==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
Form 8-K
CURRENT REPORT
Pursuant to Section 13 of 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 Acquirer and Laser Link, a Pennsylvania corporation.
The outstanding Laser Link shares were converted into 6.45 million shares
of Covad common stock (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.
The Merger Agreement is incorporated herein by reference from
Covad's Current Report on Form 8-K for an event dated March 8, 2000.
This current report on Form 8-K contains audited financial statements
for Laser Link 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
Laser Link Report on Audits of Financial Statements for
the Years Ended December 31, 1999 and 1998
(b) Pro Forma Financial Information
None
(c) Exhibits
None
<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: June 20, 2000
COVAD COMMUNICATIONS GROUP, INC.
By:/s/ Dhruv Khanna
-----------------------------------
Name: Dhruv Khanna
Title: Executive Vice President,
General Counsel and Secretary
<PAGE>
LASER LINK.NET, INC.
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
for the years ended
December 31, 1999 and 1998
<PAGE>
LASER LINK.NET, INC.
TABLE OF CONTENTS
Pages
Report of Independent Accountants 6
Balance Sheets as of December 31, 1999 and 1998 7
Statements of Operations for the years ended December 31,
1999, 1998 and 1997 9
Statements of Stockholders' Equity and Redeemable Preferred
Stock for the years ended December 31, 1999 and 1998 10
Statements of Cash Flows for the years ended December 31,
1999 and 1998 12
Notes to Financial Statements 13
<PAGE>
Report of Independent Accountants
---------------------------------
The Board of Directors and Stockholders of
Laser Link.Net, Inc.:
In our opinion, the accompanying balance sheets and the related
statements of operations, stockholders' equity and redeemable preferred
stock and of cash flows present fairly, in all material respects, the
financial position of Laser Link.Net, Inc. at December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
January 21, 2000, except for Note 9
as to which the date is March 8, 2000
<PAGE>
LASER LINK.NET, INC.
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
ASSETS 1999 1998
------ --------------------- ---------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,514 $ 4,586
Accounts receivable, net of allowance for doubtful accounts of $339 at
December 31, 1999 2,588 12
Prepaid expenses and other current assets 230 --
-------- --------
Total current assets 6,332 4,598
Property and equipment, at cost 4,516 759
Less accumulated depreciation and amortization (1,470) (157)
-------- --------
Property and equipment, net 3,046 602
-------- --------
Total assets $ 9,378 $ 5,200
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
Current liabilities:
Line of credit $ 3,750 $ --
Accounts payable 3,974 447
Accrued payroll and other expenses 776 65
Deferred revenue 349 --
Loans from officers -- 417
-------- --------
Total liabilities 8,849 929
-------- --------
Commitments and contingent liabilities
Class A Redeemable Preferred Stock, no par value, 20,000 shares authorized,
issued and outstanding at December 31, 1999 and 1998, respectively
Liquidation value: $2,000 at December 31, 1999 and 1998 842 352
Stockholders' (deficit) equity:
Preferred Stock, no par value, 10,000,000 shares authorized, 20,000
issued and outstanding as redeemable preferred stock
Class A Common Stock, no par value, 200,000,000 shares authorized,
7,562,480 and 7,474,860 shares issued and outstanding at
December 31, 1999 and 1998, respectively 4,255 4,253
<PAGE>
Class B Common Stock, no par value, 200,000,000 shares authorized,
18,512,380 and 18,600,000 shares issued and outstanding at
December 31, 1999 and 1998, respectively 348 350
Additional paid-in capital 1,182 1,672
Accumulated deficit (6,098) (2,356)
---------- ---------
Total stockholders' (deficit) equity (313) 3,919
---------- ---------
Total liabilities and stockholders'
(deficit) equity $ 9,378 $ 5,200
========== =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
LASER LINK.NET, INC.
Statements of Operations
(dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues $ 14,288 $ 30 $ 138
Cost of services provided 8,244 -- --
----------- ----------- ------------
Net revenues 6,044 30 138
----------- ----------- ------------
Costs and expenses:
Cost of internet services 5,451 1,109 263
Sales and marketing 807 120 7
General and administrative 2,048 520 74
Depreciation and amortization 1,313 130 26
----------- ----------- ------------
Total costs and expenses 9,619 1,879 370
----------- ----------- ------------
Loss from operations (3,575) (1,849) (232)
Interest income 14 2 --
Interest expense 181 68 14
----------- ----------- ------------
Net loss $ (3,742) $ (1,915) $ (246)
=========== =========== ============
Preferred stock dividends and accretion of preferred stock to
redemption value (490) -- --
Net loss attributable to common shareholders (4,232) (1,915) (246)
Basic and diluted net loss per common share $ (0.16) $ (0.09) $ (0.01)
=========== =========== ============
Basic and diluted weighted average shares outstanding 26,074,860 21,335,443 18,629,918
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
LASER LINK.NET, INC.
Statements of Stockholders' Equity and Redeemable Preferred Stock
(dollars in thousands)
<TABLE>
<CAPTION>
Redeemable Preferred Stock Class A Common Stock Class B Common Stock
----------------------------- ------------------------- ---------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 4,020
Sale of Class A Common
Stock 1,640,000 $ 410
Redemption of Class B
Common Stock (4,020)
Purchase of Class B
Common Stock 18,600,000 $ 350
Net loss for the year
-------- ---------- ------------- --------- ----------- ------
Balance at December 31,
1997 1,640,000 410 18,600,000 350
-------- ---------- ------------- --------- ---------- ------
Sale of Class A Common
Stock 5,834,860 3,843
Non-employee stock option
compensation expense
Warrants issued for Class
B Common Stock
Sale of Class A Preferred
Stock, net of expenses 20,000 352
Net loss for the year
-------- ---------- ------------- --------- ----------- ------
Balance at December 31,
1998 20,000 352 7,474,860 4,253 18,600,000 350
-------- ---------- ------------- --------- ----------- ------
Amortization of discount
on Class A Preferred
Stock 330
Accretion of dividends on
Class A Preferred Stock 160
Exchange of stock 87,620 2 (87,620) (2)
Net loss for the year
-------- ---------- ------------- --------- ----------- ------
Balance at December 31,
1999 20,000 $ 842 7,562,480 $ 4,255 18,512,380 $
348
======== ========== ============= ========= =========== ======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
LASER LINK.NET, INC.
Statements of Stockholders' Equity and Redeemable Preferred Stock
(dollars in thousands)
<TABLE>
<CAPTION>
Total Stockholders'
Additional Paid-in Capital Accumulated Deficit Deficit
-------------------------- ------------------- ------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ (195) $ (195)
Sale of Class A Common Stock 410
Redemption of Class B Common Stock --
Purchase of Class B Common Stock 350
Net loss for the year (246) (246)
------- -------- ------
Balance at December 31, 1997 (441) 319
------- -------- ------
Sale of Class A Common Stock 3,843
Non-employee stock option compensation expense $ 13 13
Warrants issued for Class B Common Stock 59 59
Sale of Class A Preferred Stock, net of expenses 1,600 1,600
Net loss for the year (1,915) (1,915)
------- -------- ------
Balance at December 31, 1998 1,672 (2,356) 3,919
------- -------- ------
Amortization of discount on Class A Preferred
Stock (330) (330)
Accretion of dividends on Class A Preferred
Stock (160) (160)
Exchange of stock --
Net loss for the year (3,742) (3,742)
------- -------- ------
Balance at December 31, 1999 $1,182 $(6,098) $ (313)
======= ======== ======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
LASER LINK.NET, INC.
Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
for the year ended December 31,
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,742) $ (1,915) $ (246)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 1,313 130 26
Amortization of debt discount -- 59 --
Allowance for doubtful accounts 339 -- --
Non-employee stock option compensation expense -- 13 --
Changes in operating assets and liabilities:
Accounts receivable (2,915) 150 (150)
Other assets (230) -- (8)
Accounts payable 3,527 409 24
Accrued payroll and other expenses 711 57 --
Deferred revenues 349 -- --
-------- -------- --------
Net cash used in operating activities (648) (1,097) (354)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (3,757) (475) (275)
-------- -------- --------
Net cash used in investing activities (3,757) (475) (275)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings under line of credit 3,750 -- --
Proceeds from issuance of common stock -- 3,843 760
Proceeds from issuance of preferred stock -- 2,000 --
Stock issuance costs -- (48) --
(Repayments of) proceeds from loans from officers (417) 317 (85)
-------- -------- --------
Net cash provided by financing activities 3,333 6,112 675
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,072) 4,540 46
Cash and cash equivalents, beginning of period 4,586 46 --
-------- -------- --------
Cash and cash equivalents, end of period $ 3,514 $ 4,586 $ 46
======== ======== ========
Supplemental disclosure of cash flow:
Cash paid for interest 181 9 14
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
LASER LINK.NET, INC.
Notes to Financial Statements
1. Organization and Liquidity:
Laser Link.Net, Inc. ("Laser Link" or the "Company") which was
incorporated in Pennsylvania on February 22, 1996 is engaged in the
business of providing a full-service dial-up based Internet access
service to corporations and other organizations. The Company has
incurred losses since its inception as it has devoted substantially
all of its efforts toward building network infrastructure and
internal staffing, developing systems, expanding into new markets,
and raising capital.
The Company has funded its operations since inception through
contributions from shareholders and the sale of common and preferred
stock to investors.
Effective August 13, 1999, the Company changed its name from Laser
Link Communications, Inc. to Laser Link.Net, Inc.
The Company operates in a single segment.
2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and
amortization are provided for using the straight-line method over
the estimated useful lives of the related assets, which is generally
three years for computers, computer related equipment, and purchased
software and five years for furniture and other equipment.
Leasehold improvements are amortized over the life of the lease.
<PAGE>
Notes to Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
Long-Lived Assets:
In accordance with Statement of Financial Accounting Standard No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", the Company
reviews assets for impairment whenever events or changes in
circumstances indicate the carrying value of the asset may not be
recoverable. A determination of impairment (if any) is made based
on estimates of undiscounted future cash flows. The Company
believes that no such impairment existed at December 31, 1999.
Revenue Recognition:
The Company recognizes revenue when services are provided. Certain
services are generally billed one month in advance while others are
billed one month in arrears. Advance billings including prepaid
services and collections relating to future access services are
recorded as deferred revenue and recognized as revenue when earned.
Costs of Services Provided:
Costs of revenues include costs related to the production of
software as well as costs incurred for Internet services provided to
the Company.
Research and Development Costs:
Research and development costs incurred to develop software products
are charged to operations as incurred.
Advertising Costs:
Advertising costs, included in sales and marketing expenses, are
expensed as incurred. Advertising expenses were $10,000 and $51,000
for the years ended December 31, 1999 and 1998, respectively.
Income Taxes:
From inception through December 28, 1998, the Company, with consent
of its stockholders, elected to have its income taxed under the S
Corporation provisions of the Internal Revenue Code (the "Code"),
which provide that, in lieu of corporate income taxes, the stockholder
<PAGE>
Notes to Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
is taxed on the Company's taxable income. Accordingly, there was no
provision for federal or state income taxes in the Company's
statement of operations. Effective December 29, 1998, the Company
terminated its S Corporation status and began operation as a C
Corporation. The Company has incurred losses from operations in the
period from December 29, 1998 through December 31, 1999; therefore,
there was no provision for income taxes in the Company's statement
of operations at December 31, 1999.
Income Taxes, continued:
The Company uses the liability method of accounting for income
taxes. Under this method, deferred income tax assets and
liabilities are recorded based on the differences between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Deferred tax liabilities or assets at
the end of each period are determined using the tax rate enacted
under the current tax law. The measurement of net deferred tax
assets is reduced by the amount of any tax benefits that, based on
available evidence, are not expected to be realized, and a
corresponding valuation allowance is established.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash
equivalents and short-term investments. Short-term investments are
stated at cost, which approximates fair market value. The Company
has its cash and cash equivalents placed with high quality,
creditworthy financial institutions. The balances at such
institutions at December 31, 1999 and periodically throughout the
year are in excess of federally insured limits. As part of its cash
management process, the Company performs periodic evaluations of the
relative credit standings of these institutions.
The Company's accounts receivable potentially subject the Company to
credit risk, as collateral is generally not required. For certain
customers, the Company's risk of loss is limited due to advance
billings for services, the use of preapproved charges to customer
credit cards, and the ability to terminate access on delinquent
accounts. In addition, the concentration of credit risk to these
customers is mitigated by the large number of customers comprising
the customer base. Where services are billed in arrears, the
Company performs ongoing credit evaluations of its customers'
financial condition. The carrying amount of the Company's
receivables approximates their fair value.
<PAGE>
Notes to Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
Vulnerability Due to Certain Concentrations:
The Company's growth and future success is substantially dependent
upon its ability to convince corporations and other organizations to
adopt the Laser Link service for their constituents. Although a
number of corporations and organizations have entered into
discussions regarding the service, only two have entered into
written agreements with the Company obligating them to offer the
service to their subscribers.
The Company has signed a Virtual Internet Provider agreement with
UUNet Technologies, Inc. ("UUNet") that provides the Company with
access to UUNet's points of presence capacity.
The Company continues to seek additional capital resources to
complete the development of its service and expand and improve its
product line.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the
dates of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Stock-Based Compensation:
Stock based compensation is recognized using the intrinsic value
method prescribed in Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the fair market value of the
Company's stock at the date of grant over the amount an individual
must pay to acquire the stock and amortized over the vesting period.
All transactions in which goods and services are the consideration
received for the issuance of equity instruments, such as stock
options, are expensed based on the fair value of the consideration
received or the fair value of the equity instruments issued,
whichever is more reliably measured. The Company has adopted the
disclosure only provisions of Statements of Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) (see Note
5).
<PAGE>
Notes to Financial Statements, Continued
Historical Net Loss Per Share:
The Company calculates net loss per common share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." Basic Earnings Per Share ("EPS") is a per
share measure of an entity's performance computed by dividing net
income (loss) available to common shareholders (the numerator) by
the weighted-average number of shares of common stock outstanding
during the period (the denominator). Diluted EPS measures the
entity's performance taking into consideration common shares
outstanding (as computed under basic EPS) and dilutive potential
common shares, such as stock options. However, entities with a net
loss do not include common stock equivalents in the computation of
diluted EPS as the effect would be anti-dilutive. Therefore, the
Company's basic and diluted EPS are equal as common stock
equivalents are not included as inclusion of such shares would have
an anti-dilutive effect.
3. Property and Equipment:
A summary of property and equipment at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ---------------------------------
<S> <C> <C>
Computer equipment $2,410,000 $681,000
Purchased software 1,658,000 78,000
Furniture 324,000 --
Leasehold improvements 124,000 --
---------- --------
Less: accumulated depreciation and amortization 4,516,000 759,000
(1,470,000) (157,000)
---------- --------
Property and equipment, net $3,046,000 $602,000
========== ========
</TABLE>
<PAGE>
Notes to Financial Statements, Continued
Depreciation expense was approximately $791,000, $109,000, and $21,000
in 1999, 1998 and 1997, respectively. Amortization expense was
approximately $522,000, $21,000, and $5,000 in 1999, 1998 and 1997,
respectively.
4. Income Taxes:
The significant components of deferred tax assets at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
1999
--------------------------------
<S> <C>
Loss carryforwards $1,410,000
Bad debt expense 132,000
-----------
Total deferred tax assets 1,542,000
Less: valuation allowance (1,542,000)
-----------
Net deferred tax assets $ --
==========
</TABLE>
As of December 31, 1999, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$3,526,000. The federal loss carryforwards, which expire between
2018 and 2019, are available to offset future federal taxable
income, if any. The Company also had state net operating loss
carryforwards as of December 31, 1999 of $3,526,000. The state loss
carryforwards, which expire between 2008 and 2009, are limited to a
maximum utilization of $1,000,000 per year.
Management has determined that realization of these tax benefits is
uncertain and therefore has provided a full valuation allowance.
The utilization of tax credit carryforwards may be limited by
changes in ownership under Section 382 of the Internal Revenue Code
and similar statutes.
<PAGE>
Notes to Financial Statements, Continued
5. Stockholders' Equity:
Common Stock:
Class A Common stockholders have the right to one vote for each
share of Class A Common Stock held. Class B Common stockholders
have the right to one vote for each share of Class B Common Stock
held. Class B Common stockholders have the right to elect a
majority of the Board of Directors.
On April 1, 1999 the Company effected a twenty-for-one stock split
of the outstanding shares of common stock in the form of a stock
dividend. Accordingly, all common stock data shown in the
accompanying financial statements and notes have been retroactively
adjusted to reflect the stock split.
Preferred Stock:
The Board of Directors has the authority to issue shares and to fix
voting privileges, dividend rates, conversion privileges and any
other rights of the preferred stock.
Redeemable Preferred Stock:
On December 29, 1998, the Company issued 20,000 shares of its Class
A Redeemable Preferred Stock to an investor for $2,000,000. Stock
issuance costs of $48,000 have been charged to the redeemable
preferred stock. The Class A Redeemable Preferred Stock has no
voting privileges and accrues quarterly dividends at 8% of the
liquidation preference (defined by the agreement to be $5 per share)
per annum. The Class A Redeemable Preferred stockholders are
entitled to distribution of $5 per share in preference to holders of
Common Stock plus all accrued and unpaid dividends on December 31,
2003 or earlier upon the occurrence of certain events such as an
initial public offering. Upon liquidation, dissolution or winding
up of the Company, Class A Redeemable Preferred stockholders are
entitled to a distribution equal to the liquidation preference
amount. This offering included a warrant to purchase 2,099,900
additional shares of Class A Common Stock at less than $.01 per
share. The warrant expires on December 29, 2008.
<PAGE>
Notes to Financial Statements, Continued
5. Stockholders' Equity, continued:
Stock Option Plan:
The Company established the 1997 Stock Option Plan (the "Plan") that
provides for the grant of stock options and warrants to officers,
directors and other key employees of the Company to purchase a
maximum of 10,000,000 shares of Class A Common Stock. The Plan
provides for granting of both incentive stock options, as defined in
Section 422 of the Code, and options that do not qualify under
Section 422 of the Code ("nonqualified options"). The Plan expires
ten years from the date of adoption of the Plan, subject to the
right of the Board of Directors to terminate the Plan at any time
prior thereto. Grants under the Plan expire five or ten years from
the date of the grant and generally vest over a four year period.
The exercise price of all options granted under the Plan must be at
least 100% of the fair market value on the date of grant. As of
December 31, 1999, no options have been exercised, and 1,885,500
options remain available for issuance under the Plan.
Non-Qualified Option Grants:
In addition to the options granted under the Plan, the Company
granted 20,000 nonqualified stock options to a consultant during
1998. Nonqualified options generally have a maximum term of 10
years and generally vest in equal annual increments over a three-
year period.
If compensation cost had been determined based on the fair value of
the options at the grant dates for those options for which no
compensation cost has been recognized, consistent with the method of
SFAS 123, the Company's net loss and loss per share would have been:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net loss: $(3,742,000) $(1,915,000) $ (246,000)
As reported (4,204,000) (1,961,000) (248,000)
Pro forma
Net loss:
As reported (0.14) (0.09) (0.01)
Pro forma (0.16) (0.09) (0.01)
</TABLE>
<PAGE>
Notes to Financial Statements, Continued
5. Stockholders' Equity, continued:
Non Qualified Option Grants, continued:
Such pro forma disclosures may not be representative of future
compensation expense because options vest over several years and
additional grants are made each year.
The weighted-average fair value of stock options granted was $0.25
per option in 1999, $0.05 in 1998 and $0.02 in 1997. The fair value
of each option grant was estimated at the date of grant using the
Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants in 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.3%, 5.6% and 5.8%;
dividend yields and volatility factors of 0%; and expected lives of
three years.
The following table summarizes stock option activity in 1999 and
1998:
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Exercise Average Remaining
Number of Price Range Exercise Contractual
Shares Per Share Price Life
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Outstanding as of December 31, 1997 $0.05-$0.25 $0.11 7.95 years
Granted $0.05-$0.50 $0.31 8.32 years
Exercised -- -- -- --
Cancelled/forfeited (80,000) $0.25 $0.25 8.94 years
Outstanding as of December 31, 1998 3,790,000 $0.05-$0.50 $0.20 8.13 years
Granted 4,499,500 $0.76-$3.38 $1.39 9.39 years
Exercised -- -- -- --
Canceled/forfeited (75,000) $0.76 $0.76 9.75 years
Outstanding as of December 31, 1999 8,214,500 $0.05-$3.38 $0.84 8.80 years
</TABLE>
<PAGE>
Notes to Financial Statements, Continued
The following table summarizes the number of options outstanding by
year of grant:
<TABLE>
<CAPTION>
Number of Exercise Price
Year of Grant Shares Range
-------------- ---------------------- ----------------------
<S> <C> <C>
1999 4,424,500 $0.76 - $3.38
1998 1,790,000 $0.05 - $0.50
1997 2,000,000 $0.05 - $0.25
</TABLE>
5. Stockholders' Equity, continued:
Non Qualified Option Grants, continued:
As of December 31, 1999, 1,994,300 shares were exercisable at a
weighted-average price per share of $0.29. As of December 31, 1998
549,800 shares were exercisable at a weighted average price per
share of $0.12. No options were exercised during 1999, 1998 or
1997.
6. Related Party Transactions:
Each nonmanagement member of the Board of Directors received an
option to purchase 300,000 shares of common stock at exercise prices
ranging from $0.05 to $0.50 per share (estimated fair market value
at date of grant). These options (totaling 1,500,000 shares) expire
on April 20, 2003 and vest over a period of three years, except that
the options may vest immediately upon the occurrence of certain
events.
An officer of the Company has made advances to the Company for
working capital and equipment purchases. These loans had a term of
one year and included interest at the prime rate. These advances
were repaid in full during 1999. In connection with these loans,
this officer was issued warrants to purchase 146,000 and 570,660
shares of Class B Common Stock at $0.38 and $0.76 per share,
respectively. These warrants expire five years from the date of
issuance on April 27, 2003 and December 9, 2003, respectively.
The Company may borrow up to $5,000,000 under a revolving credit
agreement with an investor group. The credit agreement will expire
on June 30, 2000. Borrowings under the agreement bear interest at
prime plus 2% (10.5% at December 31, 1999) and are collateralized by
substantially all of the assets of the Company. The credit facility
contains certain quarterly financial covenants. The Company had
borrowings outstanding under the credit facility of $3,750,000 and
$0 as of December 31, 1999 and 1998, respectively. As of December
31, 1999, the Company was in violation of certain financial
covenants of the credit facility.
<PAGE>
Notes to Financial Statements, Continued
7. Commitments and Contingencies:
Leases:
The Company leases three facilities for its operations and equipment
network. The equipment network facility is under a noncancelable
operating lease expiring November 15, 2003. One operations facility
is leased on a month-to-month basis with no formal agreement. The
other facility agreement is a noncancelable lease expiring March 15,
2004.
At December 31, 1999, the Company's minimum rental commitments under
non-cancelable operating leases for each fiscal year ended December
31 are as follows:
Operating
Fiscal Year Leases
----------- -------------
2000 $278,000
2001 282,000
2002 210,000
2003 210,000
2004 and thereafter 53,000
----------
Total minimum lease payments $1,033.000
==========
Total rent expense for operating leases for the years ended December
31, 1999, 1998 and 1997 amounted to approximately $184,000, $39,000
and $22,000, respectively.
Employment Contracts:
The Company has entered into various employment contracts with key
employees. These agreements are consecutive one-year terms and
entitle the employees to a total of 1,320,000 options to purchase
Class A common stock.
Significant Agreements:
Access to the Internet for subscribers is provided through points of
presence capacity leased from UUNet. The agreement with UUNet
expires June 1, 2001 and automatically renews for consecutive one-
year terms, unless terminated prior to or at the end of its current
term.
<PAGE>
Notes to Financial Statements, Continued
UUNet is also a competitor of the Company. UUNet's availability may
be limited in the future if other significant UUNet users increase
capacity. The Company pays UUNet a fee per network hour used.
The Company has licensed Netscape Communicator software ("Netscape")
from Netscape Communications Corporation, and Microsoft Internet
Explorer Software ("Explorer") from Microsoft Corporation. These
licenses permit the Company to distribute Netscape and Explorer in
the Company's Network Operations Center access packages. Management
believes that contract renewal of both of the licenses under
conditions acceptable to the Company is probable.
7. Commitments and Contingencies, continued:
The Company has entered into an agreement with a company to provide
customer service and technical support to the Company's customer
base. The Company is subject to charges by the service provider on
a fixed fee basis per subscriber.
Legal Proceedings:
The Company is subject to legal proceedings and claims that arise in
the ordinary course of business. As of December 31, 1999,
management is not aware of any asserted or pending litigation or
claims against the Company that would have a material adverse effect
on the Company's financial condition, results of operations or
liquidity.
8. Employee Benefit Plan:
In 1999, the Company established a defined contribution 401(k)
retirement plan covering substantially all its employees. Under
this plan, eligible employees may contribute a portion of their
salary until retirement and the Company, at its discretion, may
match a portion of the employee's contribution up to 15% of an
employee's annual compensation. The Company contributed $31,000 in
1999.
9. Subsequent Events:
On March 8, 2000, the Company signed an Agreement and Plan of Merger
(the "Agreement") with Covad Communications Group, Inc. ("Covad").
Under the terms of the Agreement, Covad will exchange approximately
4,300,000 shares of its common stock for all outstanding Company
common stock and all unexpired and unexercised outstanding Company
options and warrants.
