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As filed with the Securities and Exchange Commission on June 28, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-8/S-3
REGISTRATION STATEMENT
Under
The Securities Act Of 1933
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COVAD COMMUNICATIONS GROUP, INC.
(Exact name of issuer as specified in its charter)
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DELAWARE 77-0461529
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(State of Incorporation) (I.R.S. Employer Identification Number)
2330 Central Expressway
Santa Clara, CA 95050
(Address of principal executive offices)
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1997 STOCK PLAN
1998 EMPLOYEE STOCK PURCHASE PLAN
(Full title of the plan)
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Robert E. Knowling, Jr.
President and Chief Executive Officer
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, CA 95050
(408) 844-7500
(Name, address, including zip code and telephone number, including area code, of
agent for service)
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Copy to:
Barry E. Taylor, Esq.
Robert G. O'Connor, Esq.
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94306
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CALCULATION OF REGISTRATION FEE
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Title of
Securities Proposed Maximum Proposed Maximum
to be Amount to be Offering Price Aggregate Offering Amount of
Registered Registered Per Share Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par value
Issued under the 1997 Stock Plan(1).......................... 72,570 Shares $42.13(2) $ 3,057,374(2) $ 850
To be issued under the 1997 Stock Plan(1).................... 20,404,564 Shares $10.45(3) $213,212,243(3) $59,274
To be issued under the 1998 Employee Stock Purchase Plan(1).. 1,500,000 Shares $10.20(4) $ 15,300,000(4) $ 4,253
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Total...................................................... $231,569,617 $64,377
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(1) Pursuant to Rule 416, this Registration Statement shall also cover any
additional shares of the Registrant's Common Stock that become issuable by
reason of any stock dividend, stock split, recapitalization or other
similar transaction effected without the receipt of consideration that
increases the number of the Registrant's outstanding shares of Common
Stock.
(2) Estimated pursuant to Rule 457(h) solely for purposes of calculating the
registration fee on the basis of the average of the high and low price of
the Registrant's Common Stock as reported on the Nasdaq National Market on
June 23, 1999.
(3) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee. The price of $10.45 per share represents the weighted
average exercise price based on (a) the weighted average exercise price of
the 17,801,761 shares subject to options currently outstanding under the
1997 Stock Plan of $5.82 per share, and (b) as to the 2,602,803 shares
subject to future issuance under the 1997 Stock Plan, the average of the
high and low prices of the Registrant's Common Stock as reported on the
Nasdaq National Market on June 23, 1999.
(4) Estimated pursuant to rule 457 solely for purposes of calculating the
registration fee on the basis of 85% of the split-adjusted public offering
price of $12.00 per share for the Registrant's Common Stock in its initial
public offering on January 22, 1999, in accordance with the provisions of
the 1998 Employee Stock Purchase Plan.
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PROSPECTUS
COVAD COMMUNICATIONS GROUP, INC.
72,570 Shares
Common Stock
______________________________________
This prospectus relates to 72,570 shares of the common stock of Covad
Communications Group, Inc., which may be offered from time to time by selling
stockholders identified on page 21 of this prospectus for their own accounts. It
is anticipated that the selling stockholders will offer shares for sale at
prevailing prices in the Nasdaq National Market on the date of sale. We will
receive no part of the proceeds from sales made under this prospectus. The
selling stockholders will bear all sales commissions and similar expenses. Any
other expenses incurred by us in connection with the registration and offering
and not borne by the selling stockholders will be borne by us.
______________________________________
Each selling stockholder and any broker executing selling orders on behalf
of them may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, in which event commissions received by such broker may
be deemed to be underwriting commissions under the Securities Act.
Our common stock is traded on the Nasdaq National Market under the symbol
"COVD." On June 25, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $41.75 per share.
______________________________________
See "Risk Factors" beginning on page 3 to read about certain risks that you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved these securities or passed upon the adequacy or accuracy
of this prospectus. Any representation to the contrary is a criminal offense.
______________________________________
The date of this Prospectus is June 28, 1999
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy shares of our common stock in any jurisdiction where the offer or sale is
not permitted. The information contained in this prospectus is correct only as
of the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of our common stock.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-8/ S-3, of which this prospectus is a part, under the
Securities Act with respect to the shares of common stock offered hereby. The
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 copies of
these documents filed as exhibits 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
SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661
and Seven World Trade Center, 13th Floor, New York, NY 10048. 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 following documents and information previously filed with the
Securities and Exchange Commission by us are hereby incorporated by reference in
this registration statement:
(1) Our Annual Report on Form 10-K for the year ended December 31,
1998, filed pursuant to Section 13 of the Exchange Act.
(2) Our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1999, filed pursuant to Section 13 of the Exchange Act.
(3) The description of our common stock contained in our Registration
Statement on Form 8-A, dated January 19, 1999, filed pursuant to Section
12(g) of the Exchange Act, including any amendment or report filed for the
purpose of updating such description.
All documents subsequently filed by us pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-
effective amendment which indicates that all securities registered have
been sold or which deregisters all securities then remaining unsold, shall
be deemed to be incorporated by reference in this registration statement
and to be part hereof from the date of filing of such documents.
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OUR COMPANY
We are a leading high-speed Internet and network access provider offering
DSL services which are sold to small- and medium-sized businesses and consumers
through Internet service providers and to large enterprise customers directly.
As of the date of this prospectus, our services have been introduced in 14
regions encompassing 36 metropolitan statistical areas. Our services are
available in the San Francisco Bay Area and the Los Angeles, Seattle,
Sacramento, New York, Boston, Washington, D.C., Baltimore, Chicago,
Philadelphia, San Diego, Atlanta, Detroit and Denver metropolitan areas. We have
announced plans to deploy our networks in a total of 22 regions, encompassing 51
metropolitan statistical areas nationwide. Our corporate headquarters are
located at 2330 Central Expressway, Santa Clara, CA, 95050, telephone: 408-844-
7500. Our website is located at www.covad.com.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following factors before deciding to purchase
shares of our common stock. The risks described below are not the only ones that
we face. Additional risks that generally apply to publicly traded companies,
that are not yet identified or that we currently think are immaterial, may also
adversely affect our company.
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify forward-
looking statements. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this prospectus. We
disclaim any obligation to update information contained in any forward-looking
statement.
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 evaluate 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; and
. 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 March 31, 1999, we had an accumulated
deficit of approximately $79.6 million. We intend to
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increase our capital expenditures and operating expenses in order to expand our
business. As a result, we expect to incur substantial additional net losses and
substantial negative cash flow for at least the next several years.
In addition, we expect our net losses to increase in the future due to the
interest and amortization charges related to the 13 1/2% Senior Discount Notes
due 2008 issued in March 1998 and the 12 1/2% Senior Notes due 2009 issued in
February 1999, 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. For example:
. Interest and amortization charges relating to the 1998 notes were
approximately $16.0 million during the year ended December 31, 1998. These
charges 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. This increase is due to the accretion of the
1998 notes to $260 million through March 2003.
. Interest and amortization charges relating to the 1999 notes will be
approximately $24.0 million during the year ending December 31, 1999 and will
increase slightly each year to approximately $28.3 million during the year
ending December 31, 2008.
. 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 approximately $8.4 million in
each of the years in the three year period ending December 31, 2001.
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 traditional telephone companies to provide us
with central office space;
. 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, Qwest and WebMD 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 traditional telephone companies 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 networks;
. the ability to develop and commercialize new services by us or our
competitors;
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. the impact of regulatory developments, including interpretations of the 1996
Telecommunications Act;
. our ability to successfully operate our networks; and
. general economic conditions and economic conditions specific to the
telecommunications industry, which may affect the demand and pricing for our
services.
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 whether we will be successful because our business strategy is
unproven
We believe that we were the first competitive telecommunications company 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
provider 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, which may impair our
ability to achieve profitability or positive cash flow
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 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. Our consumer grade services have lower
prices than our business grade services. As a result, an increase in future
periods in the percentage of our revenues which we derive from our consumer
services would reduce our overall profit margins.
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 exist at attractive prices to
achieve profitability or positive cash flow.
We depend on Internet and on-line 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 will suffer.
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In addition, we entered into commercial agreements with each of AT&T,
NEXTLINK and Qwest and more recently with WebMD. 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. Our
agreement with WebMD provides that we will be WebMD's preferred provider of
broadband connectivity offering physician subscribers web-based multimedia and
communication services designed to enhance their practices. We cannot predict
the number of line orders that AT&T, NEXTLINK, Qwest or WebMD will generate, if
any, or whether line orders will be below our expectations. In addition, these
and future relationships we may establish with other third parties may not
improve our business.
We may be unable to manage our growth effectively
Our strategy is to significantly expand our networks within our existing
regions and to deploy substantially all of our networks in our 22 targeted
metropolitan regions representing 51 metropolitan statistical areas by the end
of 1999. The execution of this strategy involves:
. obtaining the required government authorizations;
. 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 space; and
. entering into and renewing interconnection agreements with the appropriate
traditional telephone companies 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;
. 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
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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.
We depend on traditional telephone companies to provide central office 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 physical space
from traditional telephone companies for our equipment in the traditional
telephone companies' central offices in these regions. We have experienced
initial rejections of our applications to secure this space from:
. Pacific Bell in a significant number of central offices in Pacific Bell's
service areas in California;
. GTE Corporation in certain central offices in the Los Angeles region; and
. Bell Atlantic and other traditional telephone companies in Massachusetts,
Virginia and in other states.
We expect that as we proceed with our deployment, we will face additional
rejections of our applications for central office space in our other target
regions. The rejection of our applications for central office 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 traditional
telephone companies. This could harm our business.
We face other challenges in dealing with the traditional telephone
companies:
. there are limitations on the availability of central office space in high
demand target markets in which other competitive telecommunications companies
are seeking or have obtained central office space to offer services;
. we have experienced delays and expect to continue to experience delays where
traditional telephone companies do not maintain our position in the queue for
central office space; and
. we are engaged in a variety of negotiations, regulatory disputes and legal
actions to resolve situations where traditional telephone companies assert
that certain central offices lack sufficient space for our equipment, and we
may be unable to resolve these matters successfully.
As a result of these challenges, we expect that we will continue to
experience delays in obtaining central office space which would slow down the
deployment of our networks and our ability to increase the number of end-users
for our services.
The Federal Communications Commission (FCC) has been reviewing the policies
and practices of the traditional telephone companies with the goal of
facilitating the efforts of competitive telecommunications companies to obtain
central office space more easily and on more favorable terms. On March 18,1999,
the FCC announced that it was adopting rules to make it easier and less
expensive for competitive telecommunications companies to obtain central office
space and to require traditional telephone companies to make new alternative
arrangements for obtaining central office space. The FCC's new rules may not be
implemented in a timely manner and may not enhance our ability to obtain central
office space.
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We also depend on traditional telephone companies to provide unbundled DSL-
capable lines that connect each end-user to our equipment located 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 state regulatory
commissions. The rate approval processes for DSL-capable lines and other
unbundled network elements typically involve a lengthy review of the rates
proposed by the traditional telephone companies in each state. The ultimate
rates approved typically depend on the traditional telephone company's initial
rate proposals and the policies of the state public utility commission. These
rate approval proceedings are time-consuming and expensive. 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 traditional telephone companies and approved by state regulatory
commissions from time to time, which would harm our operating results.
We depend on traditional telephone companies to provide transmission facilities
and to provision copper lines
We interconnect with and use traditional telephone companies' networks to
service our customers, which presents a number of challenges as we depend on
traditional telephone companies:
. to use their technology and capabilities to meet certain telecommunications
needs of our customers and to maintain our service standards;
. to cooperate with us for the provision and repair of transmission facilities;
and
. to provide the services and network components that we order, for which they
depend significantly on unionized labor. Labor issues have in the past and
may in the future hurt the telephone companies' performance.
Our dependence on the traditional telephone companies has caused and could
continue to cause us to encounter delays in establishing our networks and
providing higher speed DSL services.
We rely on the traditional telephone companies 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 traditional telephone companies. We must also establish
satisfactory billing arrangements with the traditional telephone companies. We
may not be able to do these things in a manner that will allow us to retain and
grow our customer and end-user base.
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 traditional telephone companies
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 traditional telephone companies when they expire. We may not
succeed in extending or renegotiating them 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 traditional telephone
companies under the dispute resolution clauses of our interconnection
agreements. These disputes have delayed our deployment of our networks. They
have also negatively affected our service to our customers and our ability to
enter into additional interconnection agreements with the traditional telephone
companies in other states. In addition, the interconnection agreements are
subject to state commission, FCC
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and judicial oversight. These government authorities may modify the terms of the
interconnection agreements in a way that harms our business.
We depend on the traditional telephone companies for the quality and
availability of the copper lines that we use
We depend significantly on the quality and availability of the traditional
telephone companies' copper lines and the traditional telephone companies'
maintenance of such lines. We may not be able to obtain the copper lines and the
services we require from the traditional telephone companies 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.
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 traditional
telephone companies, cable modem service providers, competitive
telecommunications companies, traditional and new national long distance
carriers, Internet service providers, on-line service providers and wireless and
satellite service providers. Many of these competitors have longer operating
histories, greater name recognition, better strategic relationships and
significantly greater financial, technical or marketing resources than we do. As
a result, these competitors 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;
. form new alliances and rapidly acquire significant market share; and
. be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing high-speed digital services.
The intense competition from our competitors, including the traditional
telephone companies, the cable modem service providers and the competitive
telecommunications companies could harm our business.
The traditional telephone companies represent strong competition in all of
our target service areas. We expect this competition to intensify. For example,
traditional telephone companies 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 traditional telephone companies have
aggressively priced their consumer DSL services as low as $30-$40 per month,
placing pricing pressure on our TeleSurfer services. The traditional telephone
companies can offer service to end-users from certain central offices where we
are unable to secure central office space and offer service. Accordingly, we may
be unable to compete successfully against the traditional telephone companies.
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
TeleSurfer services. 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.
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Many competitive telecommunications companies offer high-speed data
services using a business strategy similar to ours. Some of these competitors
have begun offering DSL-based access services and others are likely to do so in
the future. In addition, some competitive telecommunications companies have
extensive fiber networks in many metropolitan areas primarily providing high-
speed digital and voice circuits to large corporations, and have interconnection
agreements with traditional telephone companies pursuant to which they have
acquired central office space in many of our markets. Further, certain of our
customers have made investments in our competitors. As a result of the above, we
may be unsuccessful in generating a significant number of new customers or
retaining existing customers.
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 fail to obtain
access to important technologies, our business will suffer.
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.
As of April 30, 1999, 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.
Therefore, any continued or ongoing failure of enterprise customers to roll out
our services could have a material adverse effect on our business.
Our strategy depends on growth in demand for DSL-based services
The markets for high-speed 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 will be harmed.
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Our leverage is substantial and will increase, making it more difficult to
respond to changing business conditions
As of March 31, 1999, we had approximately $358.5 million of long-term
obligations (including current portion), which consists primarily of the 1998
notes and the 1999 notes. Because the 1998 notes accrete to $260 million through
March 2003, we will become increasingly leveraged until then, whether or not we
incur new indebtedness in the future. We may also incur additional indebtedness
in the future, subject to certain restrictions contained in the indentures
governing the 1998 notes and the 1999 notes, to finance the continued
development, commercial deployment and expansion of our networks and for funding
operating losses or to take advantage of unanticipated opportunities. 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 notes and the 1999 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 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 notes and
the 1999 notes, and any additional indebtedness we may incur. The 1998 notes
accrete to $260.0 million through March 2003 and we must begin paying cash
interest on those notes in September 2003. In addition, we must begin paying
cash interest on the 1999 notes in August 1999. We have set aside approximately
$74.1 million in government securities in a pledge account to fund the first
three years of interest payments on the 1999 notes.
Our ability to make scheduled payments with respect to indebtedness
(including the 1998 notes and the 1999 notes) will depend upon, among other
things:
. our ability to achieve significant and sustained growth in cash flow;
. the rate and success of the commercial deployment of our networks;
. successful operation of our networks;
. the market acceptance, customer demand, rate of utilization and pricing for
our services;
. our ability to successfully complete development, upgrades and enhancements
of our networks; and
. our ability to complete additional financings, as necessary.
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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, strategies that may not enable us to service and
repay our indebtedness. Any failure to satisfy our obligations with respect to
the 1998 notes or the 1999 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.
The scalability and speed of our networks remain largely unproven
To date, we have deployed our networks in a total of 13 of our 22 targeted
metropolitan regions, representing 33 of 51 metropolitan statistical areas, 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 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. Peak digital data transmission speeds currently
offered across our DSL networks are 1.5 megabits per second downstream. However,
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 traditional telephone companies;
and
. our operational support systems which manage our networks.
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.
Interference in the traditional telephone company'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 a traditional telephone company'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 traditional telephone company's copper plant and
the number and distribution of DSL and other signals in such plant and cannot
now be ascertained. When interference occurs, it is difficult to detect. The
procedures to resolve interference issues between competitive telecommunications
companies and traditional telephone companies are still being developed and may
not be effective. In the past we have agreed to interference resolution
procedures with certain traditional telephone companies. However, we may be
unable to successfully negotiate similar procedures with other traditional
telephone companies in future interconnection agreements or in renewals of
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existing interconnection agreements. In addition, the failure of the traditional
telephone companies to take timely action to resolve interference issues will
harm the provision of our services. If our TeleSpeed and TeleSurfer services
cause widespread network degradation or are perceived to cause that type of
interference, responsive actions by the traditional telephone companies or state
or federal regulators could harm our reputation, brand image, service quality,
and customer satisfaction and retention.
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 a traditional telephone company or
other service provider, such as competitive telecommunications companies, 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 harm our business.
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. This might
result in liability to our customers and also might deter potential customers.
We intend to implement security measures that are standard within the
telecommunications industry and newly developed security measures. We have not
done so yet and may not implement such measures in a timely manner. If and when
implemented, such measures may 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
harm our business.
We depend on a limited number of third parties for equipment supply and
installation
We rely on outside parties to manufacture our network equipment. This
equipment includes:
. 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
install our central office facilities and associated equipment. We have in the
past experienced supply problems with
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certain of our vendors. 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. We have identified alternative
suppliers for technologies that we consider critical. However, 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 harm our
business.
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 of them could negatively affect 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 any of them could disrupt significantly our 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 networks into targeted regions.
Competition for such qualified personnel is intense. This is particularly the
case in software development, network engineering and product management. We
also may be unable to attract, assimilate or retain other highly qualified
technical, sales, marketing and managerial personnel. Our business will be
harmed if we cannot attract the necessary technical, sales, marketing and
managerial personnel.
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 their jurisdictions 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
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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 rules. We have entered into
competitive 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. The FCC
has commenced its review of which unbundled network elements it should require
traditional telephone companies to provide to companies such as ours. In
addition, the FCC's pricing method for unbundled network elements is under
review at the Eighth Circuit. Any unfavorable decisions by the Eighth Circuit,
the FCC or state telecommunications regulatory commissions could harm our
business.
In August 1998, the FCC proposed new rules that would allow traditional
telephone companies to provide their own DSL services free from traditional
telephone company regulation through a separate affiliate. The provision of DSL
services by an affiliate of an traditional telephone company not subject to such
regulation could harm our business.
Changes to current regulations, the adoption of new regulations by the FCC
or state regulatory authorities, court decisions or legislative initiatives,
such as changes to the 1996 Telecommunications Act, could harm our business.
For further details of the government regulation to which we are subject see
"Business--Government Regulation."
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. We 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. We intend to prepare
additional applications and to seek patent protection for our systems and
services. These patents may not be issued to us. If issued, they may not protect
our intellectual property from competition. Competitors could seek to design
around or invalidate these patents.
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. 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 harm our business.
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In addition, we may be sued by others with respect to infringement of their
intellectual property rights. We were recently sued by Bell Atlantic for an
alleged infringement of a patent issued to them in September 1998 entitled
"Variable Rate and Variable Mode Transmission System." As we have only recently
received notice of this claim, we are unable to adequately assess the scope,
including materiality, or merits of the claim. Any such lawsuit, including the
Bell Atlantic suit, could significantly harm our business.
We will need additional funds in the future in order to continue to grow our
business
We believe our current capital resources will be sufficient for our funding
and working capital requirements for the deployment and operation of our
networks at least through the end of 1999. Accordingly, we will be required to
raise additional capital through the issuance of debt or equity financings,
depending on market conditions. The actual amount and timing of our future
capital requirements will depend upon a number of factors, including:
. the number of regions targeted and entered and the timing of entry and
services offered;
. network deployment schedules and associated costs;
. 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 each region we enter;
. the rate at which we invest in engineering and development and intellectual
property with respect to existing and future technology; and
. investment opportunities in complementary businesses or other
opportunities.
We may be unsuccessful in raising sufficient capital at all or on terms
that we consider acceptable. If this happens, our ability to continue to expand
our business or respond to competitive developments would be impaired.
In addition, our indentures contain covenants that restrict our business
activities and our ability to raise additional funds. As a result, we may not be
able to undertake certain activities which management believes are in our best
interest to develop our business. We also may be unable to raise as much
additional funding through the issuance of debt securities as we may need in the
future. This could require us to raise funding through the issuance of equity
securities or amend our indentures, which we may be unable to do on acceptable
terms.
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 improving. The strong economy
has led to increasing capital spending by individuals and 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 could harm our business.
Our principal stockholders and management own a significant percentage of our
capital stock, and will be able to exercise significant influence over our
affairs
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As of the date of this prospectus, our executive officers and directors and
principal stockholders together beneficially own a majority 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. This in turn could have a
negative effect on the market price of our common stock. It could also 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. 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. We 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 traditional
telephone companies that have equipment and software that may not be Year 2000
compliant. Failure of such third-party or traditional telephone company
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. This could harm our business.
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
harm our business.
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.
Our stock price could fluctuate widely in response to various factors, many of
which are beyond our control
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;
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. 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 on-line 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.
Future sales of our common stock may depress our stock price
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. Based upon shares
outstanding as of March 31, 1999, we will have 80,303,489 shares of common stock
outstanding (including common stock to be issued upon conversion of our class B
common stock). Of these shares, the 13,455,000 split-adjusted 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 volume limitations. The 8,625,000
shares of common stock that we sold in our recently completed secondary offering
are freely tradeable subject to the same volume limitations. In addition, the
72,570 shares of common stock covered by this prospectus will be freely
tradeable following the expiration of a 180-day lock-up agreement on July 21,
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. All of such remaining shares are subject to a 180-day lock-up
agreement that was entered into in connection with our initial public offering.
Such shares held by our executive officers and certain of our directors,
stockholders and warrant holders are subject to additional agreements that
extend the lock-up period until September 16, 1999, (90 days after the date of
the prospectus covering our recently completed secondary offering).
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We also have 23,280,513 shares of our common stock reserved for issuance
pursuant to options under our 1997 Stock Plan, of which 17,801,761 shares are
subject to outstanding options and 2,602,803 shares are subject to future
issuance as of the date of this prospectus. We have registered the shares of
common stock subject to outstanding options and reserved for issuance under our
1997 Stock Plan and the 1,500,000 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 475,404 shares underlying outstanding warrants. To
the extent the shares underlying these warrants are issued upon a cash
exercise, these shares will be eligible for resale in the public market upon
expiration of their one-year holding period under Rule 144. However, to the
extent that warrant holders effect a cashless exercise of these warrants, the
underlying shares will be eligible for sale in the public markets beginning on
July 21, 1999, except for the 272,904 shares underlying warrants issued in
connection with the 1998 notes which are subject to an additional 90-day lock-
up agreement extending until September 16, 1999.
Furthermore, certain holders of our common stock have certain registration
rights with respect to their shares. 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.
The managing underwriter for our offerings may, in its sole discretion and
at any time without notice, release all or any portion of the securities subject
to lock-up agreements.
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.
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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 notes
and the 1999 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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SELLING STOCKHOLDERS
None of the selling stockholders are executive officers or directors of
our company, except for Jane Marvin who is our Senior Vice President, Human
Resources. As of the date hereof, no selling stockholder beneficially owns more
than 1% of our outstanding common stock. The following table shows the names of
the selling stockholders and the total number of shares of common stock that
they may sell from time to time under this prospectus:
Name No. of Shares
----------------------------------------------------------
Hamid Alipour........................... 3,000
Steve Atanasoff......................... 1,093
Steven W. Beckett....................... 750
Kenneth W. Blackwell.................... 563
William L. Bramble...................... 1,500
Susan M. Butcher........................ 563
Alexander Byrnes........................ 999
Aadil Chaudhri.......................... 281
Sandra Cheung........................... 950
Howard Dreyfus.......................... 938
Bryan Eichenwald........................ 1,500
Rory Fox................................ 1,093
Rita L. Gomez........................... 281
William G. Goodwin...................... 1,875
Jessica Harris.......................... 563
Tamara K. Hill.......................... 938
Husn-I Hsu.............................. 1,500
Carl P. Hunt............................ 9,000
Sridhar Juvvadi......................... 2,800
Amanda Kao.............................. 1,500
Nick Kormeluk........................... 7,500
James Kwok.............................. 1,000
Jon H. Lazares.......................... 3,750
Jane Marvin............................. 6,000
Jeff Moreland........................... 563
Lesley Ngai............................. 499
Geralynn Patellaro...................... 500
Shelia C. Peach......................... 1,650
Leonard Phifer.......................... 281
Jeffrey S. Powell....................... 843
William E. Schroer...................... 1,406
Connie Scoggins......................... 281
William Shores.......................... 374
Nooshin Soleimani....................... 7,031
Elizabeth H. Spalding................... 937
Naren Thappeta.......................... 750
Scott A. Ticer.......................... 2,025
Roberto Valentin........................ 280
Lu Wang................................. 1,591
Russell B. Weaver....................... 374
Michael Yawdik.......................... 749
Jake Zoldan............................. 2,499
TOTAL................................... 72,570
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PLAN OF DISTRIBUTION
We have been advised by the selling stockholders that from time to time
they may elect to sell all or a portion of the shares offered under this
prospectus in the Nasdaq National Market or any other over-the-counter market or
stock exchange, if any, in which our shares are traded. Such sales will be made
at prices prevailing in the public market at the times of such sales. The
selling stockholders may also make private sales directly or through a broker or
brokers, who may act as agent or principal. Further, they may choose to dispose
of the shares offered under this prospectus by gift to a third party or as a
donation to a charitable or other non-profit entity. In connection with any
sales, the selling stockholders and any brokers participating in such sales may
be deemed to be underwriters within the meaning of the Securities Act.
Any broker-dealer participating in such transactions as agent may receive
commissions from the selling stockholders (and, if such broker acts as agent for
the purchaser of such shares, from such purchaser). Usual and customary
brokerage fees will be paid by the selling stockholders. Broker-dealers may
agree with them to sell a specified number of shares at a stipulated price per
share, and, to the extent such a broker-dealer is unable to do so acting as
agent for the selling stockholders, to purchase as principal any unsold shares
at the price required to fulfill the broker-dealer commitment to them. Broker-
dealers who acquire shares as principal may thereafter resell such shares from
time to time in transactions (which may involve crosses and block transactions
and which may involve sales to and through other broker-dealers, including
transactions of the nature described above) in the Nasdaq National Market or any
other over-the-counter market or stock exchange, if any, in which our shares are
traded, in negotiated transactions or otherwise at market prices prevailing at
the time of sale or at negotiated prices, and in connection with such resales
may pay to or receive from the purchasers of such shares commissions computed as
described above.
We have advised the selling stockholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling shareholders and their affiliates.
In addition, we will make copies of this prospectus available to the selling
stockholders and have informed them of the possible need for delivery of copies
of this prospectus to purchasers on or prior to sales of the shares offered
under this prospectus. The selling stockholders may indemnify any broker-dealer
that participates in transactions involving the sale of the shares against
certain liabilities, including liabilities arising under the Securities Act. Any
commissions paid or any discounts or concessions allowed to any such broker, and
any profits received on the resale of such shares, may be deemed to be
underwriting discounts and commissions under the Securities Act if any such
broker-dealers purchase shares as principal.
In order to comply with the securities laws of certain states, if
applicable, the common stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states, the
common stock may not be sold unless such shares have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Any securities covered by this prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act may be sold under that rule rather than
pursuant to this prospectus.
There can be no assurance that the selling stockholders will sell any or
all of the shares of common stock offered under this prospectus.
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SECURITIES TO BE OFFERED
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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
Article X of our Certificate of Incorporation eliminates the liability of our
directors to us or our stockholders, except for liabilities related to breach
of duty of loyalty, actions not in good faith and certain other liabilities.
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.
-23-
<PAGE>
PART II
INFORMATION REQUIRED IN REGISTRATION STATEMENT
Item 3. Incorporation of Documents By Reference.
The following documents and information previously filed with the
Securities and Exchange Commission by us are hereby incorporated by reference in
this Registration Statement:
(1) Our Annual Report on Form 10-K for the year ended December 31,
1998, filed pursuant to Section 13 of the Exchange Act.
(2) Our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1999, filed pursuant to Section 13 of the Exchange Act.
(3) The description of our common stock contained in our Registration
Statement on Form 8-A, dated January 19, 1999, filed pursuant to
Section 12(g) of the Exchange Act, including any amendment or report
filed for the purpose of updating such description.
All documents subsequently filed by us pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-
effective amendment which indicates that all securities registered have
been sold or which deregisters all securities then remaining unsold,
shall be deemed to be incorporated by reference in this Registration
Statement and to be part hereof from the date of filing of such
documents.
Item 4. Description of Securities.
Not Applicable.
Item 5. Interests of Named Experts and Counsel.
Not Applicable.
Item 6. 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.
II-1
<PAGE>
Item 7. Exemption From Registration Claimed.
Not Applicable.
Item 8. Exhibits.
Exhibit
Number Description
- ------------ -----------------------------------------------------------------
5.1 Opinion of counsel as to legality of securities being registered.
10.8* 1998 Employee Stock Purchase Plan and related agreements.
10.12* 1997 Stock Plan and related option agreements.
23.1 Consent of Independent Accountants.
23.2 Consent of Counsel (contained in Exhibit 5.1).
24.1 Power of Attorney (contained on page II-4).
____________________
* Incorporated by reference to the exhibit of corresponding number filed with
our registration statement on Form S-1 (No. 333-63899) as filed on September
21, 1998 and as subsequently amended.
Item 9. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed in
this Registration Statement or any material change to such information in this
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) 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.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Exchange Act that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
(c) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Clara, State of California, on this 28th day of
June, 1999.
COVAD COMMUNICATIONS GROUP, INC.
/S/ ROBERT E. KNOWLING, JR.
--------------------------------------
Robert E. Knowling, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Robert Knowling, Jr., Timothy
Laehy and Dhruv Khanna, and each of them acting individually, as his attorney-
in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement on
Form S-8, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or his substitutes, may
do or cause to be done by virtue hereof.
II-4
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant in the capacities indicated below on this 28th day of June,
1999.
Signature Title
- ------------------------------ ----------------------------------------------
/S/ ROBERT E. KNOWLING, JR. President, Chief Executive Officer and Director
- ------------------------------ (Principal Executive officer)
Robert E. Knowling, Jr.
/S/ TIMOTHY LAEHY Chief Financial Officer and Vice President,
- ------------------------------ Finance (Principal Financial and Accounting
Timothy Laehy Officer)
/S/ CHARLES McMINN Chairman of the Board
- ------------------------------
Charles McMinn
/S/ ROBERT HAWK Director
- ------------------------------
Robert Hawk
/S/ HENRY KRESSEL Director
- ------------------------------
Henry Kressel
/S/ JOSEPH LANDY Director
- ------------------------------
Joseph Landy
/S/ DANIEL LYNCH Director
- ------------------------------
Daniel Lynch
/S/ FRANK MARSHALL Director
- ------------------------------
Frank Marshall
/S/ RICH SHAPERO Director
- ------------------------------
Rich Shapero
II-5
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
REGISTRATION STATEMENT ON FORM S-8/S-3
INDEX TO EXHIBITS
Exhibit
Number Description
- ----------- -------------------------------------------------------------------
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.8* 1998 Employee Stock Purchase Plan and related agreements.
10.12* 1997 Stock Plan and related option agreement.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (contained in Exhibit 5.1).
24.1 Power of Attorney (contained on page II-4).
____________________
* Incorporated by reference to the exhibit of corresponding number filed with
our registration statement on Form S-1 (No. 333-63899) as filed on September
21, 1998 and as subsequently amended.
<PAGE>
Exhibit 5.1
June 28, 1999
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, CA 95050
RE: REGISTRATION STATEMENT ON FORM S-8/S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-8/S-3 to be filed by
you with the Securities and Exchange Commission on or about June 28, 1999 (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 21,977,134 shares of your Common Stock
(the "Shares"), 72,570 of which have been issued under the 1997 Stock Plan,
20,404,564 of which are to be issued pursuant to the 1997 Stock Plan and
1,500,000 of which are to be issued pursuant to the 1998 Employee Stock Plan
(together, the "Plans"). As your legal counsel, we have examined the
proceedings proposed to be taken in connection with the issuance and sale of the
Shares to be issued under the Plans.
It is our opinion that the Shares that have been issued are, and the Shares
to be issued, when issued and sold in the manner referred to in the Plans and
pursuant to the agreements that accompany the Plans, will be legally and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including any Prospectus constituting a part thereof,
and any amendments thereto.
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, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8/S-3) and related prospectus of Covad Communications Group, Inc. of our
report dated February 15, 1999 with respect to the consolidated financial
statements of Covad Communications Group, Inc. included in its Annual Report
(Form 10-K) for the year ended December 31, 1998 and the related financial
statement schedule filed with the Securities and Exchange Commission.
San Jose, California
June 25, 1999
