SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): March 20, 2000
COVAD COMMUNICATIONS GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 000-25271 77-0461529
(State or Other (Commission File (I.R.S. Employer
Jurisdiction Number) Identification No.)
of Incorporation)
2330 Central Expressway, Santa Clara, California 95050
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 844-7500
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On March 20, 2000, Covad Communications Group, Inc. ("Covad")
completed the acquisition of Laser Link.Net, Inc. ("Laser Link") pursuant
to the terms of the previously reported Agreement and Plan of Merger,
dated as of March 8, 2000 (the "Merger Agreement"), among Covad, a
Delaware Corporation, Lightsaber Acquisition Co., a Delaware corporation
and a direct, wholly owned subsidiary of Covad and Laser Link, a
Pennsylvania corporation. The outstanding Laser Link shares and stock options
were converted into 6.45 million shares of Covad common stock and stock options
(after giving effect to the three for two split of Covad common stock in April
2000). In addition, Covad assumed all of Laser Link's outstanding debt. The
amount of consideration was determined through arm's length negotiations. A
current report on Form 8-K (the "Form 8-K") was filed June 20, 2000 reporting
such event. This current report on Form 8-K/A contains unaudited pro forma
condensed combined consolidated financial information for Covad omitted
from the Form 8-K in accordance with the rules and regulations of the
Securities and Exchange Commission.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Financial Statements
None
(b) Pro Forma Financial Information
Covad Communications Group, Inc. Unaudited Pro Forma Condensed
Combined Consolidated Financial Information
(c) Exhibits:
None
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 9, 2000
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ Dhruv Khanna
---------------------------
Name: Dhruv Khanna
Title: Executive Vice President,
General Counsel
and Secretary
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COVAD COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The Covad Communications Group, Inc. Unaudited Pro Forma Condensed
Combined Consolidated Financial Statements give effect to the combination of
Covad Communications Group, Inc. and Laser Link.Net, Inc. through the issuance
of Covad common shares and stock options for the outstanding Laser Link common
shares and stock options. The combination with Laser Link was completed on
March 20, 2000.
The Unaudited Pro Forma Condensed Combined Consolidated Statements of
Operations for the year ended December 31, 1999 and for the three months ended
March 31,2000 reflect the combination as if it had taken place on January 1,
1999 and January 1, 2000, respectively. The Unaudited Pro Forma Condensed
Combined Consolidated Statements of Operations combine Covad's historical
results of operations for the year ended December 31, 1999 and the three months
ended March 31, 2000 with Laser Link's historical results of operations for the
year ended December 31, 1999 and the period from January 1, 2000 to March 20,
2000 (the closing date of the transaction), respectively. Since Covad's
historical balance sheet as of March 31, 2000 includes the financial position
of Laser Link, a pro forma balance sheet as of that date is not presented.
The Covad Communications Group, Inc. Unaudited Pro Forma Condensed
Combined Consolidated Financial Statements reflect the combination using the
purchase method of accounting and have been prepared on the basis of
assumptions described in the notes thereto, including assumptions relating to
the allocation of the total purchase cost to the assets and liabilities of
Laser Link based upon estimates of their fair value.
The Covad Communications Group, Inc. Unaudited Pro Forma Condensed
Combined Consolidated Financial Statements are not necessarily indicative of
what the actual operating results or financial position would have been had
the combination actually taken place on January 1, 1999 and January 1, 2000,
respectively, and do not purport to indicate Covad's future results of
operations.
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in 000's, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------
Pro Forma
Business Pro Forma For the
Combination Year Ended
Covad Laser Link Combined Adjustments December 31, 1999
----- ---------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 66,488 $ 6,044 $ 72,532 $ -- $ 72,532
Operating expenses:
Network and product costs . . . . . . . . . 55,347 5,451 60,798 2,605 63,403
Sales, marketing, general and
administrative . . . . . . . . . . . . . . 140,372 2,855 143,227 -- 143,227
Amortization of deferred compensation . . . 4,768 -- 4,768 -- 4,768
Depreciation and amortization . . . . . . . 37,602 1,313 38,915 77,114 116,029
--------- -------- --------- -------- -----------
Total operating expenses . . . . . . . . . 238,089 9,619 247,708 79,719 327,427
--------- -------- --------- -------- -----------
Loss from operations . . . . . . . . . . . . (171,601) (3,575) (175,176) (79,719) (254,895)
Interest income (expense):
Interest income . . . . . . . . . . . . . 20,676 14 20,690 -- 20,690
Interest expense . . . . . . . . . . . . . (44,472) (181) (44,653) -- (44,653)
--------- -------- --------- -------- -----------
Net interest income (expense) . . . . . . (23,796) (167) (23,963) -- (23,963)
--------- -------- --------- -------- -----------
Net loss . . . . . . . . . . . . . . . . . . (195,397) (3,742) (199,139) (79,719) (278,858)
Preferred dividends . . . . . . . . . . . . . (1,146) (490) (1,636) -- (1,636)
--------- -------- --------- -------- -----------
Net loss attributable to common
stockholders . . . . . . . . . . . . . . . . $(196,543) $ (4,232) $(200,775) $(79,719) $(280,494)
========= ======== ========= ======== ===========
Basic and diluted net loss per share. . . . . $ (1.83) $ (0.16) $ (2.49)
========= ======== ===========
Weighted average shares outstanding used in
computing basic and diluted net loss
per share . . . . . . . . . . . . . . . . . 107,647,812 26,074,860 112,651,871
=========== ========== ============
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Combined
Consolidated Financial Statements.
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<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS--(Continued)
(Amounts in 000's, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months ended March 31, 2000
---------------------------------
Pro Forma Pro Forma for
Business the Three
Laser Link Combination Months Ended
Covad (1/1/00-3/20/00) Combined Adjustments March 31, 2000
----- ---------------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . $ 41,807 $5,440 $ 47,247 $ -- $ 47,247
Operating expenses:
Network and product costs . . . . . . . . . . . . 31,349 2,823 34,172 651 34,823
Sales, marketing, general and administrative . . . 85,445 2,745 88,190 -- 88,190
Write-off of in-process technology 3,726 -- 3,726 (3,726) --
Amortization of deferred compensation . . . . . . 1,186 -- 1,186 -- 1,186
Depreciation and amortization . . . . . . . . . . 20,782 353 21,135 15,929 37,064
-------- ------ -------- ------- --------
Total operating expenses . . . . . . . . . . . . 142,488 5,921 148,409 12,854 161,263
-------- ------ -------- ------- --------
Loss from operations . . . . . . . . . . . . . . . (100,681) (481) (101,162) (12,854) (114,016)
Interest income (expense):
Interest income . . . . . . . . . . . . . . . . . 13,828 -- 13,828 -- 13,828
Interest expense . . . . . . . . . . . . . . . . (21,371) (137) (21,508) -- (21,508)
-------- ------ ------- ------- --------
Net interest income (expense) . . . . . . . . . . (7,543) (137) (7,680) -- (7,680)
-------- ------ ------- ------- --------
Other income . . . . . . . . . . . . . . . . . . . 999 -- 999 -- 999
Net loss . . . . . . . . . . . . . . . . . . . . . $ (107,225) $ (618) $(107,843) $(12,854) $(120,697)
========== ====== ========= ======= =========
Basic and diluted net loss per share . . . . . . . $ (0.73) $ (.79)
Weighted average shares outstanding used in ========= =========
computing basic and diluted net loss
per share. . . . . . . . . . . . . . . . . . . . . 146,967,581 151,971,640
=========== ===========
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Combined
Consolidated Financial Statements.
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<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRO FORMA PRESENTATION
On March 20, 2000, Covad Communications Group, Inc. completed its
combination with Laser Link.Net, Inc. by issuing approximately 5.0 million
common shares for all of the outstanding Laser Link common shares. The Covad
Common shares were valued for accounting purposes using the average market
price of $61.53 per share which is based on the average closing price for a
range of seven trading days around the announcement date (March 9, 2000) of the
transaction. The Covad Communications Group, Inc. Unaudited Pro Forma
Condensed Combined Consolidated Statements of Operations for the three months
ended March 31, 2000 and for the year ended December 31, 1999, reflect the
issuance of these shares as if the transaction had closed on January 1, 2000
and January 1, 1999, respectively. In addition, the outstanding Laser Link
stock options were converted into approximately 1.4 million options to purchase
Covad common shares at a fair value of $58.61 per share. The value of the
options, as well as direct transaction expenses have been included as a part of
the total purchase cost.
The Covad Communications Group, Inc. Unaudited Pro Forma Condensed
Combined Consolidated Financial Statements have been prepared on the basis of
assumptions relating to the allocation of the total purchase cost to the assets
and liabilities of Laser Link based upon estimates of their fair value.
Following is a table of the total purchase cost and annual amortization of the
intangible assets acquired (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total purchase cost:
Value of common shares issued . . . . . . . . . . . . . . . . $307,869
Assumption of laser Link.Net Inc. options . . . . . . . . . . 84,100
--------
391,969
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . 15,485
--------
Total purchase costs . . . . . . . . . . . . . . . . . . . . . $407,454
========
Life Annual
(yrs) Amortization
Purchase price allocation: ----- ------------
Tangible net assets acquired . . . . . . . . . . . . . . . . $ 5,132
Intangible assets acquired:
Developed and core technology . . . . . . . . . . . . . . . 13,023 5 $ 2,605
Customer base . . . . . . . . . . . . . . . . . . . . . . . 28,552 5 5,710
Acquired workforce . . . . . . . . . . . . . . . . . . . . . 1,141 5 228
In-process research and development . . . . . . . . . . . . 3,726
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . 355,880 5 71,176
-------- -------
Total purchase price allocation . . . . . . . . . . . . . . . . $407,454 $79,719
-------- -------
</TABLE>
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<PAGE>
Tangible net assets of Laser Link principally include cash and cash
equivalents, short-term investments, accounts receivable and fixed assets.
Liabilities assumed principally include a line of credit, accounts payable,
accrued compensation and other accrued expenses.
The customer base was valued using an Income Approach which projects the
associated revenue, expenses and cash flows attributable to the customer base
over its estimated life (five years). These cash flows are discounted to their
present value using a rate of return (20%) that reflects an appropriate level
of risk. The value attributed to the customer base is being amortized on a
straight line basis over its estimated useful life of five years.
The value of the assembled workforce was derived by estimating the costs
to replace the existing employees, including recruiting, hiring and training
costs for each category of employee. The value of the assembled workforce is
being amortized on a straight line basis over its estimated useful life of
five years.
A portion of the purchase price has been allocated to developed and core
technology and in-process research and development (IPRD). Developed and core
technology and IPRD were identified and valued through extensive interviews,
analysis of data provided by Laser Link concerning developmental
products, their stage of development, the time and resources needed to
complete them, if applicable, their expected income generating ability,
target markets and associated risks. The relief from royalty method, which
assumes that the value of an asset equals the amount a third party would pay to
use the asset and capitalize on the related benefits of the assets, was the
primary technique utilized in valuing the developed and core technology and
IPRD.
Where developmental projects had reached technological feasibility, they
were classified as developed and core technology and the value assigned to
developed technology was capitalized. The developed and core technology is
being amortized on the straight-line basis over its estimated useful life of
five years. Where the developmental projects had not reached technological
feasibility and had no future alternative uses, they were classified as IPRD.
The value allocated to projects identified as IPRD were charged to expense
during the quarter ended March 31, 2000, the quarter in which the transaction
closed. Such amount has, therefore, been reflected in the Covad's historical
financial statements for the quarter ended March 31, 2000 but has been excluded
from the Unaudited Pro Forma Condensed Combined Consolidated Statements of
Operations since such amount is non-recurring in nature.
The nature of the efforts required to develop the purchased IPRD into
commercially viable products principally relate to the completion of all
planning, designing, prototyping, verification and testing activities that
are necessary to establish that the products can be produced to meet their
design specifications, including functions, features and technical
performance requirements.
In valuing the IPRD, Covad considered among other factors, the
importance of each project to the overall development plan, the projected
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<PAGE>
incremental cash flows from the projects when completed and any associated
risks. The projected incremental cash flows were discounted back to their
present value using a discount rate of 30%. This discount rate was
determined after consideration of Covad's weighted average cost of capital
and the weighted average return on assets. Associated risks include the
inherent difficulties and uncertainties in completing each project and
thereby achieving technological feasibility, anticipated levels of market
acceptance and penetration, market growth rates and risks related to the
impact of potential changes in future target markets.
The IPRD relates to internally developed proprietary software used in its
VISP business. This software has been designed with enhancements and upgrades
continually underway. With respect to the acquired in-process technologies,
the calculations of value were adjusted to reflect the value creation efforts
of Laser Link prior to the closing date. The percent complete for the
in-process technology is estimated to be 75%.
Goodwill is determined based on the residual difference between the
amount paid and the values assigned to identified tangible and intangible
assets. Goodwill is being amortized on a straight line basis over its
estimated useful life of five years.
2. PRO FORMA NET LOSS PER SHARE
The Covad Communications Group, Inc. Unaudited Pro Forma Condensed
Combined Consolidated Statements of Operations for the year ended December 31,
1999 and the three months ended March 31, 2000 have been prepared as if the
combination of Covad, and Laser Link had occurred on January 1, 1999 and
January 1, 2000, respectively. The pro forma basic and diluted net loss per
share are based on the weighted average number of Covad common shares
outstanding during each period and the actual number of Covad shares issued to
acquired the outstanding Laser Link common shares. Outstanding stock options
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<PAGE>
for Covad and Laser Link are not included in the computation of pro forma
diluted net loss per share as their effect would be anti dilutive.
3. PRO FORMA ADJUSTMENTS
The Covad Communications Group, Inc. Unaudited Pro Forma Condensed
Combined Consolidated Financial Statements give effect to the allocation of the
total purchase cost to the assets and liabilities of Laser Link based on their
relative fair values and to the amortization over the respective useful lives
of amounts allocated to intangible assets.
Intercompany transactions between Covad Communications Group, Inc. and
Laser Link.Net, Inc. were insignificant.
No pro forma adjustments were required to conform the accounting
principles used by Laser Link to the accounting principles used by Covad.
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