letters,
(2) cannot tender its old notes in the exchange offer, and
(3) 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.
In addition, each broker-dealer that holds old notes acquired for its own
account as a result of market-making or other trading activities (a
"Participating Broker-Dealer") that receives new notes for its own account in
exchange for old notes not acquired directly from us must acknowledge that it
will deliver a prospectus in connection with any resale of such new notes. See
"Plan of Distribution."
Except as described above, this prospectus may not be used for an offer to
resell, resale or other transfer of new notes.
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Terms of the Exchange Offer
General. Upon the terms and subject to the conditions of the exchange offer
described in this prospectus and the letter of transmittal, we will accept any
and all old notes validly tendered and not withdrawn before 5:00 p.m., New
York City time, on the expiration date. We will issue $1,000 principal amount
of new notes in exchange for each $1,000 principal amount of outstanding old
notes accepted in the exchange offer. You may tender some or all of your old
notes pursuant to the exchange offer. Old notes may be tendered only in
integral multiples of $1,000 principal amount.
As of , 1999, there was $215,000,000 of aggregate principal amount of
the old notes outstanding and registered holders of old notes. We are
sending this prospectus, together with the letter of transmittal to such
registered holders as of , 1999.
We arranged for the old notes to be issued and transferable in book-entry
form through the facilities of The Depository Trust Company acting as
depositary. The new notes will also be issued and transferable in book-entry
form through DTC. See "--Book-Entry Transfer; Delivery and Form."
We will accept validly tendered old notes by giving oral (confirmed in
writing) or written notice of acceptance 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 us.
If any tendered old notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events described in this
prospectus or otherwise, the certificates for any such unaccepted old notes
will be returned, without expense, to the holder tendering them or the
appropriate book-entry transfer will be made, in each case, as promptly as
practicable after the expiration date.
You 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 tendered in the exchange offer. We will pay the
expenses, other than certain applicable taxes, of the exchange offer. See "--
Fees and Expenses."
We are not making, nor is our board of directors making, any recommendation
to you as to whether to tender or refrain from tendering all or any portion of
your old notes in the exchange offer. No one has been authorized to make any
such recommendation. You must make your own decision whether to tender in 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 your
advisers, if any, based on your own financial position and requirements.
Expiration Date; Extensions; Amendments. The "expiration date" is
, 1999. In our sole discretion, we may extend the exchange
offer, in which case the term "expiration date" means the latest date to which
the exchange offer is extended.
To extend the expiration date, we will notify the exchange agent and the
record holders of old notes of any extension by oral (followed by written)
notice, before 9:00 a.m., New York City time, on the business day following
the previously scheduled expiration date. We may extend 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.
We reserve 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
described in "--Conditions" occurs and is not waived. Waiver must be given by
oral (confirmed in writing) or written notice to the exchange agent as
promptly as practicable. If the exchange offer is amended in a manner we
determine to be material, we will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of such amendment. We will also
extend the exchange offer in such circumstances 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.
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We have no obligation to publish, advertise, or otherwise communicate any
public announcement of any delay, extension, amendment or termination of the
exchange offer, other than by making a timely release to the Dow Jones News
Service. We may make such announcement in any additional ways at our
discretion.
Interest on the New Notes and the Old Notes
The old notes will continue to accrue interest at the rate of 12 1/2% per
annum through (but not including) the date of issuance of the new notes. Any
old notes not tendered or accepted for exchange will continue to accrue
interest at the rate of 12 1/2% per annum in accordance with their terms. From
and after the date of issuance of the new notes, the new notes will accrue
interest at the rate of 12 1/2% per annum. Interest on the new notes and any
old notes not tendered or accepted for exchange will be payable semi-annually
in arrears on February 15 and August 15 of each year, commencing on August 15,
1999.
Procedures for Tendering
To tender in the exchange offer, you must follow these steps:
(a) complete, sign and date the letter of transmittal, or a facsimile of
it;
(b) have the signatures on the letter guaranteed if required by Instruction
3 of the letter of transmittal; and
(c) 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 before 5:00 p.m., New York City time, on the expiration
date.
If delivery of the old notes is made through book-entry transfer into the
exchange agent's account at DTC, you must tender the old notes in accordance
with DTC's Automated Tender Offer Program (ATOP) procedures. See "--Book-Entry
Transfer; Delivery and Form."
Your tender of old notes will constitute an agreement between us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
You must deliver all documents for tender to the exchange agent at its
address set forth below. You may also request your brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for you.
The method of delivery of certificates, the letter of transmittal and all
other required documents, is at your option and your sole risk. Documents are
delivered only when actually received by the exchange agent. If delivery is by
mail, we recommend registered mail, return receipt requested, properly
insured, or an overnight delivery service. In all cases, you should allow
sufficient time 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 our books or any other person who has
obtained a properly completed bond power from the registered holder.
If your old notes are registered in the name of your broker, dealer,
commercial bank, trust company or other nominee and you wish to tender, you
should contact such registered holder promptly and instruct such registered
holder to tender on your behalf. If your old notes are so registered and you
wish to tender on your own behalf, you must, prior to completing and executing
the letter of transmittal and delivering your old notes, either make
appropriate arrangements to register ownership of the old notes in your 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 must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., or a commercial
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bank or trust company having an office or correspondent in the U.S. (an
"Eligible Institution"). Signatures do not need to be guaranteed if the old
notes 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.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes listed on the letter, 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 must indicate their capacity when signing. Unless waived by us, you
must then submit evidence satisfactory to us of their authority to so act with
the letter of transmittal.
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of tendered old
notes and withdrawal of tendered old notes. Our determination will be final
and binding. We reserve the absolute right to reject any and all old notes not
properly tendered or any old notes acceptance of which would, in the opinion
of our counsel, be unlawful for us to accept. We also reserve the right to
waive any defects, irregularities or conditions of tender as to particular old
notes. Our 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 we
determine. No one is under any duty to give notification of defects or
irregularities with respect to tenders of old notes, nor will any person incur
any liability for failure to give such notification. Old notes are not
properly tendered 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 such old notes,
unless otherwise provided in the letter of transmittal, as soon as practicable
after the expiration date.
In addition, we reserve the right in our sole discretion:
. to purchase or make offers for any old notes that remain outstanding
after the expiration date;
. to terminate the exchange offer as described in "--Conditions"; 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, you will represent to us, among other things, that:
. the new notes you acquire in the exchange offer are being obtained in the
ordinary course of your business;
. you have no arrangement with any person to participate in the
distribution of such new notes; and
. you are not an "affiliate," as defined under Rule 405 of the Securities
Act, of ours.
If you are a Participating Broker-Dealer that will receive new notes for
your own account in exchange for old notes that were not acquired directly
from us, by tendering you will acknowledge that you will deliver a prospectus
in connection with any resale of such new notes. See "Plan of Distribution."
Book-Entry Transfer; Delivery and Form
The old notes were initially represented:
. if 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 DTC; and
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. if held by persons, other than U.S. persons, relying 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 and Cedel Bank, societe anonyme.
The new notes exchanged for the old notes represented by the global old
notes and global Regulation S old note will be represented by global new notes
in fully registered form, registered in the name of the nominee of DTC.
The global new notes will be exchangeable for definitive new notes in
registered form, in denominations of $1,000 principal amount and integral
multiples of $1,000. The new notes in global form will trade in DTC's same-day
funds settlement system, and secondary market trading activity in such new
notes will therefore settle in immediately available funds.
We understand 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. Subject to
the establishment of this account, 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 be made only after two conditions are
met.
First, DTC must timely confirm (a "Book-Entry Confirmation") such book-
entry transfer of the old notes into the exchange agent's account.
Second, the exchange agent must timely receive a Book-Entry Confirmation
with a message, transmitted by DTC and received by the exchange agent and
forming part of the Book-Entry Confirmation, which states that DTC has
received express acknowledgment from a participant tendering old notes that
such participant has received and agrees to be bound by the terms of the
letter of transmittal, and that such agreement may be enforced against such
participant.
Guaranteed Delivery Procedures
If your old notes are not immediately available or if you cannot deliver
your old notes, the letter of transmittal or any other required documents to
the exchange agent prior to the expiration date, you may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) before 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 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 of such letter)
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
(3) such properly completed and executed letter of transmittal (or facsimile
of such letter), 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.
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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.
Withdrawal of Tenders
Except as otherwise described in this prospectus, tenders of old notes may
be withdrawn at any time before 5:00 p.m., New York City time, on the
expiration date. To withdraw a tender of old notes in the exchange offer, the
exchange agent must receive a written or facsimile transmission notice of
withdrawal at its address set forth in this prospectus before 5:00 p.m., New
York City time, on the expiration date. Any such notice of withdrawal must:
(1) specify the name of the person having deposited the old notes to be
withdrawn (the "Depositor");
(2) identify the old notes to be withdrawn (including the certificate number
or numbers and principal amount at of such old notes);
(3) 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
(4) 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 us. Our determination will 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 their holder 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 before the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes not
accepted for exchange, and may terminate or amend the exchange offer as
provided in this prospectus before the acceptance of such old notes, if any of
the following conditions exist:
(1) the exchange offer, or the making of any exchange by a holder, violates
applicable law or any applicable interpretation of the SEC;
(2) 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 our sole judgment, might impair our ability to proceed with the
exchange offer;
(3) any law, statute, rule or regulation is adopted or enacted which, in our
sole judgment, might materially impair our ability to proceed with the
exchange offer;
(4) a banking moratorium is declared by U.S. federal or California or New York
state authorities which, in our judgment, would reasonably be expected to
impair our ability to proceed with the exchange offer;
(5) 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 our judgment, would reasonably be expected to impair
our ability to proceed with the exchange offer; or
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(6) 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 our knowledge, threatened for that purpose.
If any such conditions exist, we may
. refuse to accept any old notes and return all tendered old notes to
exchanging holders;
. 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
. 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, we will
promptly disclose such waiver in a manner reasonably calculated to inform
holders of old notes of such waiver.
The conditions described above are for our sole benefit. We may assert any
condition regardless of the circumstances giving rise to any such condition.
We may waive any condition in whole or in part at any time and from time to
time in our sole discretion. We are not waiving these rights by failing to
exercise them. These rights are ongoing and may be asserted at any time and
from time to time.
Exchange Agent
We appointed The Bank of New York as exchange agent for the exchange offer.
Send letters of transmittal and notices of guaranteed delivery to the exchange
agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified
Mail: By Overnight Courier:
Attention: Theresa Gass Attention: Theresa Gass
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: Theresa Gass (212) 815-6339
Reorganization Section Attention: Theresa Gass
The Bank of New York Reorganization Section
101 Barclay Street
Corporate Trust Services
Window Confirm by telephone:
Ground Floor (212) 815-5942
New York, New York 10286
</TABLE>
Fees and Expenses
We will pay the expenses of soliciting tenders. The principal solicitation
is being made by mail. Additional solicitation may be made by telegraph,
telephone or in person by officers and regular employees of ours and our
affiliates and by persons so engaged by the exchange agent.
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We 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. We may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable out-of-
pocket expenses incurred by them in forwarding
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copies of this prospectus and related documents to the beneficial owners of
the old notes, and in handling or forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the
exchange offer. We estimate these cash expenses will aggregate approximately
$ , including fees and expenses of the exchange agent and the trustee
under the indenture and accounting and legal fees.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes in 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:
(1) 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 in the name of, any person other than the registered
holder of the old notes tendered;
(2) tendered old notes are registered in the name of any person other than the
person signing the letter of transmittal; or
(3) a transfer tax is imposed for any reason other than the exchange of old
notes in the exchange offer.
In such circumstances, you must submit satisfactory evidence of payment of
such taxes or exception from such taxes with the letter of transmittal or the
amount of such transfer taxes will be billed directly to you.
Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes,
which is face value less unamortized original issue discount as reflected in
our accounting records on the date of the exchange offer. Accordingly, no gain
or loss for accounting purposes will be recognized upon completion 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 "--Where You Can Find More 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.
Brief Description of the Old Notes
The Notes:
. are senior obligations of the Company;
. rank equal in right of payment with all existing and future senior Debt
of the Company;
. rank senior in right of payment to any future subordinated Debt of the
Company; and
. are effectively subordinated to any secured Debt of the Company and
existing and future Debt and other liabilities (including subordinated
Debt and trade payables) of its Subsidiaries.
The Indenture will permit the Company and its Subsidiaries to incur
substantial additional Debt, subject to certain restrictions. See "Risk
Factors--We rely upon distributions from our subsidiaries to service our
indebtedness, and our indebtedness is subordinated to the indebtedness of our
subsidiaries." As of December 31, 1998, on a pro forma basis after giving
effect to the issuance of the old notes, the total amount of long-term
obligations (including current portion but net of debt discount, which
represents the value ascribed to the warrants issued in connection with the
1998 discount notes) was approximately $353.4 million.
The Company's operations 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 Notes. See "Risk
Factors--We rely upon distributions from our subsidiaries to service our
indebtedness, and our indebtedness is subordinated to the indebtedness of our
subsidiaries."
The Company currently has two Subsidiaries, both of which are designated as
Restricted Subsidiaries under the Indenture. Under certain circumstances, the
Company will be permitted to designate certain of its Subsidiaries, including
Subsidiaries that it creates or acquires in the future, to be Unrestricted
Subsidiaries. Unrestricted Subsidiaries are not subject to many of the
restrictive covenants in the Indenture. See "--Certain Covenants--Restricted
Payments."
Principal, Maturity and Interest
The Company has limited the aggregate principal amount of the Notes to
$265.0 million, of which approximately $215.0 million aggregate principal
amount of Notes has been issued and $50.0 million aggregate principal amount
of Notes are available for issuance in the future, subject to the covenant
described under "--Certain Covenants--Incurrence of Debt and Issuance of
Disqualified Stock." We issued the Notes in denominations of $1,000 and
integral multiples of $1,000. The Notes will mature on February 15, 2009.
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Interest on the Notes accrues at the rate of 12 1/2% per annum and is
payable in cash semi-annually in arrears on February 15 and August 15,
commencing on August 15, 1999, to the Holders of record of the Notes on the
immediately preceding February 1 and August 1.
Interest on the Notes has accrued from the closing date of the issuance of
the old notes. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Pledged Securities; Interest Reserve
We used approximately $74.0 million of the net proceeds of the issuance of
the old notes to purchase the Pledged Securities in an amount sufficient, upon
receipt of scheduled interest and principal payments on the Pledged
Securities, to pay in full the first six scheduled interest payments due on
the Notes. We pledged the Pledged Securities to The Bank of New York as escrow
agent for the benefit of the Holders of the Notes pursuant to the Pledge
Agreement, and the escrow agent holds the Pledged Securities in the Pledge
Account.
Pursuant to the Pledge Agreement, immediately prior to an interest payment
date on the Notes, we may either deposit with the Trustee from funds otherwise
available to us cash sufficient to pay the interest scheduled to be paid on
the Notes on such date or we may direct the escrow agent to release from the
Pledge Account proceeds sufficient to pay the interest then due. If we choose
to deposit cash with the Trustee, we may then direct the escrow agent to
release to us from the Pledge Account proceeds or Pledged Securities in the
amount of our cash deposit. If we fail to pay interest on the Notes in a
timely manner through February 2002, our failure will constitute an immediate
Event of Default under the Indenture, with no grace or cure period.
We will add interest we earn on the Pledged Securities to the Pledge
Account. If the funds or Pledged Securities in the Pledge Account exceed the
amount sufficient, in the opinion of a nationally recognized firm of
independent certified public accountants selected by us, to pay in full the
first six scheduled interest payments due on the Notes (or, if an interest
payment or payments have been made, an amount sufficient to pay in full any
interest payments remaining, up to and including the sixth scheduled interest
payment), the escrow agent will be permitted to release to us at our request
any such excess amount. The Notes are secured by a first priority security
interest in the Pledged Securities and the Pledge Account also secures
repayment of the principal amount of the Notes to the extent of such security.
Under the Pledge Agreement, assuming that we make the first six scheduled
interest payments on the Notes in a timely manner, all of the Pledged
Securities will be released from the Pledge Account.
Methods of Receiving Payments on the Notes
If a Holder has given wire transfer instructions to the Company, we will
make all principal, premium and interest payments on those Notes in accordance
with those instructions. All other payments on the Notes will be made at the
office or agency of the Paying Agent and Registrar within the City and State
of New York unless we elect to make interest payments by check mailed to the
Holders at their address set forth in the register of Holders.
Paying Agent and Registrar for the Notes
The Trustee will initially act as Paying Agent and Registrar. We may change
the Paying Agent or Registrar without prior notice to the Holders of the
Notes, and we or any of our Subsidiaries may act as Paying Agent or Registrar.
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 we
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may require a Holder to pay any taxes and fees required by law or permitted by
the Indenture. We are not required to transfer or exchange any Note selected
for redemption. Also, we are not required to exchange or register the transfer
of 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 its owner for all
purposes.
Optional Redemption
At any time on or prior to February 15, 2002, the Company may on any one or
more occasions redeem up to 35% of the Notes originally issued under the
Indenture at a redemption price of 112.50% of the aggregate principal amount
of the Notes, plus accrued and unpaid interest to the redemption date, with
the net cash proceeds (but only to the extent such proceeds consist of cash or
Cash Equivalents) of one or more Public Equity Offerings; provided that
(1) at least $140.0 million of the aggregate principal amount of the Notes
remains outstanding immediately after the occurrence of such redemption
(excluding Notes held by us and our Subsidiaries); and
(2) we must mail a notice of redemption no later than 30 days after the
related Public Equity Offering and must consummate the redemption within
60 days of the closing of such Public Equity Offering.
Except pursuant to the preceding paragraph, the Notes will not be
redeemable at the Company's option prior to February 15, 2004.
After February 15, 2004, the Company may redeem all or a part of these
Notes upon not less than 30 nor more than 60 days' notice, 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 February 15 of
the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2004.......................................... 106.250%
2005.......................................... 104.167%
2006.......................................... 102.083%
2007 and thereafter........................... 100.000%
</TABLE>
Selection and Notice
If less than all of the Notes are to be redeemed at any time, the Trustee
will select Notes for redemption as follows:
(1) if the Notes are listed, in compliance with the requirements of the
principal national securities exchange on which the Notes are listed; or
(2) if the Notes are not so listed, on a pro rata basis, by lot or by such
other method as the Trustee shall deem fair and appropriate.
No Notes of $1,000 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 that Note shall state the portion of the principal amount thereof
to be redeemed. A new Note in principal amount equal to the unredeemed portion
of the original Note 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
If a Change of Control occurs, each Holder of Notes will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that Holder's Notes pursuant to the Change of
Control Offer. In the Change of Control Offer, the Company will offer a Change
of Control Payment equal to 101% of the aggregate principal amount of Notes
repurchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase. 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, pursuant to the procedures required by the Indenture
and described in such notice. 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
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:
(1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) 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
(3) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount 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. 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 to any unpurchased portion of the
Notes surrendered, if any; provided that each such new Note will be in a
principal amount 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 provisions described above that require the Company to make a Change of
Control Offer following a Change of Control will be applicable regardless of
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.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
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Asset Sales
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) the Company (or the 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 Equity Interests issued or sold or otherwise
disposed of;
(2) such fair market value is determined by the Company's board of directors
and evidenced by a resolution of the board of directors set forth in an
Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of any combination of cash or Cash
Equivalents. For purposes of this provision, each of the following are
considered cash:
(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 in that conversion).
The Company and its Restricted Subsidiaries will be permitted to consummate
an Asset Sale without complying with clause (3) of the immediately proceeding
paragraph if:
(1) the Company (or the 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
(2) at least 75% of the consideration for such Asset Sale constitutes any
combination of cash, Cash Equivalents and Productive Assets. Each of the
following shall be deemed to be Net Cash Proceeds subject to the
provisions of this paragraph:
(a) any cash consideration;
(b) 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 365 days after such
Asset Sale; and
(c) any Productive Assets constituting cash or Cash Equivalents received by
the Company or any of its Restricted Subsidiaries in connection with
such Asset Sale.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company (or such Restricted Subsidiary, as the case may be) may apply such
Net Proceeds to:
(1) 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
(2) 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).
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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 preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds the greater of $10.0 million or
10% of the Consolidated Tangible Net Worth of the Company, the Company will
make an Asset Sale Offer to all Holders of Notes to repurchase the maximum
principal amount of Notes that may be purchased out of the Excess Proceeds.
The offer price in any Asset Sale Offer will be 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, and will be payable in cash. If 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 principal amount 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 each
Asset Sale Offer, 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 will not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue thereof.
Certain Covenants
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) 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);
(2) 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);
(3) 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
(4) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to as
"Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or would
occur as a consequence thereof; and
(2) 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
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(3) 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 (2), (3) and (4) of the next succeeding paragraph), is less than
the sum, without duplication, of
(a) 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
(b) 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) 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
(c) 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 (i) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted Investment.
The preceding provisions will not prohibit:
(1) 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;
(2) 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 (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Debt with the net cash proceeds from an incurrence of
Permitted Refinancing Debt;
(4) 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;
(5) 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; and
(6) other Restricted Payments not to exceed $10.0 million in the aggregate at
any time outstanding (with Restricted Payments pursuant to this clause not
being counted as Restricted Payments for purposes of clause (3) of the
immediately preceding paragraph).
The amount of all Restricted Payments (other than cash) will 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 will be determined by
the board of directors whose resolution with respect thereto shall be
delivered to the Trustee. The board of directors' determination must be based
upon an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if the fair market value exceeds $5.0
million. Not later than the date of making any Restricted Payment, the Company
shall deliver to
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the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
Designation of Restricted and Unrestricted Subsidiaries
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, 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 the
designation and will reduce the amount available for Restricted Payments under
the "Restricted Payments" covenant. All such outstanding Investments will be
valued at their fair market value at the time of such designation. That
designation will be permitted only if such Restricted Payment would be
permitted at that time and if the Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary. Any 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 the designation and an
Officers' Certificate certifying that the designation complied with these
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 the Subsidiary will be deemed to be incurred by a
Restricted Subsidiary of the Company as of that date (and, if such Debt is not
permitted to be incurred as of that date under the covenant described under
the caption "Incurrence of Debt and Issuance of Disqualified Stock," the
Company will 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 will 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 will be permitted only 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 the
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 the designation.
Incurrence of Debt and Issuance of Disqualified Stock
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 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 6.0 to 1.0.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Debt (collectively, "Permitted Debt"):
(1) the incurrence by the Company and/or any of its Restricted Subsidiaries of
Debt under Credit Facilities; provided that the 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) does not exceed the greater of $100.0
million or the Borrowing Base, 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;"
(2) the incurrence by the Company and/or any of its Restricted Subsidiaries of
Vendor Debt, provided that the aggregate amount of Vendor Debt incurred
does not exceed the total cost of the Telecommunications Related Assets
acquired and financed by such Vendor Debt (including acquisitions of
Capital Stock of a
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Person engaged in a Telecommunications Business that is or becomes a
Restricted Subsidiary of the Company);
(3) the incurrence by the Company and its Restricted Subsidiaries of Existing
Debt;
(4) the incurrence by the Company and/or any of its Restricted Subsidiaries of
Debt in an aggregate principal amount that does not exceed $50.0 million
at any one time outstanding;
(5) the incurrence by the Company of Debt (other than secured Acquired Debt)
in an aggregate principal amount that does not exceed 2.5 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), 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;
(6) the incurrence by the Company of Debt represented by the principal amount
of Notes originally issued under the Indenture;
(7) 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 (3) or (6) of this paragraph;
(8) 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 (8);
(9) 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
(10) 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 above under the caption "--Asset
Sales."
For purposes of determining compliance with this "Incurrence of Debt and
Issuance of Disqualified Stock" 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 (1) through (10) above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Company will be
permitted to classify such item of Debt on the date of its incurrence 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.
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Liens
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 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:
(1) pay dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries on its Capital Stock, or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Debt as in effect on the Closing Date;
(2) the Indenture and the Notes;
(3) applicable law;
(4) 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;
(5) customary non-assignment provisions in contracts entered into in the
ordinary course of business;
(6) 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;
(7) any agreement for the sale of a Restricted Subsidiary that restricts
distributions by that Restricted Subsidiary pending its sale;
(8) 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;
(9) 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;
(10) 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;
(11) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business; and
(12) the terms of any Credit Facility if (A) the encumbrance limits, but does
not prohibit, the payment of dividends, (B) the encumbrance or
restriction is not more disadvantageous to the holders of the Notes than
is customary in comparable Credit Facilities, as determined by the Board
of Directors and (C) the Board
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of Directors of the Company determines that any such encumbrance or
restriction is not reasonably expected to materially affect the Company's
ability to satisfy any payment obligations on the Notes or the 1998
Discount Notes, when the same may become due and payable, whether
including payments made in respect of principal, interest, premium, if
any, repayment or Change of Control.
Merger, Consolidation, or Sale of Assets
The Company and any of its Restricted Subsidiaries may not: (1) consolidate
or merge with or into another Person (whether or not the Company or such
Restricted Subsidiary is the surviving corporation); or (2) 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:
(1) either: (a) the Company or such Restricted Subsidiary is the surviving
corporation; or (b) 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 was made is a corporation organized or existing under
the laws of the United States, any state thereof or the District of
Columbia;
(2) 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 was made assumes all the obligations of
the Company under the Notes, the Indenture, the Pledge Agreement and the
Registration Rights Agreement pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default exists;
and
(4) 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 was 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 have a Debt to Annualized Cash Flow Ratio of the Company
immediately after the transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the
applicable two-quarter Measurement Period equal to or less than the
Debt to Annualized Cash Flow Ratio of the Company immediately preceding
the transaction.
Alternatively, clause (4) of the preceding sentence may be satisfied by any
other Person which:
(1) assumes or guarantees the obligations of the Company under the Notes, the
Indenture, the Pledge Agreement and the Registration Rights Agreement
pursuant to a supplemental indenture in a form reasonably satisfactory to
the Trustee;
(2) would, as a result of the applicable transaction, properly classify the
Company or such Restricted Subsidiary as a consolidated subsidiary in
accordance with generally accepted accounting principles; and
(3) would, if the conditions set forth in clauses (a) and (b) of the preceding
sentence were tested substituting such Person for the Company, satisfy
such conditions.
Transactions with Affiliates
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, an "Affiliate Transaction"), unless:
(1) 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
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(2) 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 (1) 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.
The following items will not be deemed to be Affiliate Transactions:
(1) any employment agreement and related arrangement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not otherwise
Affiliates of the Company; and
(4) 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 Company will not permit any Subsidiary, directly or indirectly, to
guarantee, assume or in any other manner become liable with respect to any
Pari Passu Debt or Subordinated Debt of the Company unless such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a guarantee of the Notes on the same terms as the guarantee of
such Debt except that:
(1) such guarantee need not be secured unless required pursuant to the caption
"--Liens" above; and
(2) 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 does not apply to any guarantee or
assumption of liability of Debt permitted under the Indenture described in
clauses (1), (6), (7), (8) and (9) of the second paragraph under "--
Incurrence of Debt and Issuance of Disqualified Stock."
Notwithstanding the preceding paragraph, any guarantee by a Subsidiary of
the Notes will provide by its terms that it (and all Liens securing the same)
will 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.
Limitations on Issuances and Sales of Equity Interests in Wholly Owned
Restricted Subsidiaries
The Company 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:
(1) such transfer, conveyance, sale, lease or other disposition is of all of
the Equity Interests in such Wholly Owned Restricted Subsidiary; and
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(2) 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."
In addition, the Company 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 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 Company and its Restricted Subsidiaries will 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:
(1) 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;
(2) 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
(3) 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
Neither the Company nor any of its Affiliates will, directly or indirectly,
pay or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder of any Notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Indenture or the
Notes unless such consideration is offered to be paid or agreed to be paid to
all Holders of the Notes that consent, waive or agree to amend in the time
frame set forth in the solicitation documents relating to such consent, waiver
or agreement.
Reports
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, in each case within the time periods
specified in the Commission's rules and regulations:
(1) 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
(2) 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.
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In addition, for so long as any Notes are outstanding, the Company will
furnish to the Holders of the Notes, 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.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the Notes
(including any Additional Interest);
(2) default in payment when due of the principal of or premium, if any, on the
Notes;
(3) 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;"
(4) failure by the Company or any of its Restricted Subsidiaries for 30 days
after receiving notice to comply with any of its other agreements in the
Indenture or the Notes;
(5) 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, if that 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;
(6) 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;
(7) default by the Company in the performance of any covenant set forth in the
Pledge Agreement, or repudiation by the Company of any of its obligations
under the Pledge Agreement or the unenforceability of the Pledge Agreement
against the Company for any reason which in any one case or in the
aggregate results in a material impairment of the rights intended to be
afforded thereby; and
(8) certain events of bankruptcy or insolvency with respect to the Company or
any of its Restricted Subsidiaries.
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. If any other 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.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
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
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consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes.
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 will
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
February 15, 2004 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 February 15, 2004, 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 Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, the Company is required 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, will 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. The 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:
(1) 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;
(2) 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;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith; and
(4) 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 will not constitute a Default or
Event of Default with respect to the Notes. If 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:
(1) 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
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principal of, premium, if any, and interest on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, the Company must deliver 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 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 will 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;
(3) in the case of Covenant Defeasance, the Company must deliver 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;
(4) no Default or Event of Default will have occurred and be continuing
either: (a) 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 (b) 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;
(5) 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;
(6) the Company must deliver 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;
(7) 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 any other creditors of the Company with the
intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(8) 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
satisfied.
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 principal amount 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):
(1) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
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(2) 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");
(3) reduce the rate of or change the time for payment of interest on any Note;
(4) 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);
(5) make any Note payable in money other than that stated in the Notes;
(6) 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, if any, or interest on the Notes;
(7) 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");
(8) amend the Pledge Agreement in a manner that adversely affects the Holders
of the Notes; or
(9) make any change in the preceding amendment and waiver provisions.
Notwithstanding the provisions described above, without the consent of any
Holder of Notes, the Company and the Trustee may amend or supplement the
Indenture or the Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(3) 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;
(4) 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;
(5) 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; or
(6) to provide for the issuance of Additional Notes in accordance with the
limitations provided in the Indenture.
Concerning the Trustee
If the Trustee becomes a creditor of the Company, the Indenture limits its
right 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 if an Event of Default occurs
(which is not 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 offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
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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., 2330 Central Expressway, Santa Clara, California
95050, 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 for a registered offer to exchange
the old notes for the new notes. The registration statement of which this
prospectus is a part constitutes such Exchange Offer Registration Statement.
The terms of the new notes will be substantially identical in all material
respects to the terms of the old notes (except that the new notes will not
contain terms with respect to transfer restrictions, registration rights or
payment of Additional Interest).
When the Exchange Offer Registration Statement is declared effective by the
Commission, the Company will offer to the Holders of Transfer Restricted
Securities who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for new notes pursuant to the
exchange offer. If:
(1) 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;
(2) for any reason the exchange offer is not consummated within 210 days after
the Closing Date;
(3) any Holder of Transfer Restricted Securities notifies the Company prior to
the 20th day following consummation of the exchange offer that:
(a) it is prohibited by law or Commission policy from participating in the
exchange offer; or
(b) that it may not resell the new notes acquired by it in the exchange
offer to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales; or
(c) that it is a broker-dealer and owns Notes acquired directly from the
Company or an affiliate of the Company,
the Company will file with the Commission a Shelf Registration Statement to
cover resales of the Transfer Restricted Securities 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 on or before the 180th day
after such obligation arises.
For purposes of the preceding paragraph, "Transfer Restricted Securities"
means each Note until:
(1) the date on which such Note has been exchanged by a person other than a
broker-dealer for a new note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of a Note
for a new note, the date on which such new 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;
(3) 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
(4) the date on which such Note is distributed to the public pursuant to Rule
144 under the Securities Act.
The Registration Rights Agreement provides that:
(1) the Company will file an Exchange Offer Registration Statement with the
Commission on or prior to 60 days after the Closing Date;
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(2) the Company will use its best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to
180 days after the Closing Date;
(3) 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, new notes in exchange for all Notes tendered prior
thereto in the exchange offer; and
(4) 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 Statement to be declared effective by the
Commission on or prior to 180 days after such obligation arises.
The Company complied with the requirements of clauses (1) and (2) in the
immediately preceding sentence on a timely basis.
Additional Interest will accrue on the Notes and the new notes (in addition
to the stated interest on the Notes and the new notes) if:
(1) 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;
(2) 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");
(3) 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
(4) 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 (1) through (4) in the preceding
sentence is a Registration Default. Additional Interest will begin accruing on
the date on which any such Registration Default shall occur, excluding the
date on which all Registration Defaults have been cured. Additional Interest
will accrue at a rate of 0.50% per annum 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. Additional Interest
will be payable in cash, semiannually in arrears on each February 15 and
August 15, regardless of whether any such date is otherwise an Interest
Payment Date. All references in this description and in the Indenture to
"interest" on the Notes and the new notes 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 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.
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"Acquired Debt" means, with respect to any specified Person:
(1) 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
(2) Debt secured by a Lien encumbering any asset acquired by such specified
Person.
"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," 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. For
purposes of this definition, the terms "controlling," "controlled by" and
"under common control with" shall have correlative meanings.
"Asset Sale" means:
(1) 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
(2) the issue or sale by the Company or any of its Subsidiaries of Equity
Interests of any of the Company's Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that: (a)
involves assets having a fair market value of less than $1.0 million; or
(b) results in net proceeds to the Company and its Subsidiaries of less
than $1.0 million;
(2) 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;
(3) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to
the Company or to another Wholly Owned Restricted Subsidiary;
(4) a Restricted Payment that is permitted by the covenant described above
under the caption "--Restricted Payments;"
(5) disposals or replacements of obsolete, uneconomical, negligible, worn-out
or surplus property in the ordinary course of business; or
(6) a conveyance constituting or pursuant to a Permitted Lien.
"Attributable Debt" in respect of any Sale and Leaseback Transaction,
means, at the time of determination, the present value (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 lease included in
such Sale and Leaseback Transaction (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.
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"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" has the meaning assigned to such term 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.
"Borrowing Base" means an amount equal to the sum of 85% of the value of
accounts receivable (before giving effect to any related reserves) shown on
the Company's most recent consolidated balance sheet in accordance with
generally accepted accounting principles not more than 60 days past due.
"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 generally accepted accounting principles.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or
membership interests (whether general or limited); and
(4) 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:
(1) United States dollars;
(2) 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;
(3) 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;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) 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
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(6) money market and mutual funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(5) of this definition.
"Change of Control" means the occurrence of any of the following:
(1) 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);
(2) the adoption of a plan relating to the liquidation or dissolution of the
Company;
(3) the consummation of any transaction (including by way of merger,
consolidation or otherwise) the result of which is that any Person or
group (as defined above) other than the Permitted Holders becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the total
Voting Stock or Total Common Equity of the Company; or
(4) the first day on which a majority of the members of the Board of Directors
of the Company are not Continuing Directors.
"Closing Date" means 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(b) 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:
(1) 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
(2) 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
(3) 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
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(4) 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
(5) non-cash items increasing such Consolidated Net Income for such period, in
each case, on a consolidated basis and determined in accordance with
generally accepted accounting principles.
Notwithstanding the preceding, 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 dividended 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 its stockholders.
"Consolidated Debt" means, with respect to any Person as of any date of
determination, the sum, without duplication, of:
(1) the total amount of Debt of such Person and its Restricted Subsidiaries;
plus
(2) 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
(3) 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 generally accepted accounting principles.
"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
generally accepted accounting principles; provided that:
(1) the Net Income (but not loss) of any Person that is not a Wholly Owned
Restricted Subsidiary shall be included only to the extent of the
percentage ownership interest in the Net Income of such Person owned on
the last day of such period by the referent Person or a Restricted
Subsidiary thereof; provided that the Net Income of any Person that is an
Unrestricted 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 Restricted
Subsidiary thereof;
(2) 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;
(3) 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
(4) 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:
(1) the consolidated equity of the common stockholders of such Person and its
consolidated Restricted Subsidiaries as of such date; plus
(2) 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
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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.
"Consolidated Tangible Net Worth" means, with respect to any Person as of
any date, Consolidated Net Worth, after deducting therefrom amounts
attributable to goodwill, trade names, patents, unamortized debt discount and
expense and any other intangibles, all as set forth on the most recent
consolidated balance sheet of such Person.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of issuance; or
(2) 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:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) 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 preceding items (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. In addition, the term "Debt"
includes 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.
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The amount of any Debt outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Debt issued with original
issue discount; and
(2) 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:
(1) the Consolidated Debt of the Company as of such date to
(2) 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 calculating the Debt to Annualized Cash Flow
Ratio:
(1) 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 (3)
of the proviso set forth in the definition of Consolidated Net Income; and
(2) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or 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. Notwithstanding the preceding sentence, 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 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 (including the accreted value of the 1998
discount notes during the term such indebtedness is outstanding).
"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.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Closing Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"guarantee" means, with respect to any Person, without duplication, a
guarantee (other than by endorsement of negotiable instruments for collection
in the ordinary course of business), direct or indirect, in any manner
(including, without limitation, by way of a pledge of assets or through
letters of credit or reimbursement agreements in respect thereof), of all or
any part of any Debt of another Person.
"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to
execute a guarantee of the Notes pursuant to the "Limitations on Issuance of
Guarantees of Debt" covenant until a successor replaces such party pursuant to
the applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
(2) 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.
"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."
"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:
(1) 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
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(2) 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, in each case 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:
(1) 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;
(2) 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
(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Pari Passu Debt" means:
(1) any Debt of the Company that is equal in right of payment to the Notes;
and
(2) with respect to any guarantee, Debt which ranks equal in right of payment
to such guarantee.
"Permitted Holder" means:
(1) any Warburg Entity; or
(2) 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:
(1) any Investment in the Company or in any Wholly Owned Restricted Subsidiary
of the Company;
(2) any Investment in Cash Equivalents;
(3) 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;
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(4) 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;"
(5) any acquisition of assets to the extent acquired in exchange for the
issuance of Equity Interests (other than Disqualified Stock) of the
Company;
(6) 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 (6) shall
not exceed the greater of $50.0 million and 5% of the Company's Total
Common Equity at any one time outstanding;
(7) accounts receivable created or acquired in the ordinary course of business
of the Company or any Restricted Subsidiary and on ordinary business
terms; and
(8) 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:
(1) Liens in favor of the Company or holders of the Notes;
(2) 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;
(3) 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;
(4) 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;
(5) Liens existing on the Closing Date;
(6) 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;
(7) 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;
(8) 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;
(9) Liens on securities constituting "margin stock" within the meaning of
Regulation 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;
(10) Liens on Capital Stock of Unrestricted Subsidiaries;
(11) Liens in favor of the Trustee arising under the Indenture; and
(12) 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
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(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:
(1) 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);
(2) 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;
(3) 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
(4) 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.
"Pledge Account" means an account established with the escrow agent
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by the Company with a portion of the proceeds from the
sale of the Notes.
"Pledge Agreement"means the Pledge and Escrow Agreement, dated as of the
date of the Indenture, by and between The Bank of New York, as escrow agent,
and the Company, governing the disbursement of funds from the Pledge Account.
"Pledged Securities" means the securities purchased by the Company with a
portion of the proceeds from the sale of the Notes, which shall consist of
Government Securities, to be deposited in the Pledge Account.
"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.
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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.
"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 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.
"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:
(1) 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
(2) 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 (including facilities such as fiber, copper and
switches), and any business related, ancillary or complementary thereto (as
determined in good faith by the Board of Directors).
"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:
(1) 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
(2) 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 (2) 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.
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"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:
(1) has no Debt other than Non-Recourse Debt;
(2) 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;
(3) 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 Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Debt of the Company or any of its Restricted Subsidiaries;
and
(5) 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:
(1) 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
(2) 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.
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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:
. 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
. 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--Consequences of Failure
to Exchange Old Notes" and "--Terms of New Notes."
DESCRIPTION OF CERTAIN INDEBTEDNESS
1998 Discount Notes
We have outstanding $260.0 million in aggregate principal amount at
maturity of our 1998 discount notes. The 1998 discount notes mature on March
15, 2008 and are accreting in value through March 15, 2003 at a rate of 13
1/2% per annum, compounded semi-annually. After March 15, 2003, the 1998
discount notes will bear interest at a rate of 13 1/2% per annum, payable in
cash semi-annually in arrears on March 15 and September 15 of each year until
maturity beginning September 15, 2003. We may redeem the 1998 discount notes
at our option, 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. If a change of control occurs, the holders of the
1998 discount notes will have the right to require us to purchase the 1998
discount notes at a price equal to 101% of the aggregate principal amount or
accreted value thereof, as applicable, plus accrued and unpaid interest, if
any, to the date of purchase.
The covenants set forth in the indenture relating to the 1998 discount
notes are similar to, but more restrictive in some instances than, those in
the indenture, including with respect to the covenant described above under
the caption "Description of Notes--Certain Covenants--Incurrence of Debt and
Issuance of Disqualified Stock." The indenture relating to the 1998 discount
notes contains certain covenants, that, among other things, limit our ability
and the ability of our subsidiaries to:
. make certain restricted payments;
. incur additional indebtedness and issue preferred stock;
. pay dividends or make other distributions, repurchase equity interests or
subordinated indebtedness;
. engage in sale and leaseback transactions;
. create certain liens;
. enter into certain transactions with affiliates;
. sell our assets or those of our subsidiaries, conduct certain lines of
business, issue or sell equity interests of our subsidiaries or enter
into certain mergers and consolidations. In addition, under certain
circumstances, we are required to offer to purchase the 1998 discount
notes at a price equal to 100% of the principal amount or accreted value
thereof, as applicable, plus accrued and unpaid interest, if any, to the
date of purchase, with the proceeds of certain asset sales.
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DESCRIPTION OF CAPITAL STOCK
The following summary describes the material terms of our capital stock.
However, it does not purport to be complete and is qualified in its entirety
by the actual terms of our capital stock contained in our Amended and Restated
Certificate of Incorporation and other agreements referenced below.
Our authorized capital stock currently consists of 190,000,000 shares of
common stock, 10,000,000 shares of class B common stock and 5,000,000 shares
of preferred stock. As of March 15, 1999, there were 335 holders of record of
common stock and five holders of class B common stock. The common stock and
preferred stock each have a par value of $0.001 per share. As of March 15,
1999, there were 42,271,466 shares of common stock, 6,379,177 shares of class
B common stock and no shares of preferred stock outstanding. As of March 15,
1999, options to purchase 11,383,597 shares of common stock at a weighted
average exercise price of $3.41 per share were outstanding.
Common Stock
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Subject to preferential
rights of any outstanding series of preferred stock, the holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the board of directors out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
our remaining assets after payment of liabilities and satisfaction of
preferential rights of any outstanding series of preferred stock. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and non-
assessable.
Class B Common Stock
The rights of holders of our class B common stock are identical to the
rights of holders of our common stock except that the holders of our class B
common stock do not have voting rights. Commencing in January 2000, the class
B common stock may be converted into common stock on a one-for-one basis at
the election of the holder, provided that such holder and its affiliates would
not hold more than 10% of our voting stock. In addition, commencing in January
2000 the class B common stock will automatically convert into common stock
upon transfer to a third party.
Preferred Stock
The board of directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series without any further action or vote by
the stockholders. In addition, the board of directors is authorized, without
stockholder approval, to fix the rights, preferences, privileges, and
restrictions granted to or imposed upon such preferred stock, including:
. dividend rights,
. conversion rights,
. terms of redemption,
. liquidation preferences,
. voting rights,
. sinking fund terms, and
. the number of shares constituting any series or the designation of such
series.
As a result, the board of directors could issue additional preferred stock
with voting and conversion rights which could adversely affect the voting
power of the holders of common stock. Issuing preferred stock could
113
<PAGE>
also have the effect of delaying, deferring or preventing a change in control
or the removal of our management. We have no present plan to issue any shares
of preferred stock.
Warrants
In connection with the issuance of our senior discount notes in March 1998,
we issued warrants to purchase an aggregate of 5,053,764 shares of our common
stock with exercise prices of $0.0033 per share. These warrants became
exercisable on September 15, 1998 and automatically expire on March 15, 2008.
We also issued to a consultant a five-year warrant to purchase 135,000 shares
with an exercise price of $1.00 per share. This warrant is immediately
exercisable.
Registration Rights
Certain holders of our common stock are entitled to registration rights.
Pursuant to the Stockholder Rights Agreement holders of 20,075,285 shares of
common stock and holders of 6,379,177 shares of class B common stock
(collectively, the "Rights Holders") are entitled to certain rights with
respect to the registration under the Securities Act of the shares of common
stock held by them or issuable upon conversion of the class B common stock.
The class B common stock may be converted into common stock at the election of
the holder commencing January 2000. The Rights Holders are entitled to demand,
"piggy-back" and S-3 registration rights, subject to certain limitations and
conditions. The number of securities requested to be included in a
registration involving the exercise of demand and "piggy-back" rights are
subject to a pro rata reduction based on the number of shares of common stock
held by each Rights Holder and any other security holders exercising their
respective registration rights to the extent that the managing underwriter
advises 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) three years after our initial the offering made hereby or (ii)
such time as such Rights Holder may sell under Rule 144 in a three month
period all registrable securities then held by such Rights Holder.
Pursuant to the Warrant Registration Rights Agreement dated March 11, 1998,
between us and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated,
holders of the warrants that were issued in connection with our senior
discount note offering in March 1998 are entitled to certain registration
rights with respect to the shares of common stock issuable upon exercise of
such warrants. The warrant holders are entitled to demand and "piggy-back"
registration rights, subject to certain limitations and conditions. Like the
Rights Holders, the number of securities that a warrant holder may request to
be included in a registration involving an exercise of its demand or "piggy-
back" rights is subject to a pro rata reduction. Such a reduction will be
based on the number of shares held by each warrant holder and any other
security holders exercising their respective registration rights to the extent
that the managing underwriter advises us that the total number of securities
requested to be included in the underwriting is such as to materially and
adversely affect the success of the offering.
Antitakeover Effects of Certain Provisions of Covad's Charter, Bylaws and
Delaware Law
As noted above, our board of directors, without stockholder approval, has
the authority under our charter to issue preferred stock with rights superior
to the rights of the holders of common stock. As a result, preferred stock
could be issued quickly and easily, could adversely affect the rights of the
common stock holders and could be issued with terms calculated to delay or
prevent a change of control of our company or make removal of management more
difficult.
Election and Removal of Directors. Our charter and bylaws provide for the
division of our board of directors into three classes, as nearly equal in
number as possible, with the directors in each class serving for a three-year
term, and one class being elected each year by our stockholders. Our directors
may be removed only for cause. This system of electing and removing directors
may tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of our company and may maintain the incumbency of
the board of directors, as it generally makes it more difficult for
stockholders to replace a majority of the directors. See "Management--
Classified Board."
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Stockholder Meetings and Written Consent. Under our bylaws, the
stockholders may not call a special meeting of the stockholders of our
company. Rather, only our board of directors, the chairman of our board of
directors and the President may call special meetings of our stockholders. Our
charter provides that stockholders may not act by written consent. As a
result, stockholders can only act at a meeting.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.
Section 203 of the Delaware General Corporation Law. We are subject to
Section 203 of the Delaware General Corporation Law. Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
. prior to such date, the board of directors of the corporation approves
either the business combination or the transaction that resulted in the
stockholder's becoming an interested stockholder,
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding voting stock, excluding shares held by
directors, officers and certain employee stock plans, or
. on or after the consummation date the business combination is approved by
the board of directors and by the affirmative vote at an annual or
special meeting of stockholders of at least 66 2/3 % of the outstanding
voting stock that is not owned by the interested stockholder.
For purposes of Section 203, a "business combination" includes, among other
things, a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is
generally a person who, together with affiliates and associates of such
person,
. owns 15% or more of the corporation's voting stock or
. is an affiliate or associate of the corporation and was the owner of 15%
or more of the outstanding voting stock of the corporation as any time
within the prior three years.
These charter and bylaw provisions and provisions of Delaware law may have
the effect of delaying, deterring or preventing a change of control of our
company.
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<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal
income tax considerations relating to the exchange offer and to the purchase,
ownership and disposition of the new notes. The 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 or interpreted differently so
as to result in federal income tax consequences different from those discussed
below. We cannot asure you that the Internal Revenue Service will not
successfully challenge one or more of the tax consequences described herein,
and we have not obtained, nor do we 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.
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, such as foreign persons, 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, some of which 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. 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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<PAGE>
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer receiving 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. Participating
Broker-Dealers may use this prospectus 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. We 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."
We will not receive any cash proceeds from the issuance of the new notes
offered by this prospectus. 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 the exchange offer and any broker or
dealer that participates in a distribution of such new notes may be deemed to
be an "underwriter" within the meaning of the Securities Act. 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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 covering the new notes to be issued in the exchange
offer. This prospectus does not contain all of the information included in the
registration statement. Statements contained in this prospectus concerning the
provisions of any document are not necessarily complete. You should refer to
the copy of these documents filed as an exhibit to the registration statement
or otherwise filed by us with the SEC for a more complete understanding of the
matter involved. Each statement concerning these documents is qualified in its
entirety by such reference.
We are also subject to the informational requirements of the Securities
Exchange Act of 1934. In accordance with the Exchange Act, we file reports,
proxy statements and other information with the SEC. The registration
statement, including the attached exhibits and schedules, may be inspected and
copied at the public reference facilities maintained by the SEC, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, New
York, New York 10048, and 500 West Madison Street, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. 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 and the
reports, proxy and information statements and other information that we file
with the SEC may be obtained from the SEC's Internet address at
http://www.sec.gov.
The SEC allows us to incorporate by reference into the registration
statement certain information that we have filed with them. We incorporate by
reference certain of our exhibits that are not included in or delivered
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with this registration statement or this prospectus. You may request a copy of
these documents, at no cost, by writing or telephoning us at the following
address:
Covad Communications Group, Inc.
Attention: Nick Kormeluk
2330 Central Expressway
Santa Clara, California 95050
(408) 844-7500
The "CovadTM", "TeleSpeedSM", "The Speed to WorkSM" and the Covad crescent
logo names and marks are our trademarks. This prospectus contains other
product names, trade names and trademarks of ours and of other organizations.
LEGAL MATTERS
The validity of the new notes offered hereby will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Certain
attorneys at Wilson Sonsini Goodrich & Rosati, P.C. hold an aggregate of 6,100
shares of our common stock.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998 and
for the years then ended included in this prospectus have been audited by
Ernst & Young LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
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COVAD COMMUNICATIONS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young
LLP, Independent
Auditors............... F-2
Consolidated Balance
Sheets................. F-3
Consolidated Statements
of Operations.......... F-4
Consolidated Statements
of Stockholders' Equity
(Net Capital
Deficiency)............ F-5
Consolidated Statements
of Cash Flows.......... F-6
Notes to Consolidated
Financial Statements... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Covad Communications Group, Inc.
We have audited the accompanying consolidated balance sheets of Covad
Communications Group, Inc. as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Covad
Communications Group, Inc. as of December 31, 1997 and 1998, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
February 15, 1999
F-2
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
ASSETS ------------- --------
Current assets: (Restated)(1)
<S> <C> <C>
Cash and cash equivalents.............................. $4,378 $ 64,450
Accounts receivable, net of allowances for
uncollectibles of $0 and $220......................... 25 1,933
Unbilled revenue....................................... 4 663
Inventories............................................ 43 946
Prepaid expenses....................................... 52 1,183
Other current assets................................... 317 514
------ --------
Total current assets................................ 4,819 69,689
Property and equipment:
Networks and communication equipment................... 2,185 55,189
Computer equipment..................................... 600 4,426
Furniture and fixtures................................. 185 1,119
Leasehold improvements................................. 114 1,887
------ --------
3,084 62,621
Less accumulated depreciation and amortization......... (70) (3,476)
------ --------
Net property and equipment............................ 3,014 59,145
Other assets:
Restricted cash........................................ 210 225
Deposits............................................... 31 337
Deferred debt issuance costs (net)..................... -- 8,112
Other long term assets................................. -- 1,911
------ --------
Total other assets.................................. 241 10,585
------ --------
Total assets........................................ $8,074 $139,419
====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable....................................... $ 651 $ 14,975
Unearned revenue....................................... 7 551
Accrued network costs.................................. 58 1,866
Other accrued liabilities.............................. 77 3,854
Current portion of capital lease obligations........... 229 263
------ --------
Total current liabilities........................... 1,022 21,509
Long-term debt (net of discount)....................... -- 142,300
Long-term capital lease obligations.................... 554 316
------ --------
Total liabilities................................... 1,576 164,125
Stockholders' equity (net capital deficiency):
Convertible preferred stock ($0.001 par value):
Authorized shares--30,000,000
Issued and outstanding shares--17,750,001 and
18,246,162 at December 31, 1997 and December 31,
1998, respectively................................... 18 18
Common stock ($0.001 par value):
Authorized shares--65,000,000
Issued and outstanding shares--11,361,204 and
11,773,997 at December 31, 1997 and December 31,
1998, respectively................................... 11 12
Additional paid-in capital............................. 9,692 30,685
Deferred compensation.................................. (611) (4,688)
Retained earnings (deficit)............................ (2,612) (50,733)
------ --------
Total stockholders' equity (net capital deficiency)... 6,498 (24,706)
------ --------
Total liabilities and stockholders' equity (net
capital deficiency).................................. $8,074 $139,419
====== ========
</TABLE>
- --------
(1) See Note 6.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000's, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998
------------- ---------
(Restated)(1)
<S> <C> <C>
Revenues............................................. $ 26 $ 5,326
Operating expenses:
Network and product costs.......................... 54 4,562
Sales, marketing, general and administrative....... 2,374 31,043
Amortization of deferred compensation.............. 295 3,997
Depreciation and amortization...................... 70 3,406
--------- ---------
Total operating expenses......................... 2,793 43,008
--------- ---------
Income (loss) from operations........................ (2,767) (37,682)
Interest income (expense):
Interest income.................................... 167 4,778
Interest expense................................... (12) (15,217)
--------- ---------
Net interest income (expense)...................... 155 (10,439)
--------- ---------
Net income (loss).................................... $ (2,612) $ (48,121)
========= =========
Net income (loss) per common share................... $ (0.80) $ (8.43)
Weighted average shares used in computing net loss
per share........................................... 3,271,546 5,708,535
</TABLE>
- --------
(1) See Note 6.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(Restated)(1)
(Amounts in 000's, except share amounts)
<TABLE>
<CAPTION>
Total
Convertible Stockholders'
Preferred Stock Common Stock Additional Retained Equity (Net
----------------- ------------------ Paid-In Deferred Earnings Capital
Shares Amount Shares Amount Capital Compensation (Deficit) Deficiency)
---------- ------ ---------- ------ ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance of
common stock........... -- $-- 12,000,000 $12 $ 38 $ -- $ -- $ 50
Repurchase of common
stock.................. -- -- (2,410,296) (3) (7) -- -- (10)
Issuance of common
stock.................. -- -- 1,771,500 2 66 -- -- 68
Issuance of Series A
Preferred Stock........ 750,000 1 -- -- 249 -- -- 250
Issuance of Series B
Preferred Stock (net of
$43 of financing
costs)................. 17,000,001 17 -- -- 8,440 -- -- 8,457
Deferred compensation... -- -- -- -- 906 (906) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 295 -- 295
Net loss................ -- -- -- -- -- -- (2,612) (2,612)
---------- --- ---------- --- ------- ------- -------- --------
Balance at December 31,
1997................... 17,750,001 18 11,361,204 11 9,692 (611) (2,612) 6,498
Issuance of common
stock.................. -- -- 412,793 1 570 -- -- 571
Issuance of Series B
Preferred Stock........ 100,002 -- -- -- 100 -- -- 100
Issuance of Series C
Preferred Stock........ 396,159 -- -- -- 1,100 -- -- 1,100
Issuance of common stock
warrants as part of
debt offering issuance
costs.................. -- -- -- -- 2,928 -- -- 2,928
Issuance of common stock
warrants pursuant to
debt offering.......... -- -- -- -- 8,221 -- -- 8,221
Deferred compensation... -- -- -- -- 8,074 (8,074) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 3,997 -- 3,997
Net loss................ -- -- -- -- -- -- (48,121) (48,121)
---------- --- ---------- --- ------- ------- -------- --------
Balance at December 31,
1998................... 18,246,162 $18 11,773,997 $12 $30,685 $(4,688) $(50,733) $(24,706)
========== === ========== === ======= ======= ======== ========
</TABLE>
- --------
(1) See Note 6.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998
----------------------------
(Restated)(1)
<S> <C> <C>
Operating activities:
Net loss......................................... $ (2,612) $ (48,121)
Reconciliation of net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization.................. 70 3,406
Amortization of deferred compensation.......... 295 3,997
Accreted interest and amortization of debt
discount and deferred debt issuance costs..... -- 16,009
Net changes in current assets and liabilities:
Accounts receivable.......................... (25) (1,908)
Inventories.................................. (43) (903)
Other current assets......................... (373) (1,987)
Accounts payable............................. 651 14,324
Unearned revenue............................. 7 544
Other current liabilities.................... 135 5,585
----------- ------------
Net cash used in operating activities ........... (1,895) (9,054)
Investing activities:
Purchase of restricted cash...................... (210) (15)
Deposits......................................... (31) (306)
Other long-term assets........................... -- (1,428)
Purchase of property and equipment............... (2,253) (59,503)
----------- ------------
Net cash used in investing activities ........... (2,494) (61,252)
Financing activities:
Net proceeds from issuance of long-term debt and
warrants........................................ -- 129,328
Principal payments under capital lease
obligations..................................... (48) (238)
Proceeds from common stock issuance, net of
repurchase...................................... 108 571
Proceeds from preferred stock issuance........... 8,707 1,200
Offering costs related to common stock offering.. -- (483)
----------- ------------
Net cash provided by financing activities........ 8,767 130,378
----------- ------------
Net increase in cash and cash equivalents........ 4,378 60,072
Cash and cash equivalents at beginning of year... -- 4,378
----------- ------------
Cash and cash equivalents at end of year......... $ 4,378 $ 64,450
=========== ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest......... $ 9 $ 99
=========== ============
Supplemental schedule of non-cash investing and
financing activities:
Equipment purchased through capital leases..... $ 831 $ 34
=========== ============
Warrants issued for equity commitment.......... -- $ 2,928
=========== ============
</TABLE>
- --------
(1) See Note 6.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
Covad Communications Group, Inc (the "Company") is a high-speed Internet
and network access provider offering Digital Subscriber Line ("DSL") services
to Internet Service Provider ("ISP") and enterprise customers. ISPs purchase
the Company's services in order to provide high-speed Internet access to their
business and consumer end-users. Enterprise customers purchase the Company's
services to provide employees with remote access to their Local Area Networks
to improve employee productivity and reduce operating costs. The Company's
services are provided over standard copper telephone lines at considerably
faster speeds than available through a standard modem.
The Company's operations are subject to significant risks and uncertainties
including competitive, financial, developmental, operational, growth and
expansion, technological, regulatory, and other risks associated with an
emerging business.
Summary of Significant Accounting Policies
A. Basis of Presentation
The 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.
Actual results may differ from those estimates.
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 for the year ended December 31, 1997 include $50,000 received during
1996 upon issuance of the initial capital stock of the Company and $2,000
expended in 1996 for general and administrative expenses. Due to the
insignificance of balances at December 31, 1996 and activity for the period
from inception through December 31, 1996, financial statements for 1996 have
not been presented.
B. Revenue Recognition
Revenue related to installation of service and sale of customer premise
equipment is recognized when equipment is delivered and installation is
completed. Revenue from monthly recurring service is recognized in the month
the service is provided. Recognized revenue for which the customer has not
been billed is recorded as unbilled revenue until the period such billings are
provided. Amounts billed in advance of providing services are recorded as
unearned revenue until the period such services are provided. For the year
ended December 31, 1998, one customer accounted for approximately 17% of the
Company's revenue. For the year ended December 31, 1998, no other customer
accounted for more than 10% of the Company's revenue.
C. Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less from
the date of original issuance are considered to be cash equivalents.
D. Restricted Cash
As of December 31, 1997 and December 31, 1998, the Company had $210,000 and
$225,000, respectively, in commercial deposits held in the Company's name but
restricted as security for certain of the Company's capital lease
arrangements.
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 and consist primarily
of customer premise equipment. 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 communication equipment........... 2 to 5 years
Furniture and fixtures....................... 3 to 7 years
Computer equipment........................... 3 years
Office equipment............................. 2 to 5 years
Computer software............................ 2 to 7 years
</TABLE>
The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally
developed software. Capitalized external software costs include the actual
costs to purchase software from vendors. Capitalized internal software costs
generally include personnel and related costs incurred in the enhancement and
implementation of purchased software packages. Capitalized internal labor
costs for the years ending December 31, 1997 and December 31, 1998 were
$139,000 and $3,063,000, respectively. Capitalized interest cost for the year
ending December 31, 1998 was $900,000.
G. Equipment Under Capital Leases
The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of
the assets under lease, whichever is less. Assets under capital lease are
amortized over the lease term or useful life of the assets.
H. Income Taxes
Due to the Company's overall loss position, there is no provision for
income taxes for 1997 or 1998. The reconciliation of income tax computed at
the US federal statutory rate to income tax expense is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
--------- ------------
<S> <C> <C>
Federal at 34%, statutory........................ $(757,000) $(16,363,000)
Non deductible interest.......................... -- 911,000
Losses with no current benefit................... 757,000 15,436,000
Other............................................ -- 16,000
--------- ------------
Provision........................................ $ -- $ --
========= ============
</TABLE>
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $40,000,000. The net operating loss and
credit carryforwards will expire at various dates beginning in 2005 through
2018, if not utilized.
The utilization of the net operating loss is subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation
F-8
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
may result in the expiration of net operating losses and credits before
utilization. Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
-------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $820,000 $16,000,000
Depreciation...................................... -- 1,000,000
Other............................................. -- 1,500,000
-------- -----------
Net deferred tax assets........................... 820,000 18,500,000
Valuation allowance................................. (820,000) (18,500,000)
-------- -----------
Net deferred tax assets............................. -- --
======== ===========
</TABLE>
The net valuation allowance increased by $17,680,000 during the year ended
December 31, 1998.
I. Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("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," 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 values of borrowings, including long-term debt, capital
lease obligations and other obligations, were estimated based on quoted market
prices, where available, or 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 all
borrowings outstanding at December 31, 1997 and December 31, 1998, fair value
approximates recorded value.
J. Earnings (Loss) Per Share
Basic earnings per share is computed by dividing income or loss applicable
to common shareholders by the weighted average number of shares of the
Company's common stock ("Common Stock"), after giving consideration to shares
subject to repurchase, outstanding during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and conversion of the Company's convertible preferred stock ("Preferred
Stock"). In addition, income or loss is adjusted for dividends and other
transactions relating to preferred shares for which conversion is assumed. The
diluted earnings per share amount has not been reported because the Company has
a net loss and the impact of the assumed exercise of the stock options and
warrants and the assumed preferred stock conversion is not dilutive.
F-9
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the Company's Certificate of Incorporation, all outstanding Preferred
Stock will convert into Common Stock on a one-for-one basis upon the
completion of the Company's initial public offering of Common Stock (see note
9).
The consolidated financial statements applicable to the prior periods have
been restated to reflect a two-for-one stock split effective May 1998 and a
three-for-two stock split effective August 1998.
The following table presents the calculation of basic and diluted net
income (loss) per share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net income (loss)................................... $ (2,612) $ (48,121)
Basic and diluted:
Weighted average shares of common stock
outstanding...................................... 11,021,269 11,505,307
Less: Weighted average shares subject to
repurchase....................................... 7,749,723 5,796,772
---------- ----------
Weighted average shares used in computing basic and
diluted net income (loss) per share................ 3,271,546 5,708,535
========== ==========
Basic and diluted net income (loss) per share....... $ (0.80) $ (8.43)
========== ==========
</TABLE>
K. Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company's cash and investment policies limit
investments to short-term, investment grade instruments. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's customer base. In addition, the
Company typically offers its customers credit terms. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral.
L. Key Suppliers
The Company is dependant on limited source suppliers for certain equipment
used to provide its services. The Company has generally been able to obtain an
adequate supply of equipment. In addition, the Company believes that there are
alternative suppliers for the equipment used to provide its service. However,
an extended interruption in the supply of equipment currently obtained from
limited source suppliers could adversely affect the Company's business and
results of operations.
M. Accounts Receivable Allowance:
The Company established a reserve for uncollectible accounts receivable in
the amount of $220,000 at December 31, 1998. No significant charges were made
against this reserve as of December 31, 1998.
N. Recently Issued Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in quarterly and
annual financial statements. SFAS 131 changes segment reporting from an
industry segment basis to an operating segment basis defined based on how the
business is managed. The Company operates in only one segment, high-speed
digital communications services, and hence, separate segment reporting is not
applicable.
F-10
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Debt
On March 11, 1998, the Company completed a private placement (the "1998
Private Offering") through the issuance of 260,000 units (the "Units"), each
unit consisting of $1,000 in principal amount at maturity of 13 1/2% Senior
Discount Notes due 2008 (the "Notes") and one warrant, initially exercisable
to purchase 19.4376 shares of common stock, $0.001 par value, of the Company
(the "Unit Warrants"). Net proceeds from the 1998 Private Offering were
approximately $129.6 million, after transaction costs of approximately $5.5
million.
The principal amount of the Notes will accrete from the date of issuance at
the rate of 13 1/2% per annum through March 15, 2003, compounded semi-
annually, and thereafter bear interest at the rate of 13 1/2% per annum,
payable semi-annually, in arrears on March 15 and September 15 of each year,
commencing on September 15, 2003. The Notes are unsecured senior obligations
of the Company that will mature on March 15, 2008. The Notes will be
redeemable at the option of the Company at any time after March 15, 2003 plus
accrued and unpaid interest thereon, if any, to the redemption date.
The Notes were originally recorded at approximately $126.9 million, which
represents the $135.1 million in gross proceeds less the approximate $8.2
million value assigned to the Unit Warrants, which is included in additional
paid-in capital. The value assigned to the Unit Warrants, representing debt
discount, is being amortized over the life of the Notes. Debt issuance costs
were incurred through the issuance of additional warrants associated with the
commitment of equity by certain investors. The debt issuance costs are also
being amortized over the life of the Notes. For the year ended December 31,
1998, the accretion of the Notes and the amortization of debt discount and
debt issuance costs was $16 million, of which $15.1 million is included in
interest expense and $900,000 is capitalized in property, plant and equipment.
The Unit Warrants have ten year terms, have exercise prices of $0.0033 per
share (subject to adjustment in certain events), contain net exercise
provisions and are currently exercisable.
3. Capital Leases
The Company has entered into capital lease arrangements to finance the
acquisition of certain operating assets, two of which have bargain purchase
options. The principal value of these leases totaled $831,000 and $865,000 as
of December 31, 1997 and December 31, 1998, respectively, 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,
------------------------
<S> <C>
1999............................................................ 335,000
2000............................................................ 294,000
2001............................................................ 44,000
2002............................................................ 4,000
2003............................................................ --
Thereafter...................................................... --
--------
677,000
Less amount representing interest............................... (98,000)
Less current portion............................................ (263,000)
--------
Total long-term portion......................................... $316,000
========
</TABLE>
F-11
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accumulated amortization for equipment under capital leases is reflected in
accumulated depreciation and amortization for property and equipment.
4. Operating Leases
The Company leases vehicles, equipment, and office space under various
operating leases. Future minimum lease payments by year under operating leases
are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999........................................................... 2,656,000
2000........................................................... 2,105,000
2001........................................................... 2,159,000
2002........................................................... 1,436,000
2003........................................................... 506,000
Thereafter..................................................... 351,000
----------
Total........................................................ $9,213,000
==========
</TABLE>
Rental expense on operating leases totaled $131,000 and $1,507,000 for the
year ended December 31, 1997 and December 31, 1998, respectively.
5. Stockholders' Equity
Covad Communications Group, Inc.
Common Stock:
The number of shares of Common Stock authorized for issuance by the Company
is 65,000,000 shares with a par value of $.001 per share. Shares of Common
Stock outstanding at December 31, 1997 and December 31, 1998, were 11,361,204
and 11,773,997 shares, respectively, of which 7,033,107 and 4,773,083 shares,
respectively, remain subject to repurchase provisions which generally lapse
over a four year period from the date of issuance.
Common Stock reserved for future issuance as of December 31, 1998 is as
follows:
<TABLE>
<S> <C>
Convertible preferred stock..................................... 18,246,162
Outstanding and reserved options................................ 15,306,843
Outstanding warrants............................................ 6,988,764
----------
Total........................................................ 40,541,769
==========
</TABLE>
F-12
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Convertible Preferred Stock:
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Authorized shares--30,000,000
Series A preferred stock ($0.001 par value):
Authorized shares--750,000
Issued and outstanding shares--750,000 at December 31, 1997
and December 31, 1998..................................... $ 1 $ 1
Series B preferred stock ($0.001 par value):
Authorized shares--17,100,003
Issued and outstanding shares--17,000,001 at December 31,
1997 and 17,100,003 at December 31, 1998.................. 17 17
Series C preferred stock ($0.001 par value):
Authorized shares--11,149,287
Issued and outstanding shares--None at December 31, 1997
and 396,159 at December 31, 1998.......................... -- --
------ ------
$18 $18
====== ======
</TABLE>
In January 1999, all of the outstanding convertible Preferred Stock
converted into Common Stock (see Note 9).
Equity Commitment
On February 20, 1998, the Company entered into a Series C Preferred Stock
and Warrant Subscription Agreement (the "Subscription Agreement") with certain
of its investors (the "Series C Investors") pursuant to which the Series C
Investors have unconditionally agreed to purchase an aggregate of 5,764,143
shares of Series C Preferred Stock and warrants to purchase an aggregate of
4,729,500 shares of Series C Preferred Stock (the "Series C Warrants") for an
aggregate purchase price of $16.0 million at a date to be determined by the
Company but no later than March 11, 1999. The Company either has agreed to
call the Equity Commitment or to complete an alternate equity financing of at
least $16.0 million by March 11, 1999. In consideration of this commitment,
the Company has issued to the Series C Investors warrants to purchase an
aggregate of 1,694,148 shares of the Company's Common Stock at a purchase
price of $0.0033 per share (the "Common Warrants"). In January 1999, the
Company completed an alternative equity financing and, as a result, the Equity
Commitment will not be called (see Note 9).
On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement between the Company, the Series C
Investors, and a director of the Company whereby the Series C Investors
assigned to the director of the Company their obligation to purchase 36,015
shares of Series C Preferred Stock and 29,559 Series C Warrants for an
aggregate purchase price of $100,000. On the same date, the director purchased
36,015 shares of Series C Preferred Stock. As a result of this amendment, the
aggregate obligation of the Series C Investors to purchase Series C Preferred
Stock and Series C Warrants was reduced from 5,764,143 shares to 5,728,128
shares, and from 4,729,500 shares to 4,699,941 shares, respectively, for an
aggregate purchase price of $15.9 million, reduced from $16.0 million.
The Stock Purchase
On March 11, 1998, an investor in the Company purchased 360,144 shares of
Series C Preferred Stock and Series C Warrants to purchase an aggregate of
295,500 shares of Series C Preferred Stock for an aggregate
F-13
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase price of $1.0 million; provided, that the Company does not have any
obligation to issue such Series C Warrants to this investor until such time as
the Equity Commitment is called. In connection with its agreement to purchase
such Series C Preferred Stock and Series C Warrants, the Company issued to
this investor Common Warrants to purchase an aggregate of 105,852 shares of
Common Stock at a purchase price of $0.0033 per share.
Preferred Stock Dividends
The holders of Series A, Series B and Series C were entitled to receive in
any fiscal year, dividends at the rate of $0.0167 per share, $0.04 per share
and $0.2233 per share, respectively, payable in preference and priority to any
payment of dividends on Common Stock. The rights to such dividends were
cumulative and accrue to the holders to the extent they were not declared or
paid were payable, in cash or Common Stock, 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 and December 31, 1998 for Preferred Stock were
$318,250 and $1,084,740, respectively, none of which has been declared or
paid.
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. As of December
31, 1998 the Plan has reserved 15,520,342 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, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------ ------------------------
Weighted- Weighted- Weighted-
Exercise Price Number of Average Life Average Number of Average
Range Shares Remaining Exercise Price Shares Exercise Price
-------------- --------- ------------ -------------- --------- --------------
<C> <S> <C> <C> <C> <C>
$0.033--$0.667.. 6,503,028 6.4 years $0.2675 1,775,834 $0.1672
$1.00 --$1.627.. 2,782,499 7.5 years $1.1538 46,870 $1.6270
$5.75........... 1,438,802 7.6 years $5.7500 4,372 $5.7500
$7.38 --$7.93... 1,311,961 7.7 years $7.7741 8,066 $7.6733
$8.16........... 195,500 7.9 years $8.1600 500 $8.1600
</TABLE>
The following table summarizes stock option activity for the year ended
December 31, 1997 and December 31, 1998:
<TABLE>
<CAPTION>
Number of Shares Option Price
of Common Stock Per Share
---------------- ----------------
<S> <C> <C>
Balance as of December 31, 1996......... -- N/A
Granted................................. 3,843,750 $0.033 -- $0.05
Exercised............................... (6,000) $0.033
Forfeited............................... (33,000) $0.033 -- $0.05
---------- ----------------
Balance as of December 31, 1997......... 3,804,750 $0.033 -- $0.05
Granted................................. 9,358,978 $0.10 -- $8.16
Exercised............................... (207,499) $0.033 -- $0.667
Forfeited............................... (724,439) $0.033 -- $7.93
---------- ----------------
Balance as of December 31, 1998......... 12,231,790 $0.033 -- $8.16
========== ================
</TABLE>
F-14
<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, compensation expense is
recognized based on the amount by which the fair value of the underlying
common stock exceeds the exercise price of stock options at the date of grant.
As a result of the Company's reassessment during 1998 of the fair values per
share of its common stock, the Company has restated its financial statements
for the year ended December 31, 1997 to record deferred compensation of
$906,000 as a result of granting stock options and issuing restricted stock
with exercise or issue prices per share below the revised fair value per share
of the Company's common stock at the date of grant or issuance. This amount
was recorded as a reduction of stockholders' equity and is being amortized as
a charge to operations over the vesting period of the applicable options. Such
amortization was $295,000 for the year ended December 31, 1997. During the
year ended December 31, 1998, the Company recorded additional deferred
compensation of approximately $8.1 million. Amortization of deferred
compensation during this same period was approximately $4.0 million.
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by SFAS 123 as if the Company had accounted for its stock-based
awards under the fair value method of SFAS 123. The fair value of the
Company's stock-based awards to employees has been estimated using the minimum
value option pricing model which does not consider stock price volatility.
Because the Company does not have actively traded equity securities,
volatility is not considered in determining the fair value of stock-based
awards to employees.
For the year ended December 31, 1997 and December 31, 1998, the fair value
of the Company's stock-based awards to employees was estimated using the
following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Expected life of options in years.............................. 4.0 4.0
Risk-free interest rate........................................ 7.0% 7.0%
Expected dividend yield........................................ 0.00% 0.00%
</TABLE>
The weighted average fair value of stock options granted during the year
ended December 31, 1997 and December 31, 1998 was $0.26 and $2.05 per share,
respectively. For pro forma purposes, the estimated fair value of the
Company's stock-based awards to employees is amortized over the options'
vesting period which would result in an increase in net loss of approximately
$12,000 and $1.7 million for the year ended December 31, 1997 and 1998,
respectively. The result of applying SFAS 123 to the Company's option grants
was not material to the results of operations or loss per share for the year
ended December 31, 1997 and would have increased the net loss per share by
$0.30 per share for the year ended December 31, 1998.
7. Related Party Transactions
The Company purchases equipment from a supplier which is partially owned by
an investor in the Company. Purchases from this supplier totaled $85,000 and
$5.8 million for the years ending December 31, 1997 and December 31, 1998,
respectively.
8. Legal Proceedings
The Company is engaged in a variety of negotiations, arbitrations and
regulatory and court proceedings with incumbent local exchange carriers
("ILECs"). These negotiations, arbitrations and proceedings concern the ILECs'
denial of physical collocation space to the Company in certain central
offices, the cost and delivery of
F-15
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
collocation spaces, the delivery of transmission facilities and telephone
lines, billing issues and other operational issues. None of these actions
involve a potential liability for the Company. However, failure to resolve any
of these matters without undue delay or expense could have a material adverse
effect on the Company's business, prospects, operating results and financial
condition. The Company is not currently engaged in any other legal proceedings
that it believes could have a material adverse effect on the Company's
business, prospects, operating results and financial condition. The Company
is, however, subject to state commission, FCC and court decisions as they
relate to the interpretation and implementation of the Telecommunications Act
of 1996, the interpretation of competitive local exchange carrier
interconnection agreements in general and the Company's interconnection
agreements in particular. In some cases, the Company may be deemed to be bound
by the results of ongoing proceedings of these bodies or the legal outcomes of
other contested interconnection agreements that are similar to the Company's
agreements. The results of any of these proceedings could have a material
adverse effect on the Company's business, prospects, operating results and
financial condition.
9. Subsequent Events
In January 1999, the Company entered into strategic relationships with AT&T
Corp. ("AT&T"), NEXTLINK Communications, Inc. ("NEXTLINK") and Qwest
Communications Corporation ("QCC"). As part of these strategic relationships,
the Company received equity investments of $25 million from AT&T's venture
capital arm and two affiliated funds, $20 million from NEXTLINK and $15
million from QCC's wholly owned subsidiary, U.S. Telesource, Inc. (as used
herein, "Qwest" refers to QCC or its subsidiary, as applicable). The Company
intends to record intangible assets of $28.7 million associated with these
transactions. Furthermore, AT&T, NEXTLINK and Qwest each entered into
commercial agreements with the Company providing for the purchase, marketing
and resale of the Company's services, the purchase by the Company of fiber
optic transport bandwidth, and collocation of network equipment. In addition,
the equity investments by AT&T, NEXTLINK and Qwest satisfied the conditions of
an alternate equity financing and thus the Equity Commitment will not be
called.
On January 27, 1999, the Company completed the Initial Public Offering
("IPO") of 8,970,000 shares of Common Stock at an initial public offering
price of $18.00 per share. Net proceeds to the Company from the IPO were
$150.2 million after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. As a result of the IPO,
all shares of Preferred Stock, including shares issued in the above-mentioned
strategic transactions, were converted into Common Stock, all cumulative but
unpaid dividends on Series A and Series B were paid in Common Stock and the
Common Warrants were exercised.
On February 11, 1999 the Company issued 12% Senior Notes due February 15,
2009 through a private placement. Interest is due and payable in cash on
February 15 and August 15 of each year, beginning on August 15, 1999. Net
proceeds to the Company were approximately $205.4 million after discounts and
transaction costs of approximately $9.6 million. Approximately $74.0 million
of the net proceeds will be used to purchase pledged securities representing
sufficient funds to pay the first six scheduled interest payments on the
notes.
F-16
<PAGE>
APPENDIX
COVAD COMMUNICATIONS GROUP, INC.
GLOSSARY OF TERMS
Access Line--A circuit that connects a telephone end-user to the ILEC
central office.
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 standard packet-switching protocol that
segments digital information into 53-byte cells (each cell has a 5-byte
standard packet-switching header and 48 bytes of data) that are switched very
quickly throughout a network over virtual circuits. ATM is able to accommodate
multiple types of media (voice, video, data).
Bandwidth--Refers to the maximum amount of data that can be transferred
through a computer's backplane or communication channel in a given time. It is
usually measured in Hertz for analog communications and bits per second for
digital communication.
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.
Digital Service 3 (DS-3)--In the digital hierarchy, this signaling standard
defines a transmission speed of 44.736 Mbps, equivalent to 28 T1 channels;
this term is often used interchangeably with T3.
DSL--Digital Subscriber Line.
FCC (Federal Communications Commission)--The U.S. government agency charged
with the oversight of communications originating in the U.S. and crossing
state lines.
Facilities-Based Provider--A telecommunications provider that delivers its
services to the end-user via owned equipment and leased (or owned) transport
in contrast to a reseller of an ILEC's services.
Frame Relay--A high-speed packet-switched data communications protocol.
G.lite--A specification to define a standard for a mass market version of
asymmetric DSL which is interoperable with full rate asymmetric DSL but is not
as fast. The specification is intended to reduce the installation complexity
and cost of a consumer DSL solution.
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. A hybrid fiber coax architecture generally
utilizes fiber optic wire between the head end and the nodes and coaxial wire
from nodes to individual end-users.
A-1
<PAGE>
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 central office, or (ii) virtual, in which the CLEC leases a facility,
similar to that which it might build, to effect a presence in the ILEC central
office.
Interconnection (Co-Carrier) Agreement--A contract between an ILEC and a
CLEC for the interconnection of the two networks and CLEC access to ILEC
unbundled network elements. These agreements set out the financial and
operational aspects of such interconnection and access.
ISP (Internet Service Provider)--A vendor that provides subscribers access
to the Internet.
ISDN (Integrated Services Digital Network)--ISDN provides standard
interfaces for digital communication networks and is capable of carrying data,
voice, and video over digital circuits. ISDN protocols are used worldwide for
connections to public ISDN networks or to attach ISDN devices to ISDN-capable
PBX systems (ISPBXs). Developed by the International Telecommunications Union,
ISDN includes two user-to-network interfaces: basic rate interface (BRI) and
primary rate interface (PRI). An ISDN interface contains one signaling channel
(D-channel) and a number of information channels ("bearer" or B channels). The
D-channel is used for call setup, control, and call clearing on the B-
channels. It also transports feature information while calls are in progress.
The B-channels carry the voice, data, or video information.
IXC (Interexchange Carrier)--Facilities-based long distance/interLATA
carriers (e.g., AT&T, MCI WorldCom and Sprint), who also provide intraLATA
toll service and may operate as CLECs.
Kbps (Kilobits per second)--One thousand bits per second.
LATA (Local Access and Transport Area)--A geographic area inside of which a
local telephone company can offer switched telecommunications services,
including long distance (known as toll). There are 196 LATAs in the U.S.
Mbps (Megabits Per Second)--One million bits per second.
RBOCs (Regional Bell Operating Companies)--ILECs created by AT&T's
divestiture of its local exchange business. The remaining RBOCs include
BellSouth, Bell Atlantic Corporation, Ameritech Corporation, U S WEST
Communications, Inc. and SBC Communications, Inc.
T1--This is a Bell system term for a digital transmission link with a
capacity of 1.544 Mbps.
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, central office collocation space, inter-
office transport, operational support systems, local switching and rights of
way.
A-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must
not rely on any unauthorized information. This prospectus does not offer to
sell or buy any notes in any jurisdiction where it is unlawful. The
information in this prospectus is current as of , 1999.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 27
Dividend Policy.......................................................... 27
Capitalization........................................................... 28
Selected Consolidated Financial Data..................................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 39
Management............................................................... 58
Certain Relationships and Related Transactions........................... 67
Principal Stockholders................................................... 71
The Exchange Offer....................................................... 73
Description of the Old Notes............................................. 81
Description of the New Notes............................................. 112
Description of Certain Indebtedness...................................... 112
Description of Capital Stock............................................. 113
Federal Income Tax Considerations........................................ 116
Plan of Distribution..................................................... 117
Where You Can Find More Information...................................... 117
Legal Matters............................................................ 118
Experts.................................................................. 118
Index to Financial Statements............................................ F-1
Glossary................................................................. A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$215,000,000
[LOGO]
Covad Communications
Group, Inc.
/Offer to Exchange All Outstanding 12 1/2% Senior Notes due February 15, 2009
for 12 1/2% Senior Notes due February 15, 2009, Which Have Been Registered
Under the Securities Act of 1933
---------------
PROSPECTUS
---------------
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article X of our Amended and Restated Certificate of Incorporation provides
for the indemnification of our directors to the fullest extent permissible
under Delaware law.
Article VI of our Bylaws provides for the indemnification of our officers,
directors, employees and agents if such person acted in good faith and in a
manner reasonably believed to be in and not opposed to the best interest of
our company, 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 us to include
in our charter documents, and in agreements between us and our directors and
officers, provisions expanding the scope of indemnification beyond that
specifically provided by the current law.
We have entered into indemnification agreements with our directors and
executive officers, and we intend to enter into indemnification agreements
with any new directors and executive officers in the future.
We maintain liability insurance coverage for all of our directors and
officers.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Purchase Agreement dated February 11, 1999 among the Registrant and
Bear, Stearns & Co. Inc., BT Alex. Brown Incorporated, Donaldson
Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co. (the
"Initial Purchasers")
3.2* Amended and Restated Certificate of Incorporation of the Registrant,
as currently in effect.
3.4* Bylaws, as currently in effect.
4.1* Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York, including form of 13 1/2% Senior Discount Note Due
2008.
4.3* 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 Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated.
4.5* Specimen 13 1/2% Senior Discount Note Due 2008.
4.6* Amended and Restated Stockholders Rights Agreement dated January 19,
1999 among the Registrant and certain of its stockholders.
4.7 Indenture dated as of February 18, 1999 among the Registrant and The
Bank of New York, including form of 12 1/2% Senior Note Due 2009
4.8 Registration Rights Agreement dated as of February 18, 1999 among the
Registrant and the Initial Purchasers
4.9 Specimen 12 1/2% Senior Note Due 2009
5.1 Opinion of Wilson sonsini Goodrich & Rosati, Professional Corporation
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
10.5* Series C Preferred Stock and Warrant Subscription Agreement dated as
of February 20, 1998 among the Registrant, Warburg, Pincus Ventures,
L.P., Crosspoint Venture Partners 1996 and Intel Corporation, as
amended by the Assignment and Assumption Agreement and First Amendment
to the Series C Preferred Stock and Warrant Subscription Agreement
dated as of April 24, 1998 among the Registrant, Warburg, Crosspoint
and Robert Hawk.
10.6* Employment Agreement dated June 21, 1998 between the Registrant and
Robert E. Knowling, Jr.
10.7* Sublease Agreement dated July 6, 1998 between Auspex Systems, Inc. and
the Registrant with respect to Registrant's facilities in Santa Clara,
California.
10.8* 1998 Employee Stock Purchase Plan and related agreements, as currently
in effect.
10.9* Note Secured by Deed of Trust dated August 14, 1998 issued by Robert
E. Knowling, Jr. in favor of the Registrant.
10.10* Form of Warrant to purchase Common Stock issued by the Registrant on
February 20, 1998 to Warburg, Pincus Ventures, L.P., Crosspoint
Ventures Partners 1996 and Intel Corporation.
10.11* Note Secured by Deed of Trust dated October 7, 1998 issued by
Catherine A. Hemmer and John J. Hemmer in favor of the Registrant.
10.12* 1997 Stock Plan and related option agreement, as currently in effect.
10.13* Series C-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 among the Registrant, AT&T Venture Fund II, LP and two affiliated
funds.
10.14* Series D-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 among the Registrant, AT&T Venture Fund II, LP and two affiliated
funds.
10.15* Series C-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 between the Registrant and NEXTLINK Communications, Inc.
10.16* Series D-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 between the Registrant and NEXTLINK Communications, Inc.
10.17* Series C-1 Preferred Stock Purchase Agreement dated as of January 19,
1999 between the Registrant and U.S. Telesource, Inc.
10.18* Series D-1 Preferred Stock Purchase Agreement dated as of January 19,
1999 between the Registrant and U.S. Telesource, Inc.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(Included in Exhibit 5.1)
24.1 Power of Attorney (Included on page II-6).
25.1 Statement of Eligibility of Trustee
27.1 Financial Data Schedules.
99.1 Form of Letter of Transmittal with respect to Exchange Offer.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Exchange Agent Agreement
</TABLE>
- --------
* Incorporated by reference to the exhibit of corresponding number filed with
our Registration Statement on Form S-1 (No. 333-63899).
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information to
be set forth therein is not applicable or is shown in the financial
statements or Notes thereto.
Item 22. Undertaking
1. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have 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 our
payment of expenses incurred or paid by one of our directors, officers or
controlling persons 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, we will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
2. We hereby undertake to respond to requests for information that is
incorporated by reference into this 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 this registration statement through the date of
responding to the request.
3. We hereby undertake to supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in this registration
statement when it became effective.
4. We hereby undertake:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
II-3
<PAGE>
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, we have
duly caused this registration statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California on April 8, 1999.
Covad Communications Group, Inc.
/s/ Robert E. Knowling, Jr.
By: _________________________________
Robert E. Knowling, Jr.
President and Chief Executive
Officer
(Principal Executive Officer)
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert Knowling, Jr., Timothy Laehy and
Dhruv Khanna, and each of them, his attorneys-in-fact, each with the power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto in all documents in connection therewith, with
the SEC, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on April 8,
1999 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Robert E. Knowling, Jr. President, Chief Executive Officer and
___________________________________________ Director (Principal Executive Officer)
(Robert E. Knowling, Jr.)
/s/ Charles McMinn Chairman of the Board
___________________________________________
(Charles McMinn)
/s/ Timothy Laehy Chief Financial Officer and Vice President,
___________________________________________ Finance (Principal Financial and Accounting
(Timothy Laehy) Officer)
/s/ Robert Hawk Director
___________________________________________
(Robert Hawk)
/s/ Henry Kressel Director
___________________________________________
(Henry Kressel)
/s/ Joseph Landy Director
___________________________________________
(Joseph Landy)
/s/ Daniel Lynch Director
___________________________________________
(Daniel Lynch)
/s/ Frank Marshall Director
___________________________________________
(Frank Marshall)
/s/ Rich Shapero Director
___________________________________________
(Rich Shapero)
</TABLE>
II-6
<PAGE>
Covad Communications Group, Inc.
REGISTRATION STATEMENT ON FORM S-4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Purchase Agreement dated February 11, 1999 among the Registrant and
Bear, Stearns & Co. Inc., BT Alex. Brown Incorporated, Donaldson
Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co. (the
"Initial Purchasers")
3.2* Amended and Restated Certificate of Incorporation of the Registrant,
as currently in effect.
3.4* Bylaws, as currently in effect.
4.1* Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York, including form of 13 1/2% Senior Discount Note Due
2008.
4.3* 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 Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated.
4.5* Specimen 13 1/2% Senior Discount Note Due 2008.
4.6* Amended and Restated Stockholders Rights Agreement dated January 19,
1999 among the Registrant and certain of its stockholders.
4.7 Indenture dated as of February 18, 1999 among the Registrant and The
Bank of New York, including form of 12 1/2% Senior Note Due 2009
4.8 Registration Rights Agreement dated as of February 18, 1999 among the
Registrant and the Initial Purchasers
4.9 Specimen 12 1/2% Senior Note Due 2009
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.
10.5* Series C Preferred Stock and Warrant Subscription Agreement dated as
of February 20, 1998 among the Registrant, Warburg, Pincus Ventures,
L.P., Crosspoint Venture Partners 1996 and Intel Corporation, as
amended by the Assignment and Assumption Agreement and First Amendment
to the Series C Preferred Stock and Warrant Subscription Agreement
dated as of April 24, 1998 among the Registrant, Warburg, Crosspoint
and Robert Hawk.
10.6* Employment Agreement dated June 21, 1998 between the Registrant and
Robert E. Knowling, Jr.
10.7* Sublease Agreement dated July 6, 1998 between Auspex Systems, Inc. and
the Registrant with respect to Registrant's facilities in Santa Clara,
California.
10.8* 1998 Employee Stock Purchase Plan and related agreements, as currently
in effect.
10.9* Note Secured by Deed of Trust dated August 14, 1998 issued by Robert
E. Knowling, Jr. in favor of the Registrant.
10.10* Form of Warrant to purchase Common Stock issued by the Registrant on
February 20, 1998 to Warburg, Pincus Ventures, L.P., Crosspoint
Ventures Partners 1996 and Intel Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.11* Note Secured by Deed of Trust dated October 7, 1998 issued by
Catherine A. Hemmer and John J. Hemmer in favor of the Registrant.
10.12* 1997 Stock Plan and related option agreement, as currently in effect.
10.13* Series C-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 among the Registrant, AT&T Venture Fund II, LP and two affiliated
funds.
10.14* Series D-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 among the Registrant, AT&T Venture Fund II, LP and two affiliated
funds.
10.15* Series C-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 between the Registrant and NEXTLINK Communications, Inc.
10.16* Series D-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 between the Registrant and NEXTLINK Communications, Inc.
10.17* Series C-1 Preferred Stock Purchase Agreement dated as of January 19,
1999 between the Registrant and U.S. Telesource, Inc.
10.18* Series D-1 Preferred Stock Purchase Agreement dated as of January 19,
1999 between the Registrant and U.S. Telesource, Inc.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(Included in Exhibit 5.1)
24.1 Power of Attorney (Included on page II-6).
25.1 Statement of Eligibility of Trustee
27.1 Financial Data Schedules.
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>
- --------
* Incorporated by reference to the exhibit of corresponding number filed with
our Registration Statement on Form S-1 (No. 333-63899).
<PAGE>
EXHIBIT 1.1
COVAD COMMUNICATIONS GROUP, INC.
$215,000,000 Principal Amount of 12 1/2% Senior Notes
due 2009
Purchase Agreement
February 11, 1999
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
$215,000,000 Principal Amount of 12 1/2% Senior Notes due 2009
PURCHASE AGREEMENT
February 11, 1999
New York, New York
Bear, Stearns & Co. Inc.
BT Alex. Brown Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
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., BT Alex.
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Brown Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and
Goldman, Sachs & Co. (together, the "Initial Purchasers") $215,000,000
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aggregate principal amount of 12 1/2% Senior Notes due 2009 (the "Senior
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Notes"), subject to the terms and conditions set forth herein. The Senior Notes
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will be issued pursuant to an indenture (the "Indenture"), to be dated the
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Closing Date (as defined below), between the Company and The Bank of New York,
as trustee (the "Trustee"). The Senior Notes are more fully described in the
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Offering Memorandum referred to below.
1. Issuance of Notes. The Company proposes to, upon the terms and subject
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to the conditions set forth herein, issue and sell to the Initial Purchasers the
Senior Notes. The Senior Notes and the Exchange Notes (as defined below)
issuable in exchange therefore are hereinafter collectively referred to as the
Notes. 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 Notes shall bear the legends required to
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be set forth in the Indenture.
2. Offering. The Notes will be offered and sold to the Initial Purchasers
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pursuant to an exemption from the registration requirements under the Securities
Act. The Company has prepared a preliminary offering memorandum, dated January
29, 1999 (the "Preliminary Offering Memorandum"), and a final offering
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memorandum, dated February 11, 1999 (the "Offering Memorandum"), relating to
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the Company and the Notes.
The Initial Purchasers have advised the Company that the Initial
Purchasers will make offers to resell (the "Exempt Resales") the Notes on the
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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"). Such QIBs shall be referred to herein as the "Eligible
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Purchasers". The Initial
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<PAGE>
Purchasers will offer the Notes to such Eligible Purchasers initially at a
purchase price equal to 97.921% 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"), to be dated the Closing Date, for
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so long as such Notes constitute "Transfer Restricted Securities" (as defined in
such agreement). 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
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statement under the Securities Act (the "Exchange Offer Registration Statement")
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with respect to an offer to exchange (the "Exchange Offer") the Notes for a new
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issue of debt securities of the Company (the "Exchange Notes") to be offered in
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exchange for the Notes and (ii) under certain circumstances, a shelf
registration statement pursuant to Rule 415 under the Securities Act (the "Shelf
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Registration Statement") relating to the resale by certain holders of the Notes,
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and to use its best efforts to cause such Registration Statements to be declared
effective and consummate the Exchange Offer. In addition, a portion of the net
proceeds from the sale of the Notes will be held by the Trustee for the benefit
of the holders of the Notes in a pledge account pursuant to a pledge agreement
(the "Pledge Agreement") between the Company and the Trustee. This Agreement,
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the Notes, the Indenture, the Pledge Agreement and the Registration Rights
Agreement are hereinafter sometimes referred to collectively as the "Operative
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Documents".
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3. Purchase, Sale and Delivery.
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(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, the
aggregate principal amount of Notes set forth opposite such Initial Purchaser's
name on Schedule I hereto. The purchase price for the Notes shall be $955.46
per Note.
(b) Delivery of, and payment of the purchase price for, the Notes
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 February 18, 1999 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".
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(c) Notes sold to QIBs will be represented by one or more permanent
global Notes in definitive, fully registered form without interest coupons (each
a "Restricted Global Note", and in the aggregate, the "Global Notes") registered
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in the name of Cede & Co., as nominee of the Depository Trust Company ("DTC"),
having an aggregate principal amount corresponding to the aggregate principal
amount of the Notes sold to QIBs. The Global Notes 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 Notes 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.
4. Agreements of the Company. The Company covenants and agrees with each
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of the Initial Purchasers as follows:
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(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 Notes 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 Notes 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 Notes 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.
(e) To cooperate with the Initial Purchasers and counsel to the
Initial Purchasers in connection with the qualification or registration of the
Notes 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.
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(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 Notes to the
Initial Purchasers, (iii) the qualification or registration of the Notes 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 Notes, (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 Notes in
the National Association of Securities Dealers, Inc. ("NASD") Automated
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Quotation System - PORTAL ("PORTAL"), (viii) all fees and expenses (including
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fees and expenses of counsel to the Company) of the Company in connection with
the approval of the Notes 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 performance by the Company of its other
obligations under this Agreement and the other Operative Documents and (xi)
"roadshow" travel and other expenses incurred in connection with the marketing
and sale of the Notes.
(g) To use the proceeds from the sale of the Notes 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 Notes.
(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 Notes.
(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 Notes in a manner that would
require the registration under the Securities Act of the sale to the Initial
Purchasers or the QIBs of the Notes 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 Notes 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
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available upon request to any beneficial owner of Notes in connection with any
sale thereof and any prospective purchaser of such Notes 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 all agreements set forth in the representation
letters of the Company to DTC relating to the approval of the Notes by DTC for
"book-entry" transfer.
(m) To use its best efforts to effect the designation of the
Notes as eligible for PORTAL and to obtain approval of the Notes by DTC for
"book-entry" transfer.
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(n) For so long as any of the Notes 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 Notes.
(q) Not to distribute any Preliminary Offering Memorandum, Offering
Memorandum or other offering material in connection with the offering and sale
of the Notes, except as permitted by the Securities Act.
(r) To comply with the agreements in the Indenture, the
Registration Rights Agreement and any other Operative Document.
(s) 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.
(t) 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 will 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,
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Warranties and Covenants of the Initial Purchasers.
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(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 Notes are issued and delivered pursuant to this
Agreement, no Note will be of the same class (within the meaning of Rule 144A
under the Securities Act) as
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<PAGE>
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) 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 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
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corporation, association or other entity other than Covad Communications
Company, a California corporation, and DIECA Communications, Inc., a Virginia
corporation. The Company or a subsidiary of the Company has obtained CLEC
regulatory approval in the States of California, Illinois, Massachusetts, New
York, Oregon, Washington, Maryland, Texas, Virginia, Delaware, Colorado, New
Jersey, New Hampshire, District of Columbia, Pennsylvania, Michigan, Florida,
Georgia and Missouri.
(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
September 30, 1998, after giving effect to the issuance and sale of the Notes
pursuant hereto and the application of the net proceeds therefrom, 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 Notes 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.
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(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 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 Indenture.
(x) The Senior 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 Notes.
(xi) 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.
(xii) The 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 Registration Rights Agreement.
(xiii) The Pledge 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 Pledge Agreement.
(xiv) Neither the Company nor any of its subsidiaries is, or, after
giving effect to the offering of the Notes, 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
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<PAGE>
reasonably be expected to (x) individually or in the aggregate, result in a
material adverse effect on the 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 sale
of the Notes pursuant hereto or (z) in any manner draw into question the
validity of this Agreement or any other Operative Document (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.
(xv) 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 Notes 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 Notes 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.
(xvi) Except as set forth in the Offering Memorandum, 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 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 Company's knowledge, is threatened or imminent.
(xvii) 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 Notes or
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<PAGE>
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 Notes,
prevents or suspends the sale of the Notes 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.
(xviii) Except as would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Change, (i) to 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,
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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 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 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
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.
(xix) 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
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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,
all such Authorizations are valid and in full 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 Company's
knowledge, no material defaults by the landlord are existing under any such
lease that could reasonably be expected to result in a Material Adverse Effect.
(xx) Except as set forth in the Offering Memorandum, 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 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 infringe on the rights of any person, except as could not
reasonably be expected to have a Material Adverse Effect.
(xxi) 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) would reasonably be expected to 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, would reasonably be expected to have had a Material Adverse
Effect or (iii) if not continued in the future, would reasonably be expected to
have a Material Adverse Effect.
(xxii) 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.
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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.
(xxiii) 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").
----------------------
(xxiv) 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.
(xxv) 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 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.
(xxvi) 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 will 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.
(xxvii) 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 Notes 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 Notes or (B) paid or agreed to
pay to any person any compensation for soliciting another to purchase any other
securities of the Company.
(xxviii) No registration under the Securities Act of the Notes is
required for the sale of the Notes to the Initial Purchasers as contemplated
hereby or for the Exempt Resales assuming (i) that the purchasers who buy the
Notes in the Exempt Resales are QIBs 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 Notes 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
11
<PAGE>
advertising. No securities of the same respective classes as the Notes have been
issued and sold by the Company within the six-month period immediately prior to
the date hereof.
(xxix) 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 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.
(xxx) 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 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.
(xxxi) 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
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<PAGE>
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.
(xxxii) None of the execution, delivery and performance of this
Agreement, the issuance and sale of the Notes, the application of the proceeds
from the issuance and sale of the Notes 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.
(xxxiii) 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.
(xxxiv) 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 Consolidated Financial
Data", "Selected Consolidated 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.
(xxxv) 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 salable 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 Notes, the present fair salable 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 Notes, 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.
(xxxvi) 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 Notes.
(xxxvii) 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.
(xxxviii) 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
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<PAGE>
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.
(xxxix) 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 Notes.
(ii) Such Initial Purchaser is not acquiring the Notes 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.
(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 Notes,
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 (A) that they will
offer to sell the Notes only to, and will solicit offers to buy the Notes only
from QIBs who in purchasing such Notes will be deemed to have represented and
agreed that they are purchasing the Notes for their own accounts or accounts
with respect to which they exercise sole investment discretion and that they or
such accounts are QIBs and (B) that such QIBs will acknowledge and agree that
such Notes 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 a
signed letter containing certain representations and agreements relating to the
Notes (the form of such letter can be obtained from the Trustee), 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.
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<PAGE>
(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 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.
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(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 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 Notes 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 Notes (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 Memorandum. The relative fault of the Company and of the
Initial Purchasers shall be determined by reference to, among other things,
whether the
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<PAGE>
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 Notes 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 Notes, 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 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 Notes
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 Notes; no action, suit or proceeding shall have been commenced and be
pending against or affecting or, to the Company's knowledge, 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
17
<PAGE>
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 in
accordance with generally accepted accounting principles on the latest balance
sheet or notes thereto included in the Offering Memorandum and are not so
disclosed. 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.
- ---------
(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.
---------
(h) 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 Winthrop
Stimson Putnam & Roberts, special New York counsel to the Company, to the effect
set forth in Exhibit C hereto.
---------
(i) 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.
(j) 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.
(k) 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,
18
<PAGE>
completeness or satisfaction in all material respects of any of the
representations, warranties or conditions herein contained.
(l) 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.
(m) The Company and the Trustee shall have entered into the
Indenture and the Pledge Agreement and the Initial Purchasers shall have
received counterparts, conformed as executed, thereof.
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 Notes set forth in the last paragraph of the outside of the
front cover page; the stabilization language set forth on the inside of the
front cover page; and the third paragraph, the fifth 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 Agreements. 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 Notes 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.
----------------------------------------
(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
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, other than as set forth in the
Offering Memorandum, (iv) any downgrading shall have occurred in the rating
accorded the Company's securities by any "nationally recognized statistical
rating organization", as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Securities Act, or any such organization shall have
publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the
19
<PAGE>
Company's debt securities, or (v)(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 Notes 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 Notes 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 Notes 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., BT Alex. Brown Incorporated,
Donaldson Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co., 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., 2330 Central Expressway, Santa Clara, CA 94050,
Attention: Chief Executive Officer, telecopy number: (408) 844-7501, with a
copy, which shall not constitute notice, to Wilson 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 Notes 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.
20
<PAGE>
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]
21
<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 among us.
Very truly yours,
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Timothy P. Laehy
-----------------------------
Name: Timothy P. Laehy
Title: Chief Financial Officer
Accepted and agreed to as of
the date first above written:
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
By: BEAR, STEARNS & CO. INC.
By: /s/ James C. Diao
--------------------------
Name: James C. Diao
Title: Senior Managing Director
<PAGE>
Schedule I
<TABLE>
<CAPTION>
Aggregate Principal
Amount of Notes to
Initial Purchasers be Purchased
- ------------------ ------------
<S> <C>
Bear, Stearns & Co. Inc............................... $134,375,000
BT Alex. Brown Incorporated........................... $ 26,875,000
Donaldson, Lufkin & Jenrette Securities Corporation... $ 26,875,000
Goldman, Sachs & Co................................... $ 26,875,000
Total: $215,000,000
</TABLE>
<PAGE>
Exhibit A
---------
Form of Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
1. The Company is 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, and 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.
2. Each of the Company's subsidiaries 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, and 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. All of the outstanding shares of capital stock of the Company
have been, to such counsel's 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 conforms in all respects to the description
thereof set forth in the Offering Memorandum.
4. There are not, to such counsel's knowledge, currently, and will
not be following the offering of the Notes, 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, except as described in the Offering
Memorandum.
5. When the Notes are issued and delivered pursuant to this
Agreement, no Note 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.
6. 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
thereby, including, without limitation, the corporate power and authority
to issue, sell and deliver the Notes.
7. This Agreement has been duly and validly authorized, executed
and delivered by the Company and is the legally valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, except that such counsel need 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 bankruptcy, insolvency,
fraudulent conveyance, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity.
1
<PAGE>
8. Each of the Indenture, the Pledge Agreement and the Registration
Rights Agreement 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
such counsel need 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 bankruptcy, insolvency, fraudulent
conveyance, reorganization or similar laws affecting the rights of
creditors generally and subject to general principles of equity.
9. The Notes are in the form contemplated by the Indenture, 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
authenticated in accordance with the terms of the Indenture and delivered
against payment therefor in accordance with the terms of this Agreement 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, except that such counsel need
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) to general principles of equity (whether considered in a proceeding in
equity or at law) or (iii) applicable public policy considerations .
10. 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 this Agreement 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, except that such counsel need 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.
11. The Offering Memorandum contains a fair summary of the principal
terms of each of the Notes, this Agreement, the Indenture, the Pledge
Agreement and the Registration Rights Agreement.
12. No registration under the Securities Act of the Notes is
required for the sale of the Notes to the Initial Purchasers as
contemplated by this Agreement or for the Exempt Resales, it being
understood that no opinion is expressed as to any subsequent resale of any
Notes, assuming (A) that the purchasers who buy such Notes in the initial
resale thereof are Eligible Purchaser, and (B) the accuracy of the Initial
Purchasers' and the Company's representations contained in this Agreement
regarding the absence of general solicitation in connection with the sale
of Notes to the Initial Purchasers and the Exempt Resales.
13. The Offering Memorandum, as of its date (except for the
financial statements and schedules and other financial or statistical data
included therein, as to which no opinion need be expressed), contains all
the information specified in, and meets the requirements of, Rule
144A(d)(4) under the Securities Act.
2
<PAGE>
14. Prior to the effectiveness of the Exchange Registration
Statement or the Shelf Registration Statement, the Indenture is not
required to be qualified under the Trust Indenture Act.
15. None of (A) the execution, delivery or performance by the
Company of this Agreement and the other Operative Documents or (B) the
issuance and sale of the Notes violates, conflicts with or constitutes 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 under, or result in the imposition of a lien
or encumbrance 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 Reviewed Agreement, (iii) the Delaware
General Corporation Law or any federal statute, rule or regulation known to
such counsel to be applicable to the Company (other than federal or state
securities laws, which are specifically addressed elsewhere herein, and
other than as are specifically addressed in the opinion of Dhruv Khanna,
General Counsel of the Company, separately delivered to you pursuant to
Section 8(g) of this Agreement, 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
known to such counsel, 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) are disclosed in the Offering
Memorandum. Assuming compliance with applicable state securities and Blue
Sky laws, as to which such counsel need express no opinion, and except for
the filing of a registration statement under the Securities Act and
qualification of the Indenture under the Trust Indenture Act in connection
with the Registration Rights Agreement, no consent, approval, authorization
or order of, or filing, registration, qualification, license or permit of
or with, any court or governmental agency, body or administrative agency is
required for the execution, delivery and performance by the Company of this
Agreement, the Operative Documents or the issuance and sale of the Notes,
except such as have been obtained and made or have been disclosed in the
Offering Memorandum. To such counsel's knowledge, after reasonable inquiry,
no consents or waivers from any other person are required for the
execution, delivery and performance by the Company of this Agreement, the
Operative Documents or the issuance and sale of the Notes, other than such
consents and waivers as have been obtained.
16. The Company is not and after giving effect to the offering and
sale of the Notes and the application of the proceeds thereof as described
in the Offering Memorandum, will not be an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
17. Except as set forth in this Agreement or the Registration Rights
Agreement, to such counsel's knowledge, there are no holders of securities
of the Company 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 of the transactions contemplated thereby, have
the right to request or demand that the Company register under the
Securities Act securities held by them.
18. None of the execution, delivery and performance of this
Agreement, the issuance and sale of the Notes, the application of the
proceeds from the issuance and sale of the Notes and the consummation of
the transactions contemplated thereby as set forth in the Offering
Memorandum, will violate Regulations T, U or X promulgated by the Board of
Governors of the Federal Reserve System.
3
<PAGE>
19. To such counsel's knowledge, after reasonable inquiry, and
except as described in the Offering Memorandum, there is (i) no action,
suit, investigation or proceeding (other than proceedings with respect to
pending license applications) before or by any court, arbitrator or
governmental agency, body or official, domestic or foreign, now pending, or
threatened or contemplated to which the Company and any of its subsidiaries
is or may be a party or to which the business or property of the Company
and any of its subsidiaries is or may be subject and (ii) no injunction,
restraining order or order of any nature by a federal or state court of
competent jurisdiction to which the Company or any of its subsidiaries is
or may be subject, or to which the business, assets or property of the
Company are or may be subject, has been issued, except in the case of
clauses (i) and (ii), those which (a) would not singly or in the aggregate
have a Material Adverse Effect upon the Company and its subsidiaries taken
as a whole or (b) which are disclosed in the Offering Memorandum.
20. To such counsel's knowledge, there is no statute, rule,
regulation or order that has been enacted, adopted or issued by any
governmental agency or that has been proposed by any governmental body to
which the Company or any of its subsidiaries is or may be subject or to
which the business, assets or property of the Company or any of its
subsidiaries are or may be subject, except those which (a) would not singly
or in the aggregate have a Material Adverse Effect upon the Company and its
subsidiaries taken as a whole or (b) which are disclosed in the Offering
Memorandum.
21. The statements contained in the Offering Memorandum under the
captions "Risk Factors--Holding Company Structure; Restrictions on Access
to Subsidiary Cash Flow", "Risk Factors--Fraudulent Conveyance Risks",
"Business--Intellectual Property", "Business--Legal Proceedings",
"Management--Employment Agreements and Change in Control Arrangements",
"Management--1997 Stock Plan", "Management--1998 Employee Stock Purchase
Plan", "Certain Relationships and Related Transactions--Series C Preferred
Stock and Warrant Subscription Agreement", "Certain Relationships and
Related Transactions--The Intel Stock Purchase", "Certain Relationships and
Related Transactions--Equipment Lease Financing", "Certain Relationships
and Related Transactions--The Strategic Investments and Relationships",
"Management--Limitation on Liability and Indemnification Matters",
"Description of Notes", "Description of Certain Indebtedness" 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.
Such counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company and the Initial Purchasers and its
representatives at which the contents of the Preliminary Offering Memorandum and
the Offering Memorandum and related matters were discussed and, although such
counsel is not passing upon and assumes no responsibility for, the accuracy,
completeness or fairness of the statements contained in the Preliminary Offering
Memorandum or the Offering Memorandum (except as indicated above), on the basis
of the foregoing, no facts have come to such counsel's attention which led such
counsel to believe that the Offering Memorandum, as of its date or the Closing
Date, contained or contains an untrue statement of a material fact or omitted or
omits to state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading (except as
to financial statements and schedules and other financial data, included
therein).
4
<PAGE>
Exhibit B
---------
Form of Opinion of Dhruv Khanna, General Counsel of the Company
1. Neither the execution and delivery of the Operative Documents nor
the sale of the Notes contemplated thereby violate (A) the Communications
Act of 1934 (the "Communications Act") as interpreted as of this date, (B)
the Telecommunications Act of 1996 (the "Telecom Act of 1996") as
interpreted as of this date, (C) any rules of regulations of the Federal
Communications Commission (the "FCC") applicable to the Company and its
subsidiaries as interpreted as of this date, or (D) any rules or regulations
of the public utility commissions in the States listed in paragraph 7 below
(the "State Telecommunications Agencies") as interpreted as of this date.
2. The Company and its subsidiaries (A) have made all reports and
filings, and paid all fees, required by the FCC and any of the State
Telecommunications Agencies, and (B) 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
Telecommunications Agencies necessary to own, lease, license and use their
respective properties and assets and to conduct their respective businesses
as described in the Offering Memorandum; and, except as described in the
Offering Memorandum, there are no pending or, to my knowledge, threatened
proceedings before the FCC or any State Telecommunications Agencies relating
to the revocation or modification of any such certificates, orders, permits,
licenses, authorizations, consents or approvals which, if determined
adversely, would have a Material Adverse Effect.
3. Except as described in the Offering Memorandum, (A) no decree or
order of the FCC or any of the State Telecommunications Agencies is
outstanding, (B) no litigation or proceeding has been commenced or, to my
knowledge, threatened, (C) to my knowledge, no inquiry or investigation has
been commenced or threatened and (D) no formal notice of violation or order
to show cause has been issued, against the Company or its subsidiaries
before the FCC or any of the State Telecommunications Agencies.
4. The statements in the Offering Memorandum under the headings of
"Risk Factors--Uncertain Availability of Collocation Space and Dependence on
ILECs to Provide Collocation Space and Collocation Facilities and Unbundled
Network Elements ("UNEs")," "Risk Factors--Dependence on ILECs to Provide
Transmission Facilities and to Provision Copper Lines," "Risk Factors--
Dependence on Interconnection Agreements with ILECs," "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 1996" and "Business--Government Regulation"
regarding the Telecommunications Laws of the FCC or the State
Telecommunications Agencies fairly and accurately summarize the matters
therein described.
5. The Company and its subsidiaries have the consents, approvals,
authorizations, licenses, certificates, permits, or orders of the FCC or the
State
5
<PAGE>
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.
6. Neither the execution and delivery of the Operative Documents nor
the sale of the Notes contemplated thereby will conflict with or result in a
violation of any of the Material Agreements, except for such conflicts or
violations which would not have a Material Adverse Effect.
7. As of the date hereof, (A) the Company's subsidiaries are
authorized to operate as CLECs in the States of California, Illinois,
Massachusetts, Michigan, New York, Oregon, Pennsylvania, Washington,
Virginia, Texas, Maryland, District of Columbia, New Hampshire, New Jersey,
Colorado, Florida, Georgia, Missouri, and Delaware, and no such
authorization is the subject of any legal challenge (except as disclosed in
the Offering Memorandum) and (B) none of the Company's subsidiaries has
received any notice of rejection or denial, nor has it withdrawn, any of its
applications for CLEC approval in seven additional States where such
applications, as of the date of the Offering Memorandum, are pending
approval.
6
<PAGE>
Exhibit C
---------
Form of Opinion of Winthrop Stimson Putnam & Roberts, special New York counsel
to the Company
1. The provisions of the Pledge Agreement are effective to create a
valid security interest in favor of the Trustee for the benefit of the
holders of Notes in that portion of the collateral described in the Pledge
Agreement which is subject to Article 9 of the UCC (the "Collateral"), as
security for the payment, to the extent set forth therein, of the
Obligations (as defined therein). To the extent that the Collateral consists
of securities entitlements held by the Trustee, the Trustee has control over
such Collateral and the security interest in such Collateral created by the
Pledge Agreement is perfected and is prior to all other security interests
therein. To the extent that the Collateral consists of certificated
securities which are registered in the name of and delivered to the Trustee,
the security interest created by the Pledge Agreement in such Collateral is
perfected and prior to any adverse claim to such Collateral.
Such counsel may render the opinion in paragraph 1 above subject to the
following assumptions, exceptions, limitations and qualifications:
(i) we express no opinion as to the creation, validity or perfection
or priority of any security interest that is not governed by, or that is
excluded from coverage by, Articles 8 and 9 of the UCC and we express no
opinion as to the priority of any security interest or lien, except as
expressly set forth in paragraph 9;
(ii) we have assumed that the Company has "rights" in the Collateral
and the Pledged Securities and that "value" has been given, as contemplated
by Section 9-203 of the UCC;
(iii) we call to your attention the fact that the perfection of a
security interest in "proceeds" (as defined in the UCC) of collateral is
governed and restricted by Section 9-306 of the UCC;
(iv) we call to your attention the fact that under the UCC, with
certain limited exceptions, the effectiveness of any financing statement
will lapse five years after the date of filing thereof and the security
interest will become unperfected, unless a continuation statement is filed
within six months prior to the end of such five-year period. We also call to
your attention the fact that perfection of security interests under the UCC
in any of the Collateral will be terminated as to any Collateral acquired by
the Company more than four (4) months after the Company changes its name,
identity or corporate structure to such an extent as to make a financing
statement seriously misleading, unless a new appropriate financing statement
indicating the new name, identity or corporate structure of the Company is
properly filed before the expiration of four (4) months after such change;
(v) Section 552 of the federal Bankruptcy Code limits the extent to
which property acquired by a debtor after the commencement of a case under
the federal Bankruptcy Code may be subject to a security interest arising
from a security agreement entered into by the debtor before the commencement
of such case
(vi) we express no opinion with respect to (a) whether or to what
extent particular items in the Pledge Account may constitute "certificated
securities," "uncertificated securities," "securities entitlements,"
"securities accounts," "commodity contracts" or "commodity accounts" (as
each such term is defined in the UCC and (b) the effect of Section 9-306 of
the UCC or any other applicable law with respect to proceeds of any funds or
other property credited to the Pledge Account to the extent such funds or
other property constitute proceeds of the Collateral of either the Trustee
or any other
7
<PAGE>
creditor; and
(vii) we have assumed (i) that the Depositary which is acting as the
securities intermediary (as defined in UCC Section 8-102(a)(14)) with
respect to any Financial Assets (as defined in UCC Section 8-102(a)(9)) in
the Pledge Account, is a bank or broker which in the ordinary course of its
business maintains "securities accounts" (as defined in UCC Section 8-
501(a)) for others and at all times the Depositary will be acting in such
capacity with respect to the maintenance of the Pledge Account and the
carrying of the Financial Assets in the Pledge Account; (ii) the Depositary
will maintain the Pledge Account as a "securities account" as defined in
Section 8-501(a) of the UCC; (iii) the books and records of the Depositary
indicate and, at the time of reference thereto, will indicate the Trustee as
the sole Person which has rights to control the Pledge Account; (iv) the
Pledge Agreement, and no other agreement or understanding with any Person,
governs the Trustee, the Depositary and the Company's rights and duties with
respect to the Pledge Account and the financial assets contained therein;
and (v) at the time each Financial Asset is acquired by the Depositary with
respect to the Pledge Account, neither the Depositary nor the Trustee will
have any notice of any adverse claim (as defined in UCC Section 8-102(a)(1))
to such Financial Asset.
8
<PAGE>
EXHIBIT 4.7
- --------------------------------------------------------------------------------
COVAD COMMUNICATIONS GROUP, INC.
$215,000,000 AGGREGATE PRINCIPAL AMOUNT
OF
SERIES A AND SERIES B
12 1/2% SENIOR NOTES DUE 2009
INDENTURE
________________________
Dated as of February 18, 1999
________________________
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)....................................................................... 10.03
(c)....................................................................... 10.03
313(a).................................................................... 7.06
(b)(1).................................................................... 10.03
(b)(2).................................................................... 7.07
(c)....................................................................... 7.06;
10.02
(d)....................................................................... 7.06
314(a).................................................................... 4.03;
10.05
(c)(1).................................................................... N.A.
(c)(2).................................................................... N.A.
(c)(3).................................................................... N.A.
(e)....................................................................... 10.05
(f)....................................................................... N.A.
315 (a)................................................................... 7.01
(b)....................................................................... N.A.
(c)....................................................................... N.A.
(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)....................................................................... N.A.
317 (a)(1)................................................................ 6.08
(a)(2).................................................................... 6.09
(b)....................................................................... 2.04
318 (a)................................................................... N.A.
(b)....................................................................... N.A.
(c)....................................................................... 10.01
</TABLE>
*This Cross-Reference Table is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE........................................................... 1
Section 1.01. Definitions....................................................................................... 1
Section 1.02. Other Definitions................................................................................. 16
Section 1.03. Incorporation by Reference of Trust Indenture Act................................................ 17
Section 1.04. Rules of Construction............................................................................. 17
ARTICLE 2. THE NOTES............................................................................................ 18
Section 2.01. Form and Dating................................................................................... 18
Section 2.02. Execution and Authentication...................................................................... 19
Section 2.03. Registrar and Paying Agent........................................................................ 19
Section 2.04. Paying Agent to Hold Money in Trust............................................................... 20
Section 2.05. Holder Lists...................................................................................... 20
Section 2.06. Transfer and Exchange............................................................................. 20
Section 2.07. Replacement Notes................................................................................. 32
Section 2.08. Outstanding Notes................................................................................. 32
Section 2.09. Treasury Notes.................................................................................... 32
Section 2.10. Temporary Notes................................................................................... 32
Section 2.11. Cancellation...................................................................................... 33
Section 2.12. Defaulted Interest................................................................................ 33
Section 2.13. CUSIP Numbers..................................................................................... 33
ARTICLE 3. REDEMPTION AND PREPAYMENT............................................................................ 33
Section 3.01. Notices to Trustee................................................................................ 33
Section 3.02. Selection of Notes to Be Redeemed................................................................. 34
Section 3.03. Notice of Redemption.............................................................................. 34
Section 3.04. Effect of Notice of Redemption.................................................................... 35
Section 3.05. Deposit of Redemption Price....................................................................... 35
Section 3.06. Notes Redeemed in Part............................................................................ 35
Section 3.07. Optional Redemption............................................................................... 35
Section 3.08. Mandatory Redemption.............................................................................. 36
Section 3.09. Offer to Purchase by Application of Excess Proceeds............................................... 36
ARTICLE 4. COVENANTS............................................................................................ 38
Section 4.01. Payment of Notes.................................................................................. 38
Section 4.02. Maintenance of Office or Agency................................................................... 38
Section 4.03. Reports........................................................................................... 38
Section 4.04. Compliance Certificate............................................................................ 39
Section 4.05. Taxes............................................................................................. 40
Section 4.06. Stay, Extension and Usury Laws.................................................................... 40
Section 4.07. Restricted Payments............................................................................... 40
Section 4.08. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries......................... 42
Section 4.09. Incurrence of debt and Issuance of Disqualified Stock............................................. 43
Section 4.10. Asset Sales....................................................................................... 45
Section 4.11. Transactions with Affiliates...................................................................... 46
Section 4.12. Limitation on Liens............................................................................... 46
Section 4.13. Business Activities............................................................................... 46
Section 4.14. Corporate Existence............................................................................... 47
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 4.15. Offer to Repurchase Upon Change of Control........................................................ 47
Section 4.16. Limitation on Sale and Leaseback Transactions..................................................... 48
Section 4.17. Limitation on Issuances and Sales of Equity Interests in Wholly Owned Restricted Subsidiaries..... 48
Section 4.18. Limitation on Issuances of Guarantees of debt..................................................... 48
Section 4.19. Payments for Consent.............................................................................. 49
ARTICLE 5. SUCCESSORS........................................................................................... 49
Section 5.01. Merger, Consolidation, or Sale of Assets.......................................................... 49
Section 5.02. Successor Corporation Substituted................................................................. 50
ARTICLE 6. DEFAULTS AND REMEDIES................................................................................ 50
Section 6.01. Events of Default................................................................................. 50
Section 6.02. Acceleration...................................................................................... 51
Section 6.03. Other Remedies.................................................................................... 52
Section 6.04. Waiver of Defaults................................................................................ 52
Section 6.05. Control by Majority............................................................................... 53
Section 6.06. Limitation on Suits............................................................................... 53
Section 6.07. Rights of Holders of Notes to Receive Payment..................................................... 53
Section 6.08. Collection Suit by Trustee........................................................................ 53
Section 6.09. Trustee May File Proofs of Claim.................................................................. 54
Section 6.10. Priorities........................................................................................ 54
Section 6.11. Undertaking for Costs............................................................................. 54
ARTICLE 7. TRUSTEE.............................................................................................. 55
Section 7.01. Duties of Trustee................................................................................. 55
Section 7.02. Rights of Trustee................................................................................. 56
Section 7.03. Individual Rights of Trustee...................................................................... 56
Section 7.04. Trustee's Disclaimer.............................................................................. 56
Section 7.05. Notice of Defaults................................................................................ 57
Section 7.06. Reports by Trustee to Holders of the Notes........................................................ 57
Section 7.07. Compensation and Indemnity........................................................................ 57
Section 7.08. Replacement of Trustee............................................................................ 58
Section 7.09. Successor Trustee by Merger, etc.................................................................. 59
Section 7.10. Eligibility; Disqualification..................................................................... 59
Section 7.11. Preferential Collection of Claims Against Company................................................. 59
ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE............................................................. 60
Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance.......................................... 60
Section 8.02. Legal Defeasance and Discharge.................................................................... 60
Section 8.03. Covenant Defeasance............................................................................... 60
Section 8.04. Conditions to Legal or Covenant Defeasance........................................................ 61
Section 8.05. Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions..... 62
Section 8.06. Repayment to Company.............................................................................. 62
Section 8.07. Reinstatement..................................................................................... 63
Section 8.08. Survival.......................................................................................... 63
ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER..................................................................... 63
Section 9.01. Without Consent of Holders of Notes............................................................... 63
Section 9.02. With Consent of Holders of Notes.................................................................. 64
Section 9.03. Compliance with Trust Indenture Act............................................................... 65
Section 9.04. Revocation and Effect of Consents................................................................. 65
Section 9.05. Notation on or Exchange of Notes.................................................................. 65
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 9.06. Trustee to Sign Amendments, etc................................................................... 65
ARTICLE 10. MISCELLANEOUS....................................................................................... 66
Section 10.01. Trust Indenture Act Controls..................................................................... 66
Section 10.02. Notices.......................................................................................... 66
Section 10.03. Communication by Holders of Notes with Other Holders of Notes.................................... 67
Section 10.04. Certificate and Opinion as to Conditions Precedent............................................... 67
Section 10.05. Statements Required in Certificate or Opinion.................................................... 67
Section 10.06. Rules by Trustee and Agents...................................................................... 68
Section 10.07. No Personal Liability of Directors, Officers, Employees and Stockholders......................... 68
Section 10.08. Governing Law.................................................................................... 68
Section 10.09. No Adverse Interpretation of Other Agreements.................................................... 68
Section 10.10. Successors....................................................................................... 68
Section 10.11. Severability..................................................................................... 68
Section 10.12. Counterpart Originals............................................................................ 68
Section 10.13. Table of Contents, Headings, etc................................................................. 68
</TABLE>
EXHIBITS
- --------
Exhibit A FORMS OF NOTES
Exhibit B FORM OF CERTIFICATE OF TRANSFER
Exhibit C FORM OF CERTIFICATE OF EXCHANGE
Exhibit D FORM OF CERTIFICATE OF ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
<PAGE>
INDENTURE dated as of February 18, 1999 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 12 1/2% Senior
Notes due 2009 (the "Series A Notes") and the 12 1/2% Senior Notes due 2009
issuable in exchange for the Series A Notes (the "Series B Notes" and, together
with the Series A Notes, the "Notes"):
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.01. 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 of the Notes sold in reliance on Rule 144A.
"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,"
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. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Agent" means any Registrar, Paying Agent or co-registrar.
"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
<PAGE>
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 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.
"Borrowing Base" means an amount equal to the sum of 85% of the value
of accounts receivable (before giving effect to any related reserves) shown on
the Company's most recent consolidated balance sheet in accordance with GAAP not
more than 60 days past due.
"Business Day" means any day other than a Legal Holiday.
2
<PAGE>
"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 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
3
<PAGE>
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 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
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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 Wholly Owned Restricted Subsidiary shall be included only to the extent of
the percentage ownership interest in the Net Income of such Person owned on the
last day of such period by the referent Person or a Restricted Subsidiary
thereof; provided that the Net Income of any Person that is an Unrestricted
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 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 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.
"Consolidated Tangible Net Worth" means, with respect to any Person as
of any date, Consolidated Net Worth, after deducting therefrom all goodwill,
trade names, patents, unamortized debt discount and expense and any other
intangibles, all as set forth on the most recent consolidated balance sheet of
such Person.
"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.
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"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) 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
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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 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 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 (including the accreted value of
the 13 1/2% Notes during the term that such indebtedness is outstanding).
"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 date of this Indenture.
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<PAGE>
"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),
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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 of the Notes sold to Institutional Accredited Investors.
"Indenture" means this Indenture, as amended or supplemented from time
to time.
"Indirect Participant" means a Person who holds a beneficial interest
in a Global Note through a Participant.
"Initial Notes" means the first $215 million aggregate principal
amount of Notes issued under this Indenture on the date hereof.
"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
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<PAGE>
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.
"Issue Date" means February 18, 1999.
"Initial Purchasers" means Bear, Stearns & Co. Inc., BT Alex. Brown
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., 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).
"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
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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. The Initial Notes and the Additional Notes shall be treated as a
single class for all purposes under 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.
"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,
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(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 the
greater of $50.0 million and 5% of the Company's Total Common Equity 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 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
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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.
"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).
"Pledge Account" means an account established with the Escrow Agent
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by the Company with a portion of the proceeds from the sale
of the Notes.
"Pledge Agreement" means the Pledge and Escrow Agreement, dated as of
the date of the Indenture, by and between the The Bank of New York, as Escrow
Agent (the "Escrow Agent") and the Company, governing the disbursement of funds
from the Pledge Account.
"Pledge Securities" means the securities purchased by the Company with
a portion of the proceeds from the sale of the Notes, which shall consist of
Government Securities, to be deposited in the Pledge Account.
"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.
"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.
"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
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on Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan 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 February 18, 1999, 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 and, with respect to any Additional
Notes, one or more registration rights agreements between the Company and the
other parties thereto, as such agreement(s) may be amended, modified or
supplemented from time to time, relating to rights given by the Company to the
purchasers of Additional Notes to register such Additional Notes under the
Securities Act.
"Regulation S" means Regulation S promulgated under the Securities
Act.
"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
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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 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
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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 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.
13
<PAGE>
"Restricted Period" means the 40-day restricted period as defined in
Regulation S.
"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.
"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.
"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.
"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, 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).
14
<PAGE>
"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 (including facilities such as fiber, copper and
switches), and any business related, ancillary or complementary thereto (as
determined in good faith by the Board of Directors).
"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 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 Person's
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
15
<PAGE>
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.
"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.
"13 1/2% Notes" means the Company's 13 1/2% Senior Discount Notes due
2008 issued pursuant to the indenture dated March 11, 1998 between the Company
and The Bank of New York.
Section 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
----------
<S> <C>
"Additional Notes".....................2.02
"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
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
"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. Incorporation by Reference of Trust Indenture Act
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.
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.
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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 of outstanding Notes from time to time
endorsed thereon and that the aggregate principal amount of 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 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 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 of the
Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes
may from time to time be
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<PAGE>
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.
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 $215,000,000 aggregate principal amount on the Issue Date. The aggregate
principal amount 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 $50 million 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.
19
<PAGE>
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 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
20
<PAGE>
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.
(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 of the relevant Global Note(s)
pursuant to Section 2.06(h) hereof.
(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
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<PAGE>
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 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
22
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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 equal to the
aggregate principal amount 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 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)
23
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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 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. 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.
(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;
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(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 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 an Unrestricted Definitive Note in the
appropriate principal amount. 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,
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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
(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 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;
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<PAGE>
(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.
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 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 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 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 Holder's 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,
27
<PAGE>
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.
(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;
28
<PAGE>
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 Order in accordance with Section 2.02, the Trustee
shall authenticate (i) one or more Unrestricted Global Notes in an aggregate
principal amount equal to the principal amount 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 equal to the principal amount 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
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.
(g) Legends. The following legends shall appear on 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
29
<PAGE>
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."
(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) 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
30
<PAGE>
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 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.
(h) General Provisions Relating to Transfers and Exchanges.
(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.
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<PAGE>
(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.
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 of any Note is considered paid under
Section 4.01 hereof, it ceases to be outstanding 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 accrue
interest.
Section 2.09. Treasury Notes.
In determining whether the Holders of the required principal
amount 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.
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.
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<PAGE>
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.
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
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<PAGE>
the redemption shall occur, (ii) the redemption date, (iii) the principal
amount 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 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; 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 (including
CUSIP numbers) and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of the
principal amount 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 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, 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
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(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, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. 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 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 February 15, 2004. 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 February 15 of the years indicated below:
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Year Percentage
---- ----------
2004......................................106.250%
2005......................................104.167%
2006......................................102.083%
2007 and thereafter.......................100.000%
(b) Notwithstanding the provisions of clause (a) of this Section
3.07, at any time on or prior to February 15, 2002, 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 to redeem up to
an aggregate of 35% of the Notes issued on the Issue Date under the Indenture at
a redemption price of 112.50% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of redemption; provided
that Notes representing at least $140.0 million of the aggregate principal
amount of the Notes remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by the Company and its Subsidiaries). 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.
(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 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
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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 accrue interest;
(d) that, unless the Company defaults in making such payment, any Note
accepted for payment pursuant to the Asset Sale Offer shall cease to 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 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 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 equal to any unpurchased portion of the Note
surrendered. Any Note not so accepted
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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.
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
of, premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes. Principal amount, 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, 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.
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
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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 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'
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Certificate specifying such Default or Event of Default and what action the
Company is taking or proposes to take with respect thereto.
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 (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 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 Section
4.09 hereof; 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 date of this Indenture
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(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 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) 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 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; (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; and (vi) other Restricted Payments not to exceed $10.0 million in
the aggregate at any time outstanding (with Restricted Payments pursuant to this
clause not being counted as Restricted Payments for purposes of clause (iii) of
the immediately preceding paragraph).
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
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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 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 Restricted
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) 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, (b) pay any indebtedness owed to the Company or any of its Restricted
Subsidiaries, (c) make loans or advances to the Company or any of its Restricted
Subsidiaries or (d) 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
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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, (k) restrictions on
cash or other deposits or net worth imposed by customers under contracts entered
into in the ordinary course of business; and (l) any Credit Facility if (1) the
encumbrance limits, but does not prohibit, the payment of dividends, (2) the
encumbrance or restriction is not more disadvantageous to the holders of the
Notes than is customary in comparable Credit Facilities, as determined by the
Board of Directors and (3) the Board of Directors of the Company determines that
any such encumbrance or restriction is not reasonably expected to materially
affect the Company's ability to satisfy any payment obligations on the Notes or
the 13 1/2% Notes, when the Company's same may become due and payable, whether
including payments made in respect of principal, interest, premium, if any,
repayment or Change of Control.
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 6.0
to 1.0. 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 the greater of $100.0 million or the
Borrowing Base 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 the total cost of the
Telecommunications Related Assets acquired and financed by such Vendor Debt
(including acquisitions of Capital Stock of a Person engaged in a
Telecommunications Business that is or becomes a Restricted Subsidiary of the
Company);
(iii) the incurrence by the Company and its Restricted
Subsidiaries of Existing Debt;
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<PAGE>
(iv) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt in an aggregate principal amount not to exceed $50.0
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 2.5 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), 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
accruing in respect of, the principal amount 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 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.
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<PAGE>
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 75% 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 75% 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 365 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 365 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 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 the greater of $10.0
million or 10% of the Consolidated Tangible Net Worth of the Company, 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, 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 principal amount of
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<PAGE>
Notes tendered pursuant to such Asset Sale Offer exceeds t he 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
(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 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 Transactions 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 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.
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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. 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 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 accrue interest
after the Change of Control Payment Date; (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 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
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<PAGE>
transferred by book-entry) to each Holder a new Note equal in principal amount
to any unpurchased portion of the Notes surrendered, if any; provided, that each
such new Note shall be in a principal amount 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 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.
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<PAGE>
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.
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
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.
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, this Indenture, the Pledge Agreement
and the Registration Rights Agreement 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 have a Debt to Annualized Cash Flow
Ratio of the Company immediately after the transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable two-quarter Measurement Period equal to or less than the Debt to
Annualized Cash Flow Ratio of the Company immediately preceding the transaction,
or any other Person which (x) assumes or guarantees the obligations of the
Company under the Notes, the Indenture, the Pledge Agreement 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 (z) 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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<PAGE>
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 of
the Notes (including Additional Notes, if any) 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 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
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execution shall not be effectively stayed) of 60 days, provided that the
aggregate of all such undischarged judgments exceeds $5 million;
(g) the Company defaults in the performance of any covenant set forth
in the Pledge Agreement, or the Company repudiates any of its obligations under
the Pledge Agreement or the Pledge Agreement is unenforceable against the
Company for any reason which in any one case or in the aggregate results in a
material impairment of the rights intended to be afforded thereby;
(h) 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
(i) 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
(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 (h) or (i) 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 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 the
Notes shall be due and payable immediately. Notwithstanding the
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<PAGE>
foregoing, if an Event of Default specified in clause (h) or (i) 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 February 15, 2004 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
February 15 of the years set forth below, as set forth below (expressed as a
percentage of the principal amount to the date of payment that would otherwise
be due but for the provisions of this sentence):
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1999...............................116.667%
2000...............................114.583%
2001...............................112.500%
2002...............................110.417%
2003...............................108.333%
</TABLE>
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
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 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.
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Section 6.05. Control by Majority.
Holders of a majority in principal amount 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 of the then
outstanding Notes make a written request to the Trustee to pursue the remedy;
(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 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 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.
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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 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, 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
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Section 6.07 hereof, or a suit by Holders of more than 10% in principal amoun t
of the then outstanding Notes.
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 (but need confirm or
investigate the accuracy of mathematical calculations or other facts stated
therein).
(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.
(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.
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(g) the rights, privilege, protections, immunities and benefits
given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and to each agent, custodian and other Person
employed to act hereunder.
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.
(g) The rights, privileges, protections, immunities and benefits
given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and to each agent, custodian and other Person
employed to act hereunder.
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.
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
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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
(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 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
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principal amount of the then outstanding Notes may petit ion 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).
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.
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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 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.
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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;
(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
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creditors of the Company or with the intent of defea ting, 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, 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.
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 of,
premium, if any, or interest on any Note and remaining unclaimed for two years
after such principal amount 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.
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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
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; or
(f) to provide for the issuance of Additional Notes in
accordance with the limitations set forth in this Indenture as of the date
hereof.
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.
63
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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
(including the Additional Notes, if any) 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 of the then outstanding Notes (including
the Additional Notes, if any) 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).
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 of the Notes (including the
Additional Notes, if any) 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
64
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a majority in aggregate principal amount of the then outstanding Notes
(including the Additional Notes, if any) 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;
(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);
(h) amend the Pledge Agreement in a manner that adversely
affects the Holders of the Notes; or
(i) 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
65
<PAGE>
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.
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.
2330 Central Expressway
Santa Clara, California 95050
Telecopier No.: (408) 844-7501
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: Barry Taylor
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 upon receipt.
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
66
<PAGE>
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:
(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.
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<PAGE>
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.
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.
68
<PAGE>
SIGNATURES
Dated as of February 18, 1999
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Dhruv Khanna
-----------------------------------
Name: Dhruv Khanna
Title: Vice President and General Counsel
Attest:
By: /s/ Timothy P. Laehy
-----------------------------------
Name: Timothy P. Laehy
Title: Chief Financial Officer
THE BANK OF NEW YORK
By: /s/ Michele L. Russo
-----------------------------------
Name: Michele L. Russo
Title: Assistant Treasurer
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EXHIBIT 4.8
REGISTRATION RIGHTS AGREEMENT
by and among
Covad Communications Group, Inc.,
as Issuer
and
Bear, Stearns & Co. Inc.
BT Alex. Brown Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.,
as Initial Purchasers
Dated as of February 18, 1999
<PAGE>
This Registration Rights Agreement (this "Agreement") is made and
---------
entered into as of February 18, 1999, by and among Covad Communications Group,
Inc., a Delaware corporation (the "Issuer"), on the one hand, and Bear, Stearns
------
& Co. Inc., BT Alex. Brown Incorporated, Donaldson Lufkin & Jenrette Securities
Corporation and Goldman, Sachs & Co. (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 12 1/2% Senior Notes due
2009 (the "Initial Notes") pursuant to the Purchase Agreement (as defined
-------------
below).
This Agreement is made pursuant to the Purchase Agreement, dated as of
February 11, 1999 (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,
--------------------------------
February 15 and August 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) 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 12 1/2% Senior Notes due 2009, 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
2
<PAGE>
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 February 18, 1999, 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 12 1/2% Senior Notes due 2009, 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.
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
February 1 and August 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.
3
<PAGE>
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 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 60 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 180 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 Offer
Registration Statement. The Issuer shall use its best efforts to cause the
Exchange Offer to be Consummated no later than 210 days after the Closing Date.
4
<PAGE>
(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 210 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 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 180th 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
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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 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
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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
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;
(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;
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<PAGE>
(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 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;
8
<PAGE>
(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);
(x) 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;
(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
9
<PAGE>
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 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;
(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);
10
<PAGE>
(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;
(xvi) 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;
(xvii) 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
Depository Trust Company;
(xviii) 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;
(xix) 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 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
(xxi) 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
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<PAGE>
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 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.
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
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<PAGE>
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 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
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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) 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
14
<PAGE>
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
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.
2330 Central Expressway
Santa Clara, California 95050
Telecopier No.: (408) 844-7501
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.
(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
15
<PAGE>
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.
16
<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
The foregoing Registration Rights Agreement is hereby
confirmed and accepted as of the date first above written.
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
By: BEAR, STEARNS & CO. INC.
By: /s/ James C. Diao
----------------------
Name: James C. Diao
Title: Senior Managing Director
17
<PAGE>
EXHIBIT 4.9
(Face of Note)
===============================================================================
CUSIP/CINS __________
12 1/2% Senior Notes due 2009
No. _____ $ _________
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to ___________________________________________________
or registered assigns,
the principal sum of_____________________________________________
Dollars on February 15, 2009.
Interest Payment Dates: February 15 and August 15
Record Dates: February 1 and August 1
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: , 1999
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)
12 1/2% Senior Notes due 2009
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 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
3
<PAGE>
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."
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 12 1/2% per annum. The Company shall pay interest and Additional
Interest, if any, semi-annually on February 15 and August 15, commencing on
August 15, 1999, 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 Closing 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 August 15, 1999. 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. 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 February 1 or August 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 February 18, 1999 (the "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
4
<PAGE>
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 $215,000,000 in aggregate principal amount.
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 February 15,
2004. 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 February 15 of the years indicated below:
Year Percentage
---- ----------
2004 ....................................... 106.250%
2005 ....................................... 104.167%
2006 ....................................... 102.083%
2007 and thereafter ........................ 100.000%
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time prior to February 15, 2002, 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 to
redeem up to an aggregate of 35% of the Notes issued on the Issue Date under the
Indenture at a redemption price of 112.50% of the aggregate principal amount of
the Notes, plus accrued and unpaid interest, if any, to the date of redemption;
provided that at least $140.0 million of the aggregate principal amount of the
Notes remains 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.
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 aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (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 $10.0 million, the Company shall commence an offer to all
Holders of Notes (as "Asset Sale Offer") pursuant to Section
5
<PAGE>
3.09 of the Indenture to purchase the maximum principal amount of Notes
(including any Additional 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 thereof plus accrued and unpaid interest and Additional Interest thereon,
if any, to the date fixed for the closing of such offer, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Notes (including any Additional 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 principal amount 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 will 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 (and Additional Notes, if any) 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 (and Additional Notes, if any) 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 or to provide
for the Issuance of Additional Notes in accordance with the limitations set
forth in the Indenture.
6
<PAGE>
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, 4.15 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 (including Additional Notes, if any) 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) default by the Company in the performance of any covenant set
forth in the Pledge Agreement, or repudiation by the Company of any of its
obligations under the Pledge Agreement or the unenforceability of the Pledge
Agreement against the Company for any reason which in any one case or in the
aggregate results in a material impairment of the rights intended to be afforded
thereby; or (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 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. PLEDGE AGREEMENT. In order to secure the due and punctual
payment of the principal of, premium and interest on the Notes and the payment
and performance of all other obligations of the Company to the Holders of the
Notes or the Trustee under the Indenture, the Company has granted a first
priority Lien on certain Pledged Securities to the Escrow Agent for the benefit
of the Holders, as more particularly described in the Pledge Agreement. If the
Pledged Securities exceed the amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants selected by the Company, to
provide for payment in full of the first six scheduled interest payments due on
the Notes (or, in the event an interest payment or interest payments have been
made, an amount sufficient to provide for payment in full of any interest
payments remaining, up to and including the sixth scheduled interest payment),
and no Default or Event of Default is then continuing, upon the satisfaction of
certain conditions specified in the Pledge Agreement, any such excess amount of
Pledged Securities shall be
7
<PAGE>
returned to the Company. Upon such release and delivery to the Company, the Lien
of the Escrow Agent thereon for the benefit of the Holders shall be released.
14. 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.
15. 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.
16. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticatin g agent.
17. 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).
18. 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 February 18, 1999, between the Company and the parties
named on the signature pages thereof or, in the case of Additional Notes,
Holders of Restricted Global Notes and Restricted Definitive Notes shall have
the rights set forth in one or more registration rights agreements, if any,
between the Company and the other parties thereto, relating to rights given by
the Company to the purchasers of any Additional Notes (collectively, the
"Registration Rights Agreement").
19. 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.
20. GOVERNING LAW. The internal laws of the State of New York shall
govern and be used to construe this Note 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.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture, the Pledge Agreement and/or the
Registration Rights Agreement. Requests may be made to:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
8
<PAGE>
Attention: Chief Executive Officer
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.
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.
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>
<S> <C> <C> <C> <C>
Principal Amount
Amount of Amount of increase of
decrease in in Principal this Global Note Signature of
Principal Amount Amount following such authorized officer
of of decrease (or of Trustee or Note
Date of Exchange this Global Note this Global Note increase) Custodian
- ------------------- ---------------- ---------------- -------- ---------
</TABLE>
12
<PAGE>
(Face of Regulation S Temporary Global Note)
================================================================================
CUSIP/CINS _____________
12 1/2 % Senior Notes due 2009
No. ____ $ ________________
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to _______________________________________________
or registered assigns,
the principal sum of __________________________________________
Dollars on February 15, 2009.
Interest Payment Dates: February 15 and August 15
Record Dates: February 1 and August 1
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: ,1999
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 Regulation S Temporary Global Note)
--------------------------------------------
12 1/2% Senior Notes due 2009
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 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
3
<PAGE>
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."
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 12 1/2% per annum. The Company shall pay interest and Additional
Interest, if any, semi-annually on February 15 and August 15, commencing on
August 15, 1999, 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 Closing 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 August 15, 1999. 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. 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 February 1 or August 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
4
<PAGE>
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 February 18, 1999 ("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 $215,000,000 in
aggregate principal amount.
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 February 15,
2004. 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 February 15 of the years indicated below:
Year Percentage
---- ----------
2004 106.250%
2005 104.167%
2006 102.083%
2007 and thereafter 100.000%
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time prior to February 15, 2002, 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 to redeem up to
an aggregate of 35% of the Notes issued on the Issue Date under the Indenture at
a redemption price of 112.50% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of redemption; provided
that at least $140.0 million of the aggregate principal amount of the Notes
remains 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.
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.
5
<PAGE>
(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 aggregate principal amount thereof plus accrued and
unpaid interest to the date of purchase (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 $10.0 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 (including any
Additional 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 thereof plus
accrued and unpaid interest and Additional Interest thereon, if any, to the date
fixed for the closing of such offer, in accordance with the procedures set forth
in the Indenture. To the extent that the aggregate amount of Notes (including
any Additional 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 principal amount 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 will 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 (and Additional Notes, if any) 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 (and Additional Notes, if any) voting as a single class.
Without the consent of any Holder of a
6
<PAGE>
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, or to provide for the Issuance of Additional
Notes in accordance with the limitations set forth in the Indenture.
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, 4.15 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 (including Additional Notes, if any) 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) default by the Company in the performance of any covenant set
forth in the Pledge Agreement, or repudiation by the Company of any of its
obligations under the Pledge Agreement or the unenforceability of the Pledge
Agreement against the Company for any reason which in any one case or in the
aggregate results in a material impairment of the rights intended to be afforded
thereby; or (vii) 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 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. PLEDGE AGREEMENT. In order to secure the due and punctual
payment of the principal of, premium and interest on the Notes and the payment
and performance of all other obligations of the Company to the Holders of the
Notes or the Trustee under the Indenture, the Company has granted
7
<PAGE>
a first priority Lien on certain Pledged Securities to the Escrow Agent for the
benefit of the Holders, as more particularly described in the Pledge Agreement.
If the Pledged Securities exceed the amount sufficient, in the opinion of a
nationally recognized firm of independent public accountants selected by the
Company, to provide for payment in full of the first six scheduled interest
payments due on the Notes (or, in the event an interest payment or interest
payments have been made, an amount sufficient to provide for payment in full of
any interest payments remaining, up to and including the sixth scheduled
interest payment), and no Default or Event of Default is then continuing, upon
the satisfaction of certain conditions specified in the Pledge Agreement, any
such excess amount of Pledged Securities shall be returned to the Company. Upon
such release and delivery to the Company, the Lien of the Escrow Agent thereon
for the benefit of the Holders shall be released.
14. 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.
15. 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.
16. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
17. 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).
18. 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 February 18, 1999, between the Company and the parties
named on the signature pages thereof or, in the case of Additional Notes,
Holders of Restricted Global Notes and Restricted Definitive Notes shall have
the rights set forth in one or more registration rights agreements, if any,
between the Company and the other parties thereto, relating to rights given by
the Company to the purchasers of any Additional Notes (collectively, the
"Registration Rights Agreement").
19. 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.
20. GOVERNING LAW. The internal laws of the State of New York shall
govern and be used to construe this Note 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.
8
<PAGE>
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture, the Pledge Agreement and/or the
Registration Rights Agreement. Requests may be made to:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Attention: Chief Executive Officer
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.
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 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.
11
<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>
<S> <C> <C> <C> <C>
Principal Amount
Amount of of this
decrease in Amount of increase Global Note Signature of
Principal Amount in Principal Amount following such authorized officer
of of decrease (or of Trustee or Note
Date of Exchange this Global Note this Global Note increase) Custodian
---------------- ---------------- ---------------- --------- ---------
</TABLE>
12
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: 12 1/2% Senior Notes due 2009 of
Covad Communications Group, Inc.
--------------------------------
Reference is hereby made to the Indenture, dated as of February 18,
1999 (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.
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
B-1
<PAGE>
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
(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.
B-2
<PAGE>
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 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-3
<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 222814AE5), or
(ii) [ ] Regulation S Global Note (CUSIP U22015AC2), or
(iii) [ ] IAI Global Note (CUSIP 222814AF2); 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 222814AE5), or
(ii) [ ] Regulation S Global Note (CUSIP U22015AC2), or
(iii) [ ] IAI Global Note (CUSIP 222814AF2); or
(iv) [ ] Unrestricted Global Note (CUSIP 222814AJ4); or
(b) [ ] a Restricted Definitive Note; or
(c) [ ] an Unrestricted Definitive Note,
in accordance with the terms of the Indenture.
B-4
<PAGE>
EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: 12 1/2% Senior Notes due 2009 of
Covad Communications Group, Inc.
---------------------------------
(CUSIP______________)
Reference is hereby made to the Indenture, dated as of February 18,
1999 (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.
(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
C-1
<PAGE>
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.
(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-2
<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-3
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: 12 1/2% Senior Notes due 2009 of
Covad Communications Group, Inc.
-----------------------------------
Reference is hereby made to the Indenture, dated as of February 18,
1999 (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 "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
D-1
<PAGE>
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: ______________________
<PAGE>
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
EXHIBIT 5.1
April 8, 1999
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, CA 95050
Re: New 12 1/2% Senior Notes Due 2009
Covered By Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as corporate counsel to Covad Communications Group, Inc., a
Delaware corporation (the "Company"), in connection with the filing by the
Company with the Securities and Exchange Commission (the "Commission") of a
registration statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"). The Registration
Statement relates to the proposed issuance by the Company to exchange $1,000
principal amount of its 12 1/2% Senior Notes due 2009 (the "New Notes") for each
$1,000 principal amount of its outstanding 12 1/2% Senior Notes due 2009 (the
"Old Notes"), of which $215,000,000 aggregate principal amount is outstanding as
of the date hereof. The Old Notes are, and the New Notes will upon issuance be,
covered by that certain indenture dated February 18, 1999 (the "Indenture") by
and between the Company and The Bank of New York, as trustee (the "Trustee").
This opinion letter is delivered in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of: (i) the Registration
Statement, in the form filed with the Commission; (ii) the charter documents of
the Company, as currently in effect; (iii) the Indenture; (iv) the form of the
New Notes; and (v) resolutions of the Board of Directors of the Company relating
to, among other things, the issuance and exchange of the New Notes for the Old
Notes and the filing of the Registration Statement. We also have examined such
other documents as we have deemed necessary or appropriate as a basis for the
opinions set forth below.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents. As to certain facts
material to this opinion, we have relied without independent verification upon
oral or written statements and representations of officers and other
representatives of the Company and others.
Based upon the foregoing, and subject to the assumptions and limitations
set forth herein, we are of the opinion that, when (i) the Registration
Statement, as finally amended (including all necessary post-effective
amendments, if any), shall have become effective under the Securities Act and
(ii) when the
<PAGE>
Covad Communications Group, Inc.
April 8, 1999
Page 2
New Notes are duly executed, attested, issued and delivered by duly authorized
officers of the Company, and authenticated by the Trustee, all in accordance
with the terms of the Indenture and the prospectus contained in the Registration
Statement, against surrender and cancellation of a like principal amount of Old
Notes, the New Notes issued by the Company will be legally issued, and the New
Notes will constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except to the extent that
enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance and other laws
relating to or affecting creditors' rights generally, and (ii) general
principles of equity, whether such enforcement is considered in a proceeding in
equity or at law.
To the extent relevant to the opinions set forth above, we have assumed
that the Trustee is duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization; that the Trustee is duly qualified
to engage in the activities contemplated by the Indenture and is duly qualified
and eligible under the terms of the Indenture to act as trustee thereunder; that
the Indenture was duly authorized, executed and delivered by the Trustee; that
the Indenture is a valid and binding obligation of the Trustee; that the Trustee
is in compliance, generally with respect to acting as a trustee under the
Indenture, with all applicable laws and regulations; and that the Trustee has
the requisite organizational and legal power and authority to perform its
obligations under the Indenture.
This opinion is given in respect of the Indenture and the New Notes only,
and we express no opinion as to the legality, validity or binding effect of any
collateral agreement or other document or any other matter beyond the matters
expressly set forth herein.
We express no opinion as to the enforceability of provisions of the
Indenture or the New Notes which provide that the assertion or employment of any
right or remedy shall not prevent the concurrent assertion or employment of any
other right or remedy, or that every right and remedy shall be cumulative and in
addition to every other right and remedy, or that any delay or omission to
exercise any right or remedy shall not impair any other right or remedy or
constitute a waiver thereof.
Members of our firm are admitted to the bar of the State of California and
we do not express any opinion as to the laws of any jurisdiction other than the
laws of the State of California, the General Corporation Law of the State of
Delaware and the federal laws of the United States, and we express no opinion
with respect to the applicability thereto, or the effect thereon, of the laws of
any other jurisdiction. In this regard, we note that Section 10.08 of the
Indenture provides that the Indenture and the New Notes are to be governed by
the law of the State of New York. The opinions expressed herein concerning the
validity, binding effect and enforceability of the Indenture and the New Notes
are intended to express our views on those matters as if the substantive law of
California were applicable. We render no opinion with respect to said Section
10.08 (and the corresponding provisions of the New Notes) or the appropriate
choice of laws with respect to the Indenture or the New Notes. Moreover, we
express no opinion with respect to compliance with state securities laws or as
to the applicability to the obligations of the Company under the Indenture or
the New Notes of Sections 547 and 548 of Title 11 of the United States Code or
applicable state law (including, without limitation, Article 10 of the New York
Debtor & Creditor Law and Sections 3439 et seq. of the California Civil Code)
relating to fraudulent transfers.
<PAGE>
Covad Communications Group, Inc.
April 8, 1999
Page 3
This opinion is rendered solely for your benefit in connection with the
transactions described above. This opinion may not be used or relied upon by any
other person and may not be disclosed, quoted, filed with a governmental agency
or otherwise referred to without our prior written consent. However, we consent
to the filing of this opinion as an exhibit to the Registration Statement and
prospectus and to the use of our name under the caption "Legal Matters" in the
Registration Statement and any amendments thereto. In giving such consent, we do
not concede that we are experts within the meaning of the Securities Act or the
rules and regulations thereunder or that this consent is required by Section 7
of the Securities Act.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati, P.C.
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 15, 1999, in the Registration Statement (Form
S-4) and related Prospectus of Covad Communications Group, Inc. for the
registration of $215,000,000 of 12 1/2% Senior Notes due February 15, 2009.
/s/ Ernst & Young LLP
San Jose, California
April 7, 1999
<PAGE>
EXHIBIT 25.1
========================================================================
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.)
One 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.)
2330 Central Expressway
Santa Clara, California 95050
(Address of principal executive offices) (Zip code)
_____________
12-1/2% Senior Notes due 2009
(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>
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.
-2-
<PAGE>
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 7th day of April, 1999.
THE BANK OF NEW YORK
By: /s/ MICHELE L. RUSSO
-----------------------------------------
Name: MICHELE L. RUSSO
Title: ASSISTANT TREASURER
<PAGE>
Exhibit 7
---------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One 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,
1998, 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>
ASSETS Dollar Amounts
in Thousands
Cash and balances due from depository
institutions:
<S> <C>
Noninterest-bearing balances and currency and $ 3,951,273
coin...........................................
Interest-bearing balances....................... 4,134,162
Securities:
Held-to-maturity securities..................... 932,468
Available-for-sale securities................... 4,279,246
Federal funds sold and Securities purchased 3,161,626
under agreements to resell......................
Loans and lease financing receivables:
Loans and leases, net of unearned
income.......................................... 37,861,802
LESS: Allowance for loan and
lease losses.................................... 619,791
LESS: Allocated transfer risk
reserve......................................... 3,572
Loans and leases, net of unearned income,
allowance, and reserve......................... 37,238,439
Trading Assets................................... 1,551,556
Premises and fixed assets (including capitalized
leases)......................................... 684,181
Other real estate owned.......................... 10,404
Investments in unconsolidated subsidiaries and
associated companies............................ 196,032
Customers' liability to this bank on acceptances
outstanding..................................... 895,160
Intangible assets................................ 1,127,375
Other assets..................................... 1,915,742
Total assets..................................... $ 60,077,664
LIABILITIES
Deposits:
In domestic offices............................. $ 27,020,578
Noninterest-bearing............................. 11,271,304
Interest-bearing................................ 15,749,274
In foreign offices, Edge and Agreement 17,197,743
subsidiaries, and IBFs.........................
Noninterest-bearing............................. 103,007
Interest-bearing................................ 17,094,736
Federal funds purchased and Securities sold
under agreements to repurchase.................. 1,761,170
Demand notes issued to the U.S.Treasury.......... 125,423
Trading liabilities.............................. 1,625,632
Other borrowed money:
With remaining maturity of one year or less..... 1,903,700
With remaining maturity of more than one year 0
through three years............................
With remaining maturity of more than three years 31,639
Bank's liability on acceptances executed and
outstanding..................................... 900,390
Subordinated notes and debentures................ 1,308,000
Other liabilities................................ 2,708,852
Total liabilities................................ 54,583,127
EQUITY CAPITAL
Common stock..................................... 1,135,284
Surplus.......................................... 764,443
Undivided profits and capital reserves........... 3,542,168
Net unrealized holding gains (losses) on
available-for-sale securities................... 82,367
Cumulative foreign currency translation
adjustments..................................... (29,725)
Total equity capital............................. 5,494,537
Total liabilities and equity capital............. $60,077,664
</TABLE>
I, Thomas J. Mastro, 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.
Thomas J. Mastro
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. Reyni
Gerald L. Hassell > Directors
Alan R. Griffith
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 4,378 64,450
<SECURITIES> 0 0
<RECEIVABLES> 25 2,153
<ALLOWANCES> 0 220
<INVENTORY> 43 946
<CURRENT-ASSETS> 4,819 69,689
<PP&E> 3,084 62,621
<DEPRECIATION> 70 3,476
<TOTAL-ASSETS> 8,074 139,419
<CURRENT-LIABILITIES> 1,022 21,509
<BONDS> 0 142,300
0 0
18 18
<COMMON> 11 12
<OTHER-SE> 6,469 (24,736)
<TOTAL-LIABILITY-AND-EQUITY> 8,074 139,419
<SALES> 26 5,326
<TOTAL-REVENUES> 26 5,326
<CGS> 54 4,562
<TOTAL-COSTS> 54 4,562
<OTHER-EXPENSES> 2,739 38,446
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 12 15,217
<INCOME-PRETAX> (2,612) (48,121)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,612) (48,121)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,612) (48,121)
<EPS-PRIMARY> (0.80) (8.43)
<EPS-DILUTED> (0.80) (8.43)
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
Covad Communications Group, Inc.
Offer for all Outstanding
12 1/2% Senior Notes due 2009
in Exchange for
12 1/2% Senior Notes due 2009
Pursuant to the Prospectus, dated _____ __, 1999.
- -----------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON _____ __,
1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- -----------------------------------------------------------------------------
The Bank of New York
<TABLE>
<S> <C> <C>
By Registered or Certified Facsimile Transmission By Hand/Overnight Delivery:
Mail: Number:
(For Eligible Institutions Only) The Bank of New York
The Bank of New York Attn.: Theresa Gass 101 Barclay Street
101 Barclay Street, Floor 7E Reorganization Section Corporate Trust Services
New York, New York 10286 (212) 815-6339 Window
Attn.: Theresa Gass Ground Level
Reorganization Section Confirm by Telephone: New York, New York 10286
(212) 815-5942 Attn.: Theresa Gass
For Information Call: Reorganization Section
(212) 815-5942
</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 _____ __, 1999 (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 of up to 12 1/2%
Senior Notes due 2009 (the "New Notes") of the Company for a like principal
amount of the issued and outstanding 12 1/2% Senior Notes due 2009 (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
Tendering" 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 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 there after 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 of Old Notes should be listed on a separate signed schedule affixed
hereto.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES 1 2 3
- ------------------------------------------------------------------------------------------------------------------------------------
Name(s) and Address(es) of Registered Holder(s) Certificate Aggregate Principal Amount
(Please fill in, if blank) Number(s) Principal Amount Tendered*
of Old Note(s)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total
- -----------------------------------------------------------------------------------------------------------------------------------
* 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 of $1,000 and any integral multiple thereof. See Instruction 1.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] 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 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 and
-4-
<PAGE>
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
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.
-6-
<PAGE>
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 of Old Notes to be tendered in the box above entitled "Description of Old
Notes--Principal Amount 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.
-7-
<PAGE>
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 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.
-8-
<PAGE>
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 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.
-9-
<PAGE>
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.
-10-
<PAGE>
<TABLE>
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4) (See Instructions 3 and 4)
To be completed ONLY if certificates for Old Notes not To be completed ONLY if certificates for Old Notes not
exchanged and/or New Notes are to be issued in the name exchanged and/or New Notes are to be issued in the name of
of and sent to someone other than the person or persons and sent to someone other than the person or persons whose
whose signature(s) appear(s) on this Letter of signature(s) appear(s) on this Letter of Transmittal below.
Transmittal above, or if Old Notes delivered by
book-entry transfer which are not accepted for exchange Mail: New Notes and/or Old Notes to:
are to be returned by credit to an account maintained at
DTC other than the account indicated below. Name(s)
----------------------------------------------------------
Issue: New Notes and/or Old Notes to: (Please Type or Print)
---------------------------------------------------------
Name(s) (Please Type or Print)
----------------------------------------------------
(Please Type or Print) Address
-------------------------------------------------------
------------------------------------------------------
- -----------------------------------------------------------
(Please Type or Print) (Zip Code)
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)
- -------------------------------------------------------------- -------------------------------------------------
</TABLE>
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.
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
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)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
SUBSTITUTE FORM W-9
=========================================================================================================================
<S> <C>
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 Part 1-Please provide your TIN (either your social security TIN
Form W-9 number or employer identification number) in the box to the
right and certify by signing and dating below.
Department of the Treasury
Internal Revenue Service Part 2-Awaiting TIN [ ]
SIGN THIS FORM and THE CERTIFICATION OF
Payor's Request for AWAITING TAXPAYER IDENTIFICATION NUMBER BELOW.
Taxpayer
Identification Number (TIN) Part 3-Exempt [ ]
and Certification 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____________________________
=========================================================================================================================
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE
BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
<TABLE>
<S> <C>
==============================================================================================================================
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____________________________
==============================================================================================================================
</TABLE>
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.
-12-
<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.
-13-
<PAGE>
EXHIBIT 99.2
COVAD COMMUNICATIONS GROUP, INC.
NOTICE OF GUARANTEED DELIVERY
This form or one substantially equivalent hereto must be used to accept the
offer for all outstanding 12 1/2% Senior Notes due 2009 (the "Old Notes") of
Covad Communications Group, Inc. (the "Company") in exchange for the Company's
12 1/2% Senior Notes due 2009 made pursuant to the prospectus, dated _____ __,
1999 (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:
(For Eligible Institutions Only) The Bank of New York
The Bank of New York Attn.: Theresa Gass 101 Barclay Street
101 Barclay Street, Floor 7E Reorganization Section Corporate Trust Services
New York, New York 10286 (212) 815-6339 Window
Attn.: Theresa Gass Ground Level
Reorganization Section Confirm by Telephone: New York, New York 10286
(212) 815-5942 Attn.: Theresa Gass
For Information Call: Reorganization Section
(212) 815-5942
</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
of Old Notes set forth below, pursuant to the guaranteed delivery procedures
described in "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus.
<TABLE>
<S> <C>
Principal Amount 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
Represented by Old Notes Certificate(s):
$
----------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
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 of $1,000 and any integral
multiple thereof.
-2-
<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):
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
-3-
<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 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.
-4-
<PAGE>
EXHIBIT 99.3
[FORM OF EXCHANGE AGENT AGREEMENT]
As of ______, 1999
The Bank of New York
Corporate Trust Trustee Administration
101 Barclay Street, 21st Floor
New York, New York 10286
Ladies and Gentlemen:
Covad Communication Group, Inc. (the "Company") proposes to make an offer
(the "Exchange Offer") to exchange its 12 1/2% Senior Notes due 2009
(the "Old Securities") for its 12 1/2% Senior Notes due 2009 (the "New
Securities"). The terms and conditions of the Exchange Offer as currently
contemplated are set forth in a prospectus, dated _____ __, 1999 (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 _____ __, 1999. 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 occur rence 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;
-2-
<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 of New Securities for each $1,000
principal amount 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
-3-
<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 first-class certified mail.
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
-4-
<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 of Old
Securities tendered and the aggregate principal amount 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.
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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.
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 and so long as you have not
determined, in your reasonable judgment, that a conflict of interest exists
between you and the Company.
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.
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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.
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
2330 Central Expressway
Santa Clara, California 95050
Facsimile: (408) 844-7500
Attention: Chief Financial Officer
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If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile: (212) 815-5915
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 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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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
