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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 2000
REGISTRATION NO. 333-30360
====================================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
NOTE EXCHANGE OFFER
ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COVAD COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 77-0461529
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
4250 BURTON DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 987-1000
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
ROBERT E. KNOWLING, JR.
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN, BOARD OF DIRECTORS
COVAD COMMUNICATIONS GROUP, INC.
4250 BURTON DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 987-1000
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
MEREDITH S. JACKSON, ESQ.
ASHOK W. MUKHEY, ESQ.
GEOFFREY M. TRACHTENBERG, ESQ.
IRELL & MANELLA LLP
1800 AVENUE OF THE STARS
LOS ANGELES, CALIFORNIA 90067
(310) 277-1010
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
in connection with the formation of a holding company and there is compliance
with General Instruction G. check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
====================================================================================================================================
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
securities and exchange commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
********************************************************************************
SUBJECT TO COMPLETION, DATED MAY 11, 2000
[LOGO]
COVAD COMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
12% SENIOR NOTES DUE 2010, SERIES A (UNREGISTERED)
FOR 12% SENIOR NOTES DUE 2010, SERIES B (REGISTERED)
We currently have outstanding $425.0 million in principal amount of 12%
Senior Notes due 2010, Series A. We are offering to exchange new registered 12%
Senior Notes due 2010, Series B for any and all of the old notes.
TO EXCHANGE YOUR UNREGISTERED OLD NOTES FOR REGISTERED NEW NOTES, YOU MUST
TENDER YOUR OLD NOTES NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON
______________ , 2000, UNLESS EXTENDED.
--------------
No public market currently exists for the new notes. We do not expect that
an active public market in the new notes will develop. We do not intend to list
the new notes on any securities exchange or on the Nasdaq National Market.
--------------
SEE THE "RISK FACTORS" SECTION ON PAGE 10 FOR INFORMATION THAT YOU SHOULD
CONSIDER BEFORE YOU DECIDE TO PARTICIPATE IN THIS EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 2000.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................................................................... 1
Summary Consolidated Financial Data......................................................................... 9
Risk Factors................................................................................................ 10
Use of Proceeds............................................................................................. 27
Capitalization.............................................................................................. 28
Selected Consolidated Financial Data........................................................................ 29
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 30
Business.................................................................................................... 38
Management.................................................................................................. 56
Security Ownership of Certain Beneficial Owners and Management.............................................. 60
Certain Relationships and Related Transactions.............................................................. 61
The Exchange Offer.......................................................................................... 67
Description of Certain Indebtedness......................................................................... 75
Certain Terms of the New Notes.............................................................................. 76
Description of Notes........................................................................................ 77
Certain Federal Income Tax Considerations................................................................... 108
Plan of Distribution........................................................................................ 109
Where You Can Find More Information......................................................................... 110
Legal Matters............................................................................................... 110
Experts..................................................................................................... 110
Index to Financial Statements............................................................................... F-1
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You should rely only on the information provided in this prospectus. We
have authorized no one to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus or the
prospectus supplement is accurate as of any date other than the date on the
front of the document.
i
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" BEGINNING ON
PAGE 10, CAREFULLY BEFORE INVESTING IN THE NOTES.
COVAD COMMUNICATIONS GROUP, INC.
OUR COMPANY
We are a leading provider of broadband communications services to
Internet service provider, enterprise, telecommunications carrier and other
customers. These services include a range of high-speed, high capacity Internet
and network access services using digital subscriber line (DSL) technology, and
related value-added services. Internet service providers purchase our services
in order to provide high-speed Internet access to their business and consumer
end-users. Enterprise customers purchase our services directly or indirectly
from us to provide employees with high-speed remote access to the enterprise's
local area network (RLAN access), which improves employee productivity and
reduces network connection cost. Telecommunications carrier customers purchase
our services for resale to their Internet service provider affiliates, Internet
users and enterprise customers.
As of December 31, 1999, we believe we have the nation's largest DSL
network with more than 1,100 operational central offices passing over at least
29 million homes and businesses. As of December 31, 1999, we had installed
57,000 DSL based high-speed access lines and received orders for our services
from 295 Internet service provider, enterprise, and telecommunications carrier
customers, including AT&T, Concentric Network, Flashcom, MindSpring, Oracle,
Prodigy, PSINet, Qwest, Stanford University, Sun Microsystems, UUNET and Verio.
By February 29, 2000, we had deployed our network in a total of 62
metropolitan statistical areas. When our 100 metropolitan statistical area
(MSA's) build-out is completed, which we expect to be by the end of 2000, our
network will pass a total of 46 million homes and businesses, representing 40%
of homes and 45% of businesses in the United States.
We plan to continue to pursue rapid network expansion and installation of
high-speed access lines. We also plan to develop a variety of services that are
enhanced or enabled by our expanding network by entering into business
arrangements with broadband-related service providers in order to bring a
variety of value-added service offerings to our customers and their end-users.
OUR MARKET OPPORTUNITY
We believe that we have a substantial business opportunity for the
following reasons:
o There is a growing market demand for broadband communications
services.
o Broadband communications services are enabling new applications
for businesses and consumers.
o DSL is a cost-effective technology for broadband communications.
o The current regulatory environment facilitates the provision of
competitive broadband communications service offerings.
OUR COMPETITIVE STRENGTHS
WE OFFER AN ATTRACTIVE VALUE PROPOSITION COMPARED TO ALTERNATIVE
TECHNOLOGIES. For business Internet users, our high-end services offer bandwidth
comparable to that offered by T1 and frame relay circuits (which are up to 25
times the speed of most analog modems) at a substantially lower cost than
traditional T1 service. For the RLAN market, our mid-range services are three to
six times the speed of ISDN lines and up to ten times the speed of most analog
modems at monthly rates similar to or lower than those for heavily-used ISDN
lines. For consumer Internet users, our consumer services are comparably priced
to other services, such as cable modem services, but offer significant
advantages in security, network performance and speed.
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WE HAVE LEVERAGED OUR FIRST-MOVER ADVANTAGE TO RAPIDLY EXPAND OUR NETWORK
AND GROW OUR NUMBER OF LINES INSTALLED. We were the first to widely roll out DSL
services on a commercial basis, making DSL service available for purchase in the
San Francisco Bay Area in December 1997. We believe that we have leveraged our
first-mover advantage to rapidly expand our network into our targeted
metropolitan regions and grow our number of line installations. We believe we
have the nation's largest DSL network with more than 1,100 operational central
offices passing over more than 29 million homes and businesses. As of December
31, 1999, we had installed a total of 57,000 lines nationwide.
OUR SERVICES ARE WIDELY AVAILABLE, CONTINUOUSLY CONNECTED AND SECURE. Our
strategy of providing blanket coverage in each region we serve is designed to
ensure that our services are available to the vast majority of our customers'
end-users. Our networks provide a 24-hour continuous connection, unlike ISDN
lines and analog modems which require customers to dial-up each time for
Internet or RLAN access. Also, because we use dedicated connections from each
end-user to the Internet service provider or enterprise network, our customers
can reduce the risk of unauthorized access. These factors are important to our
customers because any Internet service they market to their end-users must
actually be available for them to purchase and be secure enough to not risk
their own reputation or business with any security lapses.
OUR MANAGEMENT TEAM HAS EXTENSIVE INDUSTRY EXPERIENCE. Our management
team includes individuals with extensive experience in the data communications,
telecommunications and personal computer industries, including Robert Knowling,
Jr., Chairman of the Board, President and Chief Executive Officer (former
Executive Vice President of Operations and Technology at U S WEST
Communications), Catherine Hemmer, Executive Vice President and Chief Operations
Officer (former Vice President, Network Reliability and Operations at U S WEST
Communications, Inc., former General Manager, Network Provisioning at Ameritech
Corporation and former Vice President, Network Services at MFS), Robert Roblin,
Executive Vice President, Sales and Marketing (former Executive Vice President
of Marketing at Adobe Systems, Inc. and former Vice President and General
Manager of Marketing, Consumer Division at IBM Corporation), Timothy Laehy,
Executive Vice President and Chief Financial Officer (former Vice President of
Corporate Finance and Treasurer of Leasing Solutions, Inc.), Robert Davenport,
III, Executive Vice President, Business Development (former Senior Vice
President and Chief Operating Officer of Tele-Communication, Inc.'s Internet
Services subsidiary TCI.NET), Joseph Devich, Executive Vice President, Corporate
Services (former Vice President, Operations and Technologies Staff of U S WEST
Communications), Dhruv Khanna, Executive Vice President, General Counsel and
Secretary, Jane Marvin, Executive Vice President of Human Resources (former Vice
President of Human Resources for the General Business Services unit of Ameritech
Corporation), Terry Moya, Executive Vice President, External Affairs (former
Vice President & Chief Financial Officer, Capital Management, Network Operations
and Technologies at U S West Communications, Inc), and Michael Lach, Executive
Vice President, Business Integration (former Vice President, Customer
Provisioning and Maintenance of Ameritech Corporation).
OUR BUSINESS STRATEGY
Our objective is to become the leading nationwide provider of broadband
services and a critical element in the proliferation of e-commerce and other
applications that are enabled or enhanced by broadband communications. The key
elements of our strategy to achieve this objective are as follows:
EXPAND OUR NETWORK AND ROLL OUT SERVICE RAPIDLY IN OUR TARGETED
METROPOLITAN STATISTICAL AREAS. As of February 29, 2000, we introduced our
services in62 of the top metropolitan statistical areas nationwide. We have
recently announced our plan to expand our services to a total of 100
metropolitan statistical areas by the end of 2000. In the aggregate, these 100
metropolitan statistical areas cover 40% of homes and 50% of businesses in the
United States. In addition, we have recently begun to assess the regulatory and
competitive environments in other countries.
PROVIDE PERVASIVE COVERAGE IN EACH METROPOLITAN STATISTICAL AREA. We are
pursuing a blanket coverage strategy of providing service in a substantial
majority of the central offices in each region that we enter since our Internet
service provider customers desire to market their Internet access services on a
region-wide basis. Blanket coverage is also important to our enterprise
customers since most of them desire to offer RLAN access to all employees
regardless of where they reside. In addition, we believe our presence in 100
metropolitan statistical areas will allow us to better serve our Internet
service provider, enterprise, telecommunications carrier and other customers.
These customers are increasingly seeking a single supplier in multiple
metropolitan areas.
2
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ESTABLISH AND MAINTAIN SALES AND MARKETING RELATIONSHIPS WITH LEADING
INTERNET SERVICE PROVIDERS, TELECOMMUNICATIONS CARRIERS AND OTHER DSL RESELLERS.
We principally target Internet service providers, telecommunications carriers
and other DSL resellers that can offer their end-users cost and performance
advantages for Internet access using our services. We primarily provide
connections to Internet service providers, which in turn offer high-speed
Internet access using our network. In other cases, we provide wholesale DSL and
Internet access services for resale by our customers such as Prodigy
Communications Corporation and Juno Online Services. In this way, we:
o carry the traffic of multiple Internet service providers,
telecommunications carriers and other customers in any region,
increasing our volume and reducing our costs;
o leverage our selling efforts through the sales and support staff of
these Internet service providers, telecommunications carriers and
other customers;
o offer Internet service providers, telecommunications carriers and
other customers an alternative, since the traditional telephone
company typically provides its own retail Internet access services in
competition with our customers; and
o provide Internet service providers, telecommunications carriers and
other customers a high-speed service offering to compete with
cable-based Internet access.
DEVELOP A NATIONAL BRAND. We believe that we can enhance our competitive
position and increase demand for our services by actively developing a positive
brand and image for our Company and our services through a combination of
television, print and radio advertisements on both a national and local basis.
In October 1999, we commenced a significant national advertising campaign in
pursuit of this strategy. This branding strategy has created the opportunity for
us to provide end-user leads to our existing customers.
DEVELOP AND COMMERCIALIZE VALUE-ADDED SERVICES. We intend to introduce
value-added services to our customers and leverage the value of the network
access we offer today. Offering services such as voice over DSL, DSL plus
International Protocol (DSL + IP), and our Virtual Broadband Service Provider
(VBSP) offering will allow us to bundle service offerings to our customers and
improve the quality of content delivery to their end-users as well as reduce
costs. We believe this is an important part of our strategy and will allow us to
build upon our success to date in adding and retaining subscribers.
ACQUIRE AND ENTER INTO BUSINESS ARRANGEMENTS WITH NETWORK AND
BROADBAND-RELATED SERVICE PROVIDERS. We believe that the pace of deployment of
our network can be increased by acquiring and entering into business
arrangements with other network service providers, some of which may be located
outside of the United States. We also believe our network deployment will enable
the delivery of a variety of broadband-related services and content that are
desired by our customers. We expect to make these services available to our
customers through acquiring and entering into business arrangements with leading
providers of broadband-related services or content. For example, we recently
acquired Laser Link.Net, Inc. This acquisition will allow us to better provide
DSL and IP services on a wholesale basis and better enable us to serve customers
who do not wish to maintain any network facilities.
TAKE ADVANTAGE OF NEW REGULATORY DEVELOPMENTS. In late 1999, the FCC
required the major local phone companies to provide us, and other competitive
local carriers, with "line sharing." This would allow us to provide our services
over the same telephone wire used by the traditional telephone companies to
provide analog voice services. In addition, some of the Ameritech/SBC merger
conditions adopted by the FCC in October 1999 also contain provisions on line
sharing and provide for reductions in costs for telephone wires in certain
circumstances. In many cases, line sharing would allow us to provision our
asymmetric DSL services on the same telephone wire as the existing local phone
companies' voice service. Currently, we provide our DSL services over a separate
additional telephone wire. Asymmetric DSL and standard telephone service can
exist on a single line and most, if not all, of the traditional telephone
companies provision their own asymmetric services on the same line as existing
voice services.
We see line sharing as an extremely important opportunity for us for
three primary reasons. First, line sharing should significantly reduce the
monthly recurring charges we incur for telephone wires. Second, line sharing
should reduce the time it takes traditional telephone companies to deliver
telephone wires because the telephone wire will already exist. Third, line
sharing should resolve lack of telephone wire problems that we have encountered
when ordering telephone wires in some areas of the country. We have entered into
line sharing agreements with U S West
3
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Communications and Bell South and we are negotiating line sharing arrangements
with the major incumbent local telephone carriers. We have also implemented line
sharing line sharing on a trial basis in one state. We expect the traditional
local phone companies to implement line sharing on a wide scale later this year.
RECENT DEVELOPMENTS
On January 28, 2000, we completed a private placement of $425.0 million
aggregate principal amount of 12% senior notes (the "2000 notes") due 2010. The
2000 notes are unsecured senior obligations maturing on February 15, 2010 and
are redeemable at our option any time after February 15, 2005 at stated
redemption prices plus accrued and unpaid interest thereon. Net proceeds from
the 2000 notes were approximately $413.3 million, after discounts, commissions
and other transaction costs of approximately $11.7 million. The discount and
debt issuance costs are being amortized over the life of the 2000 notes. These
notes were sold in a private placement under Rule 144A and Regulation S under
the Securities Act of 1933, as amended.
We are currently aware of a Staff Accounting Bulletin entitled SAB 101
"Revenue Recognition in Financial Statements," which was issued in December 1999
by the Securities and Exchange Commission. SAB 101 provides that, in certain
circumstances, revenues which are received in the first month of a contract
might have to be recognized over an extended period of time, instead of in the
first month of the contract. Due to complications surrounding the implementation
of SAB 101, the SEC in March 2000 deferred the implementation date of certain
provisions of SAB 101 until the quarter ended June 30, 2000, with retroactive
application to transactions entered into during the quarter ended March 31,
2000. This extension will allow us and other companies impacted by this Bulletin
adequate time to fully understand the broader implications of SAB 101 and to
respond accordingly. We believe that based on the current guidelines, our
revenue recognition policy is in accordance with generally accepted accounting
principles.
On February 15, 2000 our Board of Directors adopted a Stockholder
Protection Rights Plan under which stockholders received one right for each
share of our Common Stock or Class B Common Stock owned by them. The rights
become exercisable, in most circumstances, upon the accumulation by a person or
group of 15% or more of our outstanding shares of Common Stock. Each right
entitles the holder to purchase from us, as provided by the Stockholder
Protection Rights Agreement, one one-thousandth of a share of Participating
Preferred Stock, par value $.001 per share, for $400.00, subject to adjustment.
On March 7, 2000, we announced a 3-for-2 stock split, which was
effectuated through a stock dividend. Our Common Stock began trading on a split
adjusted basis on April 3, 2000.
On March 20, 2000 we completed the acquisition of Laser Link.net, a
leading provider of branded internet access, based in Media, Pennsylvania in a
transaction to be accounted for as a purchase. Under the acquisition agreement,
we issued 6.45 million shares of Common Stock for all Laser Link.net
outstanding shares, plus assumption of all outstanding debt. We anticipate that
this acquisition will allow us to provide a turnkey broadband access solution to
companies and affinity groups who want to offer broad band internet services to
their customers, members, or affiliates. .Laser Link.net currently provides a
similar service using dial-up access. The total consideration related to the
acquisition approximates $372.0 million.
On April 18, 2000, we announced our preliminary operating results for the
three months ended March 31, 2000. For the first quarter of 2000 we recorded
revenues of $41.8 million, representing a 35% increase over the quarter ended
December 31, 1999, a net loss of $107.2 million, and an EBITDA deficit of $75.0
million. We also announced that, during the first quarter, our subscriber lines
increased 63% to 93,000 lines, and homes and businesses passed increased to 35
million from 29 million at December 31, 1999.
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SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
Registration rights agreement.... You are entitled under the registration
agreement to exchange your unregistered notes
for registered notes with substantially
identical terms. We are now offering to
exchange your unregistered old notes for
registered new notes with substantially the
same terms in the exchange offer. The
exchange offer is intended to satisfy our
obligations under the registration rights
agreement. After the exchange offer is
completed, you will no longer be entitled to
any exchange or registration rights with
respect to your old notes.
The registration rights agreement requires us
to file a registration statement for a
continuous offering in accordance with Rule
415 under the Securities Act for your benefit
if you would not receive freely tradeable
registered notes in the exchange offer or you
are ineligible to participate in the exchange
offer and indicate that you wish to have your
old notes registered under the Securities Act.
See "The exchange offer--Procedures for
tendering."
The exchange offer............... We are offering to exchange $1,000 principal
amount of new notes, our Series B 12% Senior
Notes due 2010 which have been registered
under the Securities Act, for each $1,000
principal amount of old notes, our Series A
12% Senior Notes due 2010 which were issued on
January 28, 2000 in a private placement. In
order to be exchanged, an old note must be
properly tendered and accepted. All old notes
that are validly tendered and not validly
withdrawn will be exchanged for new notes.
As of this date, there is $425.0 million
aggregate principal amount of old notes
outstanding.
We will issue the new notes promptly after
the expiration of the exchange offer.
Resales of the registered notes.. We believe that the new notes may be offered
for resale, resold and otherwise transferred
by you without compliance with the
registration and prospectus delivery
provisions of the Securities Act if you meet
the following conditions:
o The new notes to be acquired by you in
the exchange offer are acquired by you in
the ordinary course of your business;
o you are not engaging in and do not intend
to engage in a distribution of the new
notes;
o you do not have an arrangement or
understanding with any person to
participate in the distribution of the
registered notes; and
o you do not control us, you are not
controlled by us, and you are not under
common control with us, either directly
or indirectly.
If you do not meet the above conditions,
you may incur liability under the Securities
Act if you transfer any new note without
delivering a prospectus meeting the
requirements of the Securities Act. We do not
assume or indemnify you against that
liability.
Each broker-dealer that receives new notes
in the exchange offer for its own account
in exchange for old notes which were
acquired by that broker-dealer as a result
of market-making activities or other
trading activities must acknowledge that
it will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resales of the
registered notes. A broker-dealer may use
this prospectus for an offer to resell or
to otherwise transfer these registered
notes.
Expiration date.................. The exchange offer will expire at 5:00 p.m.,
New York City time, on [ ], 2000, unless
we decide to extend the exchange offer. We do
not intend to extend the exchange offer,
although we reserve the right to do so.
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Conditions to the exchange offer. The only conditions to completing the exchange
offer are that the exchange offer not violate
applicable law or any applicable
interpretation of the staff of the Securities
and Exchange Commission and no injunction,
order or decree has been issued which would
prohibit, prevent or materially impair our
ability to proceed with the exchange offer.
See "The exchange offer--Conditions."
Withdrawal....................... You may withdraw the tender of your old notes
at any time prior to 5:00 p.m., New York City
time, on the expiration date. We will return
to you any old notes not accepted for exchange
for any reason without expense to you as
promptly as we can after the expiration or
termination of the exchange offer.
Exchange agent................... United States Trust Company of New York is
serving as the exchange agent in connection
with the exchange offer.
Consequences of failure to
exchange...................... If you do not participate in the exchange
offer, upon completion of the exchange offer,
the liquidity of the market for your old notes
could be adversely affected. If the liquidity
of the market for your old notes is adversely
affected, you may be unable to sell or
transfer your old notes and the value of your
old notes may decline. See "Risk factors--The
value of your old notes may decline if you
fail to exchange your old notes for new
notes."
Federal income tax consequences.. The exchange of the old notes should not be a
taxable event for federal income tax purposes.
See "Certain United States Federal Income Tax
Considerations."
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SUMMARY OF THE TERMS OF THE NEW NOTES
THE NEW NOTES........................... $425.0 million principal amount of 12% Senior Notes due 2010, Series B.
MATURITY................................ February 15, 2010.
INTEREST................................ The new notes will pay interest in cash at a fixed annual rate of 12%, payable every six
months on February 15 and August 15 of each year, beginning on August 15, 2000.
RANKING................................. The new notes will be our senior obligations. The new notes will rank equal in right of
payment with all of our existing and future senior debt and will rank senior in right of
payment to any of our future subordinated debt, but will be effectively subordinated to
our subsidiaries' existing and future debt and other liabilities (including our
subsidiaries' subordinated debt and trade payables). We and our subsidiaries may incur
substantial additional debt under the indenture, subject to certain restrictions.
Assuming we had completed the exchange offer December 31, 1999, the new notes:
o would have ranked equally with $374.7 million of our senior debt; and
o would have been effectively subordinated to $82.5 million of debt and other
liabilities (including trade payables) of our subsidiaries.
SINKING FUND............................ None.
OPTIONAL REDEMPTION..................... On or after February 15, 2005, we may redeem some or all of the new notes at any time at
the redemption prices listed in "Description of the notes--optional redemption."
On or prior to February 15, 2003, we may redeem up to 35% of the new notes with the
proceeds of certain public offerings of equity in our Company at the price listed in
"Description of the notes--optional redemption."
MANDATORY OFFER TO REPURCHASE........... If we sell certain assets or experience specific kinds of changes of control, we must
offer to repurchase the new notes at the prices listed in "Description of the notes."
BASIC COVENANTS OF INDENTURE............ We will issue the new notes under an indenture with United States Trust Company of New
York. The indenture will, among other things, restrict our ability and the ability of our
subsidiaries to:
o borrow money;
o pay dividends on stock or purchase stock;
o make investments;
o use assets as security in other transactions; and
o sell certain assets or merge with or into other companies.
For more details, see the section
"Description of the notes" under the
heading "Certain Covenants."
We are not currently in default of any of the covenants in the old notes. These covenant
limitations are subject to significant qualifications and exceptions. See "Description of
the notes--Covenants."
USE OF PROCEEDS......................... We will not receive any proceeds from the exchange offer.
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RISK FACTORS
An investment in the new notes includes a high degree of risk. You should
carefully consider all the information in this prospectus. In particular, you
should evaluate the specific risk factors set forth under "Risk Factors,"
beginning on page 10.
8
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SUMMARY CONSOLIDATED FINANCIAL DATA
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YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- --------- ----------
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
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Revenues.................................................................. $ 26 $ 5,326 $ 66,488
Operating expenses:
Network and product costs.............................................. 54 4,562 55,347
Sales, marketing, general and administrative........................... 2,374 31,043 140,372
Amortization of deferred compensation.................................. 295 3,997 4,768
Depreciation and amortization.......................................... 70 3,406 37,602
--------- --------- ----------
Total operating expenses............................................. 2,793 43,008 238,089
--------- --------- ----------
Loss from operations...................................................... (2,767) (37,682) (171,601)
Net interest expense................................................... 155 (10,439) (23,796)
--------- --------- ----------
Net loss.................................................................. $ (2,612) $ (48,121) $ (195,397)
========= ========= ==========
Preferred dividends....................................................... -- -- (1,146)
--------- --------- ----------
Net loss avilable to common stockholders.................................. $ (2,612) $ (48,121) $ (196,543)
========= ========= ==========
Net loss per share-basic and diluted...................................... $ (.35) $ (3.75) $ (1.83)
========= ========= ==========
Weighted average shares used in computing net loss per share- basic
and diluted............................................................. 7,360,978 12,844,203 107,647,812
========= ========= ==========
OTHER FINANCIAL DATA:
EBITDA(1)................................................................. $ (2,402) $ (30,154) $ (129,486)
Capital expenditures...................................................... 2,253 59,503 208,186
Deficiency of earnings avilable to cover fixed charges(2)................. $ (2,612) $ (48,121) $ (195,397)
========= ========= ==========
AS OF DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments...................... $ 4,378 $ 64,450 $ 767,357
Net property and equipment................................................ 3,014 59,145 237,542
Total assets.............................................................. 8,074 139,419 1,147,606
Long-term obligations, including current portion.......................... 783 142,879 375,049
Total stockholders' equity (net capital deficiency)....................... 6,498 (24,706) 690,291
AS OF DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- ----------
OTHER OPERATING DATA:
Homes and businesses passed............................................... 278,000 6,023,217 29,000,000
Lines installed........................................................... 26 3,922 57,000
</TABLE>
- --------------
(1) EBITDA consists of net loss excluding net interest, taxes, depreciation and
amortization, non-cash stock-based compensation expense and other
non-operating income or expenses. We have provided EBITDA because it is a
measure of financial performance commonly used in the telecommunications
industry as well as to enhance an understanding of our operating results.
EBITDA should not be construed as either:
- an alternative to operating income (as determined in accordance with
generally accepted accounting principles) as an indicator of our
operating performance, or
- an alternative to cash flows from operating activities (as determined
in accordance with generally accepted accounting principles) as a
measure of liquidity.
EBITDA as calculated by us may be calculated differently than EBITDA for other
companies. See our consolidated financial statements and the related notes
thereto contained elsewhere in this prospectus.
(2) for purposes of determining the deficiency of earnings available to cover
fixed charges, "earnings" included pre-tax loss from operations adjusted
for fixed charges. "Fixed charges" included interest expense, capitalized
interest, amortization of debt discount and financing costs, and that
portion of rent expense which we believe to be representative of interest.
In view of our limited operating history and due to additional interest
charges (including amortization of debt discount and debt issuance costs)
with respect to our existing debt securities, the deficiency of earnings
available to cover fixed charges should not be considered indicative of the
deficiency of earnings available to cover fixed charges in the future.
9
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RISK FACTORS
THE NEW NOTES, LIKE THE OLD NOTES, ENTAIL A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS WELL AS OTHER INFORMATION IN
THIS PROSPECTUS, BEFORE DECIDING TO TENDER OLD NOTES FOR NEW NOTES. 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.
RISKS RELATED TO COVAD AND THE INDUSTRY
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:
o rapidly expand the geographic coverage of our services;
o attract and retain customers within our existing and in new
metropolitan statistical areas;
o increase awareness of our services;
o respond to competitive developments;
o continue to attract, train, integrate, retain and motivate qualified
persons;
o continue to upgrade our technologies in response to competition
and market factors;
o manage our traditional telephone company suppliers;
o rapidly install high-speed access lines;
o effectively manage the rapid growth of our operations; and
o deliver additional value-added services to our customers without
causing existing customers to cease reselling our services or
reducing the volume or rate of growth of sales of our services.
WE HAVE A HISTORY OF LOSSES AND EXPECT INCREASING LOSSES IN THE FUTURE
We have incurred substantial losses and experienced negative cash flow
each fiscal quarter since our inception. As of December 31, 1999, we had an
accumulated deficit of approximately $246.1 million. We intend to 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 the next several years due to continued development,
commercial deployment and expansion of our network. We may also make investments
in and acquisitions of businesses that are complementary to ours to support the
growth of our business. Our future cash requirements for developing, deploying
and enhancing our network and operating our business, as well as our revenues,
will depend on a number of factors including:
o the number of regions entered, the timing of entry and services
offered;
o network development schedules and associated costs;
o the rate at which customers and end-users purchase our services
and the pricing of such services;
o the level of marketing required to acquired and retain customers
and to attain a competitive position in the market place;
o the rate at which we invest in engineering and development and
intellectual property with respect to existing and future
technology; and
10
<PAGE>
o unanticipated opportunities.
In addition, we expect our net losses to increase in the future due to
interest and amortization charges related to our 1998 notes, our 1999 notes and
the notes, and the amortization charges related to our issuance of preferred
stock to AT&T Ventures and two affiliated funds ("AT&T Ventures"), NEXTLINK and
Qwest in January 1999. For example:
o Interest and amortization charges relating to the 1998 notes were
approximately $22.3 million during the year ending December 31, 1999.
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.
o Interest and amortization charges relating to the 1999 notes were
approximately $24.8 million during the year ending December 31, 1999
and will increase slightly each year to approximately $29.3 million
during the year ending December 31, 2008.
o Interest and amortization charges relating to the notes will be
approximately $48.2 million during the year ending December 31, 2000
and will be $52.2 million each following year through the maturity of
the notes in February 2010.
o We recorded intangible assets of $28.7 million associated with the
issuance of our preferred stock to AT&T Ventures, NEXTLINK and Qwest.
Amortization charges relating to our preferred stock issuance were
approximately $8.2 million during the year ending December 31, 1999.
These amounts will result in an annual amortization charge of
approximately $8.4 million in each of the years in the two-year
period ending December 31, 2001.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE IN FUTURE PERIODS AND MAY FAIL TO
MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS
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:
o the timing and willingness of traditional telephone companies to
provide us with central office space and the prices, terms and
conditions on which they make available the space to us;
o the amount and timing of capital expenditures and other costs
relating to the expansion of our network and the marketing of our
services;
o 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;
o the ability to develop and commercialize new services by us or our
competitors;
o the ability to deploy on a timely basis our services to adequately
satisfy end-user demand;
o our ability to successfully operate our network;
o the rate at which customers subscribe to our services;
o decreases in the prices for our services due to competition,
volume-based pricing and other factors;
o our ability to retain Internet service provider, enterprise and
telecommunications carrier customers and limit end-user churn rates;
o the mix of line orders between consumer end-users and business
end-users (which typically have higher margins);
o the success of our relationships with AT&T, NEXTLINK, Qwest and WebMD
and other potential third parties in generating significant end-user
demand;
o the development and operation of our billing and collection
systems and other operational systems and processes;
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<PAGE>
o the rendering of accurate and verifiable bills by our traditional
telephone company suppliers and resolution of billing disputes;
o the incorporation and interpretation of enhancements, upgrades and
new software and hardware products into our network and operational
processes, all of which may cause unanticipated disruptions; and
o the interpretation and enforcement of regulatory developments and
court rulings concerning the 1996 Telecommunications Act,
interconnection agreements and the anti-trust laws.
As a result, it is likely that in some future quarters our operating
results will be below the expectations of securities analysts and investors.
WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL BECAUSE OUR BUSINESS STRATEGY IS
LARGELY UNPROVEN
We believe that we were the first competitive telecommunications company
to widely provide high-speed Internet and network access using DSL technology.
To date, our business strategy remains significantly unproven. To be successful,
we must develop and market services that achieve broad commercial acceptance by
Internet service provider, enterprise and telecommunications carrier customers
in our targeted metropolitan statistical areas. Because our business and the
demand for high-speed digital communications services are in the early stages of
development, we are uncertain whether our services will achieve broad commercial
acceptance.
It is uncertain whether our strategy of selling and providing our service
through Internet service providers, telecommunication carriers and others will
be successful. This strategy creates marketing, operational and other challenges
and complexities that are less likely to appear in the case of a single entity
providing integrated DSL and ISP services. For example, cable modem service
providers, such as Excite@Home and Time Warner, market, sell and provide
high-speed services, Internet access and content services on an integrated
basis. Also, our new DSL + IP and VBSP services may adversely affect our
relationship with our current ISP customers, since we will be providing some of
the services that they provide. We do not anticipate that this will have a
substantial adverse effect on our relationship with our ISP customers because we
will be able to provide our ISP customers with these additional services at a
lower cost then they would pay if they developed these additional services
internally.
Two recently-announced mergers and acquisitions--between America Online
and Time Warner, and between NEXTLINK and Concentric Network--highlight a
growing trend among service providers and telecommunications carriers to combine
the marketing, selling and provisioning of high-speed data transmission
services, Internet access and content services. While we do not believe that
such combined entities providing integrated services will adversely affect our
business, no assurance can be given that such combinations will not ultimately
have such an adverse effect. Further, no assurance can be given that additional
acquisitions of Internet service providers by traditional and local competitive
telecommunications carriers, and other strategic alliances between such
entities, will not harm our business.
In light of our acquisition of Laser Link.Net, Inc. and other changes we
have made in our business to provide Internet access services on a wholesale
basis to Internet service providers, such as Prodigy and Juno Online Services,
some of our existing Internet service provider customers may perceive us as a
potential or actual competitor instead of as a supplier. Such Internet service
providers may therefore reduce the volume or the rate of growth of the sales of
our services, or may cease to resell our services. No assurance can be given
that our provision of additional services, even on a wholesale-only basis, will
not alienate some or all of our existing customers and thus harm our business.
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, an increase in the proportion of our revenues generated by
our consumer services 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, expected increases in the
percentage of our revenues which we derive from our
12
<PAGE>
consumer services will likely 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 prices that enable us to achieve profitability or
positive cash flow.
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 arrangements to install our service initially for a small number of
end-users. An enterprise customer decides whether to implement a broad roll out
of our services after evaluating the results of this initial phase of
deployment. Based on our experience to date, we believe that an enterprise
customer's initial phase of deployment and its decision to roll out our service
to additional end-users has typically taken at least six months, and has
generally taken longer than we originally expected. As of December 31, 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. During this lengthy sales cycle
we incur significant expenses in advance of the receipt of revenues. Therefore,
any continued or ongoing failure for any reason of enterprise customers to roll
out our services will have a materially adverse effect on our business,
prospects, operating results and financial condition.
OUR BUSINESS WILL SUFFER IF OUR INTERNET SERVICE PROVIDERS, TELECOMMUNICATIONS
CARRIERS AND OTHER THIRD PARTIES ARE NOT SUCCESSFUL IN MARKETING AND SELLING OUR
SERVICES
We market our Internet access services through Internet service
providers, telecommunications carriers and other customers 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 or revenues provided
by one or more of our key Internet service providers could materially harm our
operating results in any given period. We expect that our Internet service
provider customers and telecommunications carriers will account for the majority
of our future market penetration and revenue growth. Our agreements with our
customers are generally non-exclusive. Many of our customers also resell
services offered by our competitors. In addition, a number of our customers have
committed to provide large numbers of end-users in exchange for price discounts.
If our 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.
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 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. To date, these
relationships have not generated significant line orders. 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 result in
significant line orders or revenues.
OUR FAILURE TO MANAGE OUR RAPID GROWTH EFFECTIVELY MAY DELAY OUR NETWORK
EXPANSION AND SERVICE ROLLOUT
Our strategy is to significantly expand our network within our existing
metropolitan statistical areas and to deploy our network in substantially all of
our 100 targeted metropolitan statistical areas by the end of 2000. The
execution of this strategy involves:
o obtaining the required government authorizations;
o identifying, accessing and initiating service in key central
offices within existing and target regions;
o designing, maintaining and upgrading adequate operational support,
billing and collection systems;
o obtaining central office space and maintaining connections between
central offices;
o obtaining phone lines and electronic ordering facilities from our
traditional telephone company suppliers on a timely basis; and
13
<PAGE>
o 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:
o market to and acquire a substantial number of customers and
end-users;
o 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, collection, fixed assets and other financial management
systems;
o hire and train additional qualified management and technical
personnel;
o manage and resolve any disputes which may arise with our
traditional telephone company suppliers;
o establish and maintain relationships with third parties to market and
sell our services, install network equipment and provide field
service; and
o continue to expand and upgrade our network infrastructure.
We may be unable to do these things successfully. As a result, we may be
unable to deploy our network 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
significantly increase our employee base to support the deployment of our
network. We also expect to implement system upgrades, new software systems, new
network capabilities, new service offerings and other enhancements, which could
cause disruption and dislocation in our business. If we are successful in
implementing our marketing strategy, we may have difficulty responding to demand
for our services and technical support in a timely manner and in accordance with
our customers' expectations. We expect these demands to require the addition of
new management personnel and the increased outsourcing of Company functions to
third parties. We may be unable to do this successfully, in which case we could
experience a reduction in the growth of our line orders and therefore our
revenues.
In February to March 2000, we deployed new software systems that caused
some disruption to our business while enhancing the productivity and efficiency
of certain operational practices. Future changes in our processes that we
introduce or we are required to introduce as a result of our arrangements with
the traditional telephone companies could cause similar or more serious
disruption to our ability to provide our services and to our overall business.
Thus far we have electronically linked our own ordering software systems
to the software systems of only one of the traditional telephone companies. Such
electronic linkage is essential for us to successfully place a large volume of
orders for access to telephone wires. There is no assurance that we will be
successful in electronically linking our software system to those of all of the
traditional telephone companies. Our failure to electronically link our systems
with those of all major traditional telephone companies would severely harm our
ability to provide our services in large volume to our customers.
REJECTIONS OF OUR APPLICATIONS FOR CENTRAL OFFICE SPACE BY TRADITIONAL TELEPHONE
COMPANIES MAY DELAY THE EXPANSION OF OUR NETWORK AND THE ROLL OUT OF
OUR SERVICES
We must secure physical space from traditional telephone companies for
our equipment in their central offices in order to provide our services in our
targeted metropolitan statistical areas. In the past, we have experienced
rejections of our applications to secure this space in many central offices,
however most of these rejections have been reversed and we do not currently
receive many such rejections.
We expect that, as we proceed with our deployment, we may face additional
rejections of our applications for central office space in our other targeted
metropolitan statistical areas. These rejections have in the past resulted, and
could in the future result, in delays and increased expenses in the rollout of
our services in our targeted metropolitan statistical areas, including delays
and expenses associated with engaging in legal proceedings with the traditional
telephone companies. This has harmed our business in the past but is less likely
to harm our business in the future periods.
14
<PAGE>
We face other challenges in dealing with the traditional telephone
companies:
o there may be real limitations on the availability of central
office space in certain central offices;
o they frequently claim lack of available facilities when asked by us
to provide connections between central offices and telephone wires to
end-users;
o they frequently fail to promise delivery of, and actually deliver,
properly connected telephone wires to our end-users on time;
o they frequently do not cooperate in providing us with relevant
telephone wire information such as the length of the wire;
o they frequently do not deploy and provide us with integrated software
systems that allow us to seamlessly place large volumes of orders for
telephone lines; and
o they frequently do not cooperate in maintaining and resolving
problems relating to delivery of telephone lines.
We are engaged in a variety of negotiations, regulatory disputes and
legal actions to resolve these situations. We may be unable to resolve these
matters successfully.
The 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 and telephone wires
more easily and on more favorable terms. On March 31, 1999, the FCC adopted
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. However, the FCC's new rules have not been uniformly implemented in a
timely manner, may not ultimately enhance our ability to obtain central office
space, and have been subject to litigation.
Moreover, in March 2000, a federal appeals court struck portions of the
FCC's new rules, and has required the FCC to reconsider and review those rules.
In particular, the appeals court has required the FCC to revise its rules
concerning the types of equipment that we may collocate on the traditional
telephone company premises and the steps that traditional telephone companies
may take to separate their equipment from our equipment. The traditional
telephone companies may implement the court's ruling and any subsequent FCC
rules in a manner that impairs our ability to obtain collocation space and
collocate the equipment of our choice on their premises. Such actions by the
traditional telephone companies could adversely affect our business and disrupt
our existing network design, configuration and services.
CHARGES FOR UNBUNDLED NETWORK ELEMENTS ARE OUTSIDE OF OUR CONTROL BECAUSE THEY
ARE PROPOSED BY THE TRADITIONAL TELEPHONE COMPANIES AND ARE SUBJECT TO COSTLY
REGULATORY APPROVAL PROCESSES
Traditional telephone companies provide the unbundled DSL-capable lines
or telephone wires 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 (telephone
wires) 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.
THE FAILURE OF TRADITIONAL TELEPHONE COMPANIES TO ADEQUATELY PROVIDE
TRANSMISSION FACILITIES AND PROVISION TELEPHONE WIRES IS LIKELY TO IMPAIR OUR
ABILITY TO INSTALL LINES AND ADVERSELY AFFECT OUR GROWTH RATE
We interconnect with and use traditional telephone companies' networks to
service our customers. This presents a number of challenges because we depend on
traditional telephone companies:
15
<PAGE>
o to use their technology and capabilities to meet certain
telecommunications needs of our customers and to maintain our
service standards;
o to cooperate with us for the provision and maintenance of
transmission facilities; and
o 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 network and
providing higher speed DSL services. We rely on the traditional telephone
companies to provision telephone wires 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 electronic billing and payment
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.
It has been and continues to be our experience that, at any given time,
one or more of the traditional telephone companies will fail to deliver the
central office space, transmission facilities, telephone wires or other
elements, features and functions that our business requires. For example, the
traditional telephone companies currently are significantly impairing our
ability to efficiently install our services, and this has adversely affected the
growth in the volume of orders we receive. The failure of the traditional
telephone companies to consistently and adequately deliver operable telephone
wires to us on time has significantly contributed to an increase in the backlog
of uninstalled orders. The continued inadequate performance of the traditional
telephone companies could slow the growth in our revenues and reduce the growth
in orders placed by our customers, which could materially harm our business.
On November 18, 1999, the FCC decided that the traditional local
telephone companies must provide us and other competitive local exchange
carriers with access to line sharing. This would allow us to provide our
services over the same telephone wire used by the traditional telephone
companies to provide analog voice services. The FCC has directed the traditional
local telephone companies to enter into agreements with competitors, such as
ourselves, and take the necessary steps to provide such access by mid-2000. We
have entered into interior line sharing agreements with BellSouth and USWEST,
and are in negotiations with the other major traditional local telephone
companies. However, it is unclear whether the traditional telephone companies
will provide us with such access in a meaningful way this year.
The rates, terms and conditions of line sharing access have not yet been
mutually agreed to between the traditional local phone companies and us. State
commissions have not yet arbitrated disputes or set line sharing rates in
connection with failed negotiations between traditional local phone companies
and us. The efforts of traditional local telephone companies to provide us with
line sharing may inadvertently or purposefully cause disruption and dislocation
to our existing processes for obtaining full telephone lines and our ability to
provide our services.
WE DEPEND ON THE TRADITIONAL TELEPHONE COMPANIES FOR THE QUALITY AND
AVAILABILITY OF THE TELEPHONE WIRES THAT WE USE
We depend significantly on the quality and availability of the
traditional telephone companies' telephone wires, shared lines and the
traditional telephone companies' maintenance of such wires. We may not be able
to obtain the telephone wires 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 network and degrade the
quality of our services to our customers.
OUR BUSINESS WILL SUFFER IF OUR INTERCONNECTION AGREEMENTS ARE NOT RENEWED OR IF
THEY ARE MODIFIED ON UNFAVORABLE TERMS
We are required to enter into and implement interconnection agreements in
each of our targeted metropolitan statistical areas with the appropriate
traditional telephone companies in order to provide service in those regions. We
have not yet entered into all of the interconnection agreements we require to
complete our 100 metropolitan statistical area build-out. We may be unable to
timely enter into these agreements, which is a prerequisite for us to provide
service in those areas. Many of our existing 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 or at all.
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Additionally, disputes have arisen and will continue to arise in the
future as a result of differences in interpretations of the interconnection
agreements. For example, we are in litigation proceedings with certain of the
traditional telephone companies. These disputes have delayed the deployment of
our network, and resolution of the litigated matters will cause us ongoing
expenditure of money and management time. They may 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 and judicial oversight. These government authorities may modify
the terms of the interconnection agreements in a way that harms our business.
THE MARKETS WE FACE ARE HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH
SIGNIFICANTLY GREATER FINANCIAL RESOURCES
The markets we face 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. In addition, the traditional
telephone companies dominate the current market and have a monopoly on telephone
wires. We pose a competitive risk to the traditional telephone companies and, as
both our competitors and our suppliers, they have the ability and the motivation
to harm our business. We also face competition from 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:
o 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;
o may form new alliances and rapidly acquire significant market
share; and
o may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and devote substantially more
resources to developing high-speed digital services.
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 the dominant competition in
all of our target service areas, and we expect this competition to intensify.
For example, they 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 telephone wires 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 $19-$29 per month,
placing pricing pressure on our TeleSurfer services. While we may be allowed to
provide our data services over the same telephone wires that they provide analog
voice services, we may be unable to obtain this ability. Even if we do obtain
this ability, there is no assurance that we will be permitted to provide our
services in this manner without running into operational or technical obstacles;
including those created by the traditional telephone companies. Further, they
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 Excite@Home and MediaOne (and
their respective cable partners), are deploying high-speed Internet access
services over 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.
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
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office space in many of our existing and target markets. Further, certain of our
customers have made investments in our competitors. As a result of these
factors, we may be unsuccessful in generating significant number of new
customers or retaining existing customers.
OUR LEVERAGE IS SUBSTANTIAL AND WILL INCREASE, MAKING IT MORE DIFFICULT TO
RESPOND TO CHANGING BUSINESS CONDITIONS
After giving effect to the issuance of the notes, as of December 31,
1999, on a pro forma basis, we would have had approximately $800.0 million of
long-term obligations (including current portion), which would have consisted
primarily of the 1998 notes, the 1999 notes and the notes. Because the 1998
notes are accreting 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, the
1999 notes and the notes, to finance the continued development, commercial
deployment and expansion of our network and for funding operating losses or to
take advantage of unanticipated opportunities. The degree to which we are
leveraged could have important consequences. For example, it could:
o 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;
o 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;
o limit our ability to redeem the notes, the 1998 notes, 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
and interest on our current indebtedness and the notes, and any additional
indebtedness we may incur. The 1998 notes are accreting to $260 million through
March 2003 and we must begin paying cash interest on those notes in September
2003. In addition, we began paying cash interest on the 1999 notes in August
1999 and will begin paying cash interest on the notes in August 2000. We have
provided for the first six payments on the 1999 notes by setting aside
approximately $74.1 million in government securities to fund such payments.
Our ability to make scheduled payments with respect to indebtedness will
depend upon, among other things:
o our ability to achieve significant and sustained growth in cash flow;
o the rate and success of the commercial deployment of our network;
o successful operation of our network;
o the market acceptance, customer demand, rate of utilization and
pricing for our services;
o our ability to successfully complete development, upgrades and
enhancements of our network;
o and our ability to complete additional financings, as necessary.
Each of these factors is affected by economic, financial, competitive and
other factors, many of which are beyond our control. If we are unable to
generate sufficient cash flow to service our indebtedness, we may have to reduce
or delay network deployments, restructure or refinance our indebtedness or seek
additional equity capital, strategies that may not enable us to service and
repay our indebtedness. Any failure to satisfy our obligations with respect to
the notes, the 1998 notes or the 1999 notes at or before maturity would be a
default under the related indentures and could cause a default under agreements
governing our other indebtedness. If such defaults occur, the holders of the
other 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.
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OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS
We regard certain aspects of 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 been issued one patent and we have a number of
additional patent applications pending. 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.
In addition, others may sue us with respect to infringement of their
intellectual property rights. Last year we were 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." Although the court held
that we do not infringe Bell Atlantic's patent, Bell Atlantic is seeking
reconsideration of this ruling and this ruling is still subject to appeal. As
litigation is inherently unpredictable, there is no guarantee that we will
prevail on a motion for reconsideration or on an appeal of this ruling. An
unfavorable outcome on appeal of this ruling, or in any other lawsuit that may
be brought against us, could limit our ability to provide all our services and
require us to pay damages, which 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
network for at least the next twelve months. Thereafter, we may be required to
raise additional capital through the issuance of debt or equity financings. We
may choose to raise additional capital sooner, depending on market conditions.
The actual amount and timing of our future capital requirements will depend upon
a number of factors, including:
o the number of geographic areas targeted and entered and the timing
of entry and services offered;
o network deployment schedules and associated costs;
o the rate at which customers and end-users purchase our services
and the pricing of such services;
o the level of marketing required to acquire and retain customers
and to attain a competitive position in each region we enter;
o the rate at which we invest in engineering and development and
intellectual property with respect to existing and future
technology; and
o investment opportunities in complementary businesses, acquisitions
or other opportunities.
We also 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, indentures governing our existing indebtedness contain
covenants that may 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
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funding through the issuance of equity securities or amend our indentures, which
we may be unable to do on acceptable terms.
THE SCALABILITY AND SPEED OF OUR NETWORK REMAIN LARGELY UNPROVEN
As of February 29, 2000, we had deployed our network in a total of 62
metropolitan statistical areas, many 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 network could be significantly slower and will depend on a variety of
factors, including:
o the type of DSL technology deployed;
o the distance an end-user is located from a central office;
o the configuration of the telecommunications line being used;
o quality of the telephone wires provisioned by traditional
telephone companies; and
o our operational support systems which manage our network.
As a result, our network 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 COMPANIES' COPPER PLANT COULD DEGRADE
THE PERFORMANCE OF OUR SERVICES
Certain tests 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. In addition, if and when we obtain line sharing from the traditional
local telephone companies, our deployment of our ADSL data services could
interfere with the voice services of the traditional local telephone companies
carried over the same line or adjacent lines. If it occurs, such interference
could cause degradation of performance of our services or the services of the
traditional local telephone companies and 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 existing
interconnection agreements. In addition, the failure of the traditional
telephone companies to take timely action to resolve interference issues could
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, actions by the traditional telephone companies or state or federal
regulators could harm our reputation, brand image, service quality, customer
satisfaction and retention, and overall business. Moreover, ostensible
interference concerns have in the past been, continue to currently and may in
the future be used by the traditional telephone companies as a pretext to delay
the deployment of our services and otherwise harm our business.
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
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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 network may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. Internet service provider, telecommunications
carrier 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. Moreover, if and when implemented, such measures may be
circumvented, and 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:
o digital subscriber line access multiplexers;
o customer premise equipment modems;
o network routing and switching hardware;
o network management software;
o systems management software; and
o database management software.
As we sign additional service contracts, we will need to increase
significantly 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 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 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 network.
Our reliance on third-party vendors involves additional risks, including:
o the absence of guaranteed capacity; and
o 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, OUR ABILITY TO
HIRE ADDITIONAL KEY PERSONNEL AND THE MAINTENANCE OF GOOD LABOR RELATIONS
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. Additionally, we do not have "key person" life insurance policies on
any of our employees.
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Our future success also depends on our continuing ability to identify,
hire, train and retain other highly qualified technical, sales, marketing, legal
and managerial personnel in connection with our expansion within our existing
regions and the deployment, legal and marketing of our network 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, operations, sales, marketing and managerial personnel. Our
business will be harmed if we cannot attract the necessary technical, sales,
marketing and managerial personnel. In addition, in the event that our employees
unionize, we could incur higher ongoing labor costs and disruptions in our
operations in the event of a strike or other work stoppage.
WE HAVE AND MAY MAKE ACQUISITIONS OF COMPLEMENTARY TECHNOLOGIES OR BUSINESSES IN
THE FUTURE, WHICH MAY DISRUPT OUR BUSINESS
In addition to our acquisition of Laser Link.Net, Inc., we intend to
consider acquisitions of businesses and technologies in the future on an
opportunistic basis. Acquisitions of businesses and technologies involve
numerous risks, including the diversion of management attention, difficulties in
assimilating the acquired operations, loss of key employees from the acquired
company, and difficulties in transitioning key customer relationships. In
addition, these acquisitions may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time expenses and the
creation of goodwill or other intangible assets that result in significant
amortization expense. Any of these factors could materially harm our business or
our operating results in a given period.
AN ECONOMIC DOWNTURN COULD ADVERSELY IMPACT DEMAND FOR OUR SERVICES
In the last few years the general health of the economy, particularly the
California economy, has been relatively strong and growing, a consequence of
which has been increasing capital spending by individuals and growing companies
to keep pace with rapid technological advances. To the extent the general
economic health of the United States or of California declines from recent
historically high levels, or to the extent individuals or companies fear such a
decline is imminent, such individuals and companies may reduce, in the near
term, expenditures such as those for our services. Any such decline or concern
about an imminent decline could delay decisions among certain of our customers
to roll out our services or could delay decisions by prospective customers to
make initial evaluations of our services. Such delays would have a material
adverse effect on our business, prospects, operating results and financial
condition.
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 filed and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
We have reviewed our internally developed information technology systems
and programs and believe that our systems are Year 2000 compliant and that
there're not 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, which could have a material adverse effect on our business, prospects,
operating results and financial condition.
To date, we have not experienced any problems in complying with Year 2000
requirements, nor have we experienced any operational difficulties related to
Year 2000 issues.
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THE BROADBAND COMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES,
AND NEW TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE
The broadband 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 broadband communications such as cable modem technology. As a
consequence:
o 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;
o our success will depend on our ability to anticipate or adapt to
new technology on a timely basis; and
o 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 STRATEGY DEPENDS ON GROWTH IN DEMAND FOR DSL-BASED SERVICES
The demand for high-speed Internet and RLAN access is in the early stages
of development. As a result, we cannot predict the rate at which this demand
will grow, if at all, or whether new or increased competition will result in
satisfying all demand. 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 demand for our services grows more slowly than we
anticipate or is satisfied by competitors, our ability to achieve revenue growth
and positive cash flow will be harmed.
WE MUST COMPLY WITH FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICE,
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 these 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
regulations. The 1996 Telecommunications Act, which became effective in February
1996, introduced widespread changes in the regulation of the telecommunications
industry, including the digital access services segment in which we operate.
The1996 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 and the U.S. Court of Appeals for the District of Columbia, which has
overruled certain of the FCC's rules. While the U.S. Supreme Court overruled the
Eighth Circuit in January 1999 and upheld the FCC rules, the District of
Columbia's ruling remains intact. We have entered into competitive
interconnection agreements using the federal guidelines established in the FCC's
first interconnection order. In
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September 1999, the FCC, in response to the Supreme Court decision in January
1999, issued new definitions of unbundled network elements.
We have not entered into interconnection agreements that take advantage
of these new federal guidelines. We anticipate that traditional and local
telephone companies will challenge these new definitions in regulatory
proceedings. In addition, the FCC's pricing method for unbundled network
elements is under review at the Eighth Circuit. Any unfavorable decisions by the
courts, 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 a traditional telephone company not subject to such
regulation could harm our business.
Moreover, in March 2000, a federal appeals court struck portions of the
FCC's new rules, and has required the FCC to reconsider and review those rules.
In particular, the appeals court has required the FCC to revise its rules
concerning the types of equipment that we may collocate on the traditional
telephone company premises and the steps that traditional telephone companies
may take to separate their equipment from our equipment. The traditional
telephone companies may implement the court's ruling and any subsequent FCC
rules in a manner that impairs our ability to obtain collocation space and
collocate the equipment of our choice on their premises. Such actions by the
traditional telephone companies could adversely affect our business and disrupt
our existing network design, configuration and services.
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."
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RISKS RELATED TO THIS OFFERING AND THE NOTES
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the exchange offer, we will have no further
obligation to register the old notes. Thereafter, any holder of old notes who
does not tender its old notes in the exchange offer, including any holder which
is an "affiliate" of ours which cannot tender its old notes in the exchange
offer, will continue to hold restricted securities which may not be offered,
sold or otherwise transferred, pledged or hypothecated except pursuant to Rule
144 and Rule 144A under the Securities Act or pursuant to any other exemption
from registration under the Securities Act relating to the disposition of
securities, provided that an opinion of counsel is furnished to us that such an
exemption is available. These restrictions may limit the trading market and
price for the old notes.
THERE IS NO PUBLIC MARKET FOR THE NEW NOTES
The new notes are being offered to the holders of the old notes. Prior to
this exchange offer, there has been no existing trading market for any of the
old notes and there can be no assurance that a trading market will develop for
the new notes. We do not intend to apply for listing of the notes on any
securities exchange or on the Nasdaq National Market. Although the new notes are
eligible for trading in the PORTAL Market, the new notes may trade at a discount
from their initial offering price, depending upon prevailing interest rates, the
market for similar securities, our performance and other factors. In connection
with the old note issuance, we were advised by the Initial Purchasers that they
intended to make a market in the new notes. However, the Initial Purchasers are
not obligated to do so and any such market-making activities may be discontinued
at any time without notice. Therefore, we cannot assure you that an active
market for the new notes will develop.
WE RELY UPON DISTRIBUTIONS FROM OUR SUBSIDIARIES TO SERVICE OUR INDEBTEDNESS AND
OUR INDEBTEDNESS IS EFFECTIVELY SUBORDINATED TO THE INDEBTEDNESS OF OUR
SUBSIDIARIES
We are a holding company. As such, we conduct substantially all of our
operations through our subsidiaries. As of December 31, 1999, we had
approximately $800.0 million total indebtedness (including the current portion
but net of debt discount and after giving pro forma effect to the issuance of
the notes). Our indentures permit us and our subsidiaries to incur substantial
additional indebtedness in the future. In addition, the notes will not be
guaranteed by any of our subsidiaries. Consequently, the notes will be
effectively subordinated in right of payment to all indebtedness and other
liabilities of our subsidiaries, including subordinated indebtedness and trade
payables.
Our cash flow and ability to service our indebtedness, including the
notes, will depend upon the cash flow of our subsidiaries and payments of funds
by those subsidiaries to us in the form of repayment of loans, dividends or
otherwise. These subsidiaries are separate and distinct legal entities with no
legal obligation to pay any amounts due on the notes or to make any funds
available therefor. In addition, our subsidiaries may become parties to
financing arrangements which may contain limitations on the ability of our
subsidiaries to pay dividends or to make loans or advances to us or otherwise
make cash flow available to us.
In addition, if we caused a subsidiary to pay a dividend in order to
enable us to make payments in respect of the notes, and such transfer were
deemed a fraudulent transfer or unlawful distribution, the holders of the notes
could be required to return the payment.
If we were unable to generate sufficient cash flow or are otherwise
unable to obtain funds necessary to meet required payments of principal,
premium, if any, and interest on our indebtedness, including the notes, we would
be in default under the terms of the agreements governing such indebtedness,
including the indentures. In that case, the holders of our other indebtedness
could elect to declare all of the funds borrowed to be due and payable together
with accrued and unpaid interest. If an acceleration occurs and we do not have
sufficient funds to pay the accelerated indebtedness, the holders could initiate
enforcement action against us.
In addition, in the event of any distribution or payment of our assets in
any foreclosure, dissolution, winding-up, liquidation or reorganization, holders
of any secured indebtedness will have a secured claim to our assets that
constitute their collateral, prior to the satisfaction of any unsecured claim
from such assets. Our indentures permit the incurrence of indebtedness secured
by our assets and our subsidiaries' assets. In the event of our bankruptcy,
liquidation or reorganization, holders of the notes will be entitled to payment
from the remaining
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assets only after payment of, or provision for, all secured indebtedness. In any
of the foregoing events, we may not have sufficient assets to pay amounts due on
the notes.
Under certain circumstances, our subsidiaries will be required to
guarantee our obligations under the indenture and the notes. If any subsidiary
enters into such a guarantee and bankruptcy or insolvency proceedings are
initiated by or against that subsidiary within 90 days (or, possibly, one year)
after that subsidiary issued a guarantee or that subsidiary incurred obligations
under its guarantee in anticipation of insolvency, then all or a portion of the
guarantee could be avoided as a preferential transfer under federal bankruptcy
or applicable state law. In addition, a court could require holders of the notes
to return all payments pursuant to any such guarantee made within any such 90
day (or, possibly, one year) period as preferential transfers.
26
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of new notes in the
exchange offer. In consideration for issuing the new notes, we will receive an
equivalent principal amount of old notes. The old notes surrendered in exchange
for new notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the new notes will not result in any increase in our indebtedness.
The net proceeds to us from the sale of the old notes by us were
approximately $413.3 million after deducting the offering expenses.
We anticipate that the net remaining proceeds we received from the issuance
of the old notes will be used:
o to fund capital expenditures to be incurred in the deployment of our
network in existing and new regions,
o for expenses associated with our continued development and sales and
marketing activities,
o to fund other operating expenses,
o to support possible strategic investments and strategic acquisitions,
and
o for working capital and other general corporate purposes.
The amounts that we actually expend will vary depending upon a number of
factors, including future revenue growth, capital expenditures and the amount of
cash generated by our operations. Additionally, if we determine it would be in
our best interest, we may increase or decrease the number, selection and timing
of entry of our targeted regions. Accordingly, our management will retain broad
discretion in the allocation of such net proceeds. We may also use a portion of
the net proceeds of this offering to pursue possible strategic investments in or
acquisitions of businesses, technologies or products complementary to ours in
the future. We actively investigate strategic investment and acquisition
opportunities. Pending use of such net proceeds for the above purposes, we
intend to invest such funds primarily in United States Treasury securities.
27
<PAGE>
CAPITALIZATION
The following table sets forth (i) our capitalization as of December 31,
1999, and (ii) our capitalization as of December 31, 1999 on a pro forma basis
to reflect the net proceeds from the sale of the Notes after deducting the
offering expenses payable by us.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------
PRO
ACTUAL FORMA(1)
----------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 216,038 $ 629,307
Pledged securities (2)............................................. 63,308 63,308
---------- ------------
Total cash, cash equivalents and pledged securities............. 279,346 692,615
========== ============
LONG-TERM OBLIGATIONS:
Capital lease obligations (including current portion).............. 312 312
13 1/2% Senior Discount Notes due 2008, net (3)..................... 163,821 163,821
12 1/2% Senior Notes due 2009, net (4)............................... 210,916 210,916
12% Senior Notes due 2010.......................................... -- 425,000
---------- ------------
Total long-term obligations (including current portion)......... 375,049 802,049
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 45,000,000 shares authorized, no shares issued
and outstanding actual and pro forma............................ -- --
Common Stock, $0.001 par value; 97,500,000 shares authorized,
32,331,316 shares issued and outstanding actual and pro forma... 82 82
Common Stock--Class B, $0.001 par value; 15,000,000 shares
authorized, 6,379,177 shares issued and outstanding actual and
pro forma (5)................................................... 6 6
Additional paid-in capital......................................... 851,589 851,589
Deferred compensation.............................................. (6,513) (6,513)
Accumulated other comprehensive income............................. 91,257 91,257
Accumulated deficit................................................ (246,130) (246,130)
---------- ------------
Total stockholders' equity...................................... 690,291 690,291
---------- ------------
Total capitalization.......................................... $1,065,340 $ 1,490,340
========== ============
</TABLE>
- --------------
(1) The pro forma amount includes $413.3 million of net proceeds from the
issuance of the notes.
(2) Represents the portion of the net proceeds from the issuance of the 1999
notes used to purchase government securities held in a pledge account.
Amount includes accrued interest on the securities.
(3) The 1998 notes accrete in value through March 15, 2003 at a rate of 13 1/2%
per annum, compounded semi-annually. No cash interest will be payable on
the 1998 notes prior to that date. An additional unamortized debt discount
of $7.4 million at September 30, 1999, which represents the unamortized
value ascribed to the warrants issued in connection with the 1998 notes, is
being amortized to interest expense over the term of the 1998 notes.
(4) The 1999 notes are presented net of unamortized debt discount of
approximately $4.5 million at December 31, 1999, which represents the
unamortized additional original issue discount to be amortized to interest
expense over the term of the 1999 notes.
(5) Beginning in January 2000, the 6,379,177 shares of class B common stock are
convertible into 14,353,147 shares of common stock.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
December 31, 1997, 1998 and 1999 have been derived from our audited Consolidated
Financial Statements and the related Notes, which are included elsewhere in this
prospectus. You should read the following selected consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our Consolidated Financial Statements and the related
Notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- --------- ----------
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Revenues.................................................................. $ 26 $ 5,326 $ 66,488
Operating expenses:
Network and product costs.............................................. 54 4,562 55,347
Sales, marketing, general and administrative........................... 2,374 31,043 140,372
Amortization of deferred compensation.................................. 295 3,997 4,768
Depreciation and amortization.......................................... 70 3,406 37,602
--------- --------- ----------
Total operating expenses............................................. 2,793 43,008 238,089
--------- --------- ----------
Loss from operations...................................................... (2,767) (37,682) (171,601)
Net interest expense................................................... 155 (10,439) (23,796)
--------- --------- ----------
Net loss.................................................................. $ (2,612) $ (48,121) $ (195,397)
========= ========= ==========
Preferred dividends....................................................... -- -- (1,146)
--------- --------- ----------
Net loss avilable to common stockholders.................................. $ (2,612) $ (48,121) $ (196,543)
========= ========= ==========
Net loss per share-basic and diluted...................................... $ (.35) $ (3.75) $ (1.83)
========= ========= ==========
Weighted average shares used in computing net loss per share- basic
and diluted............................................................. 7,360,978 12,844,203 107,647,812
========= ========= ==========
OTHER FINANCIAL DATA:
EBITDA(1)................................................................. $ (2,402) $ (30,154) $ (129,486)
Capital expenditures...................................................... 2,253 59,503 208,186
Deficiency of earnings avilable to cover fixed charges(2)................. $ (2,612) $ (48,121) $ (195,397)
========= ========= ==========
AS OF DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments...................... $ 4,378 $ 64,450 $ 767,357
Net property and equipment................................................ 3,014 59,145 237,542
Total assets.............................................................. 8,074 139,419 1,147,606
Long-term obligations, including current portion.......................... 783 142,879 375,049
Total stockholders' equity (net capital deficiency)....................... 6,498 (24,706) 690,291
AS OF DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- ----------
OTHER OPERATING DATA:
Homes and businesses passed............................................... 278,000 6,023,217 29,000,000
Lines installed........................................................... 26 3,922 57,000
</TABLE>
- --------------
(1) EBITDA consists of net loss excluding net interest, taxes, depreciation and
amortization, non-cash stock-based compensation expense and other
non-operating income or expenses. We have provided EBITDA because it is a
measure of financial performance commonly used in the telecommunications
industry as well as to enhance an understanding of our operating results.
EBITDA should not be construed as either:
- an alternative to operating income (as determined in accordance with
generally accepted accounting principles) as an indicator of our
operating performance, or
- an alternative to cash flows from operating activities (as determined
in accordance with generally accepted accounting principles) as a
measure of liquidity.
EBITDA as calculated by us may be calculated differently than EBITDA for other
companies. See our consolidated financial statements and the related notes
thereto contained elsewhere in this prospectus.
(2) for purposes of determining the deficiency of earnings available to cover
fixed charges, "earnings" included pre-tax loss from operations adjusted
for fixed charges. "Fixed charges" included interest expense, capitalized
interest, amortization of debt discount and financing costs, and that
portion of rent expense which we believe to be representative of interest.
In view of our limited operating history and due to additional interest
charges (including amortization of debt discount and debt issuance costs)
with respect to our existing debt securities, the deficiency of earnings
available to cover fixed charges should not be considered indicative of the
deficiency of earnings available to cover fixed charges in the future.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THE ACCURACY OF WHICH
INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS FOR MANY REASONS
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS. WE DISCLAIM ANY OBLIGATION TO UPDATE INFORMATION CONTAINED
IN ANY FORWARD-LOOKING STATEMENT. SEE "--FORWARD LOOKING STATEMENTS."
OVERVIEW
We are a leading provider of broadband communications services to
Internet service provider, enterprise and telecommunications carrier, and other
customers. Since March 1998, we have raised $1,580.4 million of gross proceeds
from debt and equity financings to fund the deployment and expansion of our
network. By February 29, 2000, we had deployed our services in 62 metropolitan
statistical areas. We plan to build our network and offer our services in a
total of 100 metropolitan statistical areas nationwide. As of December 31, 1999,
our network passed 29 million homes and businesses, and we had installed 57,000
end-user lines.
In connection with our expansion within existing metropolitan statistical
areas and into new metropolitan statistical areas, we expect to significantly
increase our capital expenditures, as well as our sales and marketing
expenditures, to deploy our network and support additional end-users in those
regions. Accordingly, we expect to incur substantial and increasing net losses
for at least the next several years.
We derive revenue from:
o monthly recurring service charges for connections from the end-user
to our facilities and for backhaul services from our facilities to
the Internet service provider or enterprise customer;
o service order set-up and other non-recurring charges; and
o the sale of customer premise equipment that we provide to our
customers due to the general unavailability of customer premise
equipment through retail channels.
We expect prices for the major components of both recurring and
non-recurring revenues to decrease each year in part due to the effects of
competitive pricing and future volume discounts. We believe our revenues from
the sale of customer premise equipment will decline over time, as customer
premise equipment becomes more generally available. We expect that the prices we
charge to customers for customer premise equipment will decrease each year.
The following factors comprise our network and service costs:
o MONTHLY NON-RECURRING AND RECURRING CIRCUIT FEES. We pay traditional
telephone companies and other competitive telecommunications
companies non-recurring and recurring fees for services including
installation, activation, monthly line costs, maintenance and repair
circuits between and among our digital subscriber line access
multiplexers and our regional data centers, customer backhaul, and
end-user lines. As our end-user base grows, we expect that the
largest element of network and product cost will be the traditional
telephone companies' charges for our leased telephone wires; and
o OTHER COSTS. Other costs that we incur include those for materials in
installation and the servicing of customers and end-users, and the
cost of customer premise equipment.
The development and expansion of our business will require significant
expenditures. The principal capital expenditures incurred during the buildup
phase of any metropolitan statistical area involve the procurement, design and
construction of our central office cages, end-user DSL line cards, and
expenditures for other elements of our network design. Currently, the average
capital cost to deploy our facilities in a central office, excluding end-user
line cards, is approximately $85,000 per central office facility. This cost may
vary in the future due to the quantity and type of equipment we initially deploy
in a central office facility as well as regulatory limitations imposed on the
traditional phone companies relative to pricing of central office space,
including cageless physical collocation. Following the build-out of our central
office space, the major portion of our capital expenditures is the purchase of
30
<PAGE>
DSL line cards to support incremental end-users. We expect that the average cost
of such line cards will decline over the next several years. Network
expenditures will continue to increase with the number of end-users. However,
once an operating region is fully built out, a substantial majority of the
regional capital expenditures will be tied to incremental customer and end-user
growth. In addition to developing our network, we will use our capital for
marketing our services, acquiring Internet service provider, enterprise, and
telecommunication carrier customers, and funding our customer care and field
service operations.
In connection with rolling out service on a national basis we have
commenced a branding campaign to differentiate our service offerings in the
marketplace. As a result, we expect our selling, general and administrative
expenses to increase significantly in future periods as we implement increased
marketing efforts as part of the campaign.
RECENT DEVELOPMENTS
On January 28, 2000, we completed a private placement of $425.0 million
aggregate principal amount of the old notes. We are now offering to exchange our
new notes for any and all outstanding old notes. The old notes are unsecured
senior obligations maturing on February 15, 2010 and are redeemable at our
option any time after February 15, 2005 at stated redemption prices plus accrued
and unpaid interest thereon. Net proceeds from the old notes were approximately
$413.3 million, after discounts, commissions and other transaction costs of
approximately $11.7 million. The discount and debt issuance costs are being
amortized over the life of the notes. The old notes were sold in a private
placement under Rule 144A and Regulation S under the Securities Act of 1933, as
amended.
We are currently aware of a Staff Accounting Bulletin entitled SAB 101
"Revenue Recognition in Financial Statements," which was issued in December 1999
by the Securities and Exchange Commission. SAB 101 provides that, in certain
circumstances, revenues which are received in the first month of a contract
might have to be recognized over an extended period of time, instead of in the
first month of the contract. Due to complications surrounding the implementation
of SAB 101, the SEC in March 2000 deferred the implementation date of certain
provisions of SAB 101 until the quarter ended June 30, 2000, with retroactive
application to transactions entered into during the quarter ended March 31,
2000. This extension will allow us and other companies impacted by this Bulletin
adequate time to fully understand the broader implications of SAB 101 and to
respond accordingly. We believe that based on the current guidelines, our
revenue recognition policy is in accordance with generally accepted accounting
principles.
On February 15, 2000, our Board of Directors adopted a Stockholder
Protection Rights Plan under which stockholders received one right for each
share of our Common Stock or Class B Common Stock owned by them. The
rights become exercisable, in most circumstances, upon the accumulation by a
person or group of 15% or more of our outstanding shares of Common
Stock. Each right entitles the holder to purchase from us, as provided
by the Stockholder Protection Rights Agreement, one one-thousandth of a share of
Participating Preferred Stock, par value $.001 per share, for $400.00 subject to
adjustment.
On March 7, 2000, we announced a 3-for-2 stock split, which was
effectuated through a stock dividend. Our Common Stock began trading on a
split-adjusted basis on April 3, 2000.
On March 20, 2000, we completed the acquisition of Laser Link.Net, Inc.,
a leading provider of branded Internet access, based in Media, Pennsylvania.
Under the acquisition agreement we issued 6.45 million shares of Common Stock
for all Laser Link.Net, Inc. outstanding shares, plus assumption of all
outstanding debt. We anticipate that this acquisition will allow us to provide a
turnkey broadband access solution to companies and affinity groups who want to
offer broadband Internet services to their customers, members, or affiliates.
Laser Link.Net, Inc. currently provides a similar service using dial-up access.
On April 18, 2000, we announced our preliminary operating results for the
three months ended March 31, 2000. For the first quarter of 2000 we recorded
revenues of $41.8 million, representing a 35% increase over the quarter
ended December 31, 1999, a net loss of $107.2 million, and an EBITDA deficit of
$75.0 million. We also announced that, during the first quarter, our subscriber
lines increased 63% to 93,000 lines, and homes and businesses passed increased
to 35 million from 29 million at December 31, 1999.
RESULTS OF OPERATIONS
Results of operations for the three years ended December 31, 1999 are as
follows:
REVENUES
We recorded revenues of $66.5 million for the year ended December 31,
1999, $5.3 million for the year ended December 31, 1998 and $26,000 for the year
ended December 31, 1997. The increase in revenues in all periods is
31
<PAGE>
attributable to growth in the number of customers and end-users resulting from
our increased sales and marketing efforts and the expansion of our national
network. We expect revenues to increase in future periods as we expand our
network within our existing regions, deploy networks in new regions and increase
our sales and marketing efforts in all of our regions.
NETWORK AND PRODUCT COSTS
We recorded network and product costs of $55.3 million for the year ended
December 31, 1999, $4.6 million for the year ended December 31, 1998 and $54,000
for the year ended December 31, 1997. The increase in network costs in all
periods is attributable to the expansion of our network and increased orders
resulting from our sales and marketing efforts. We expect network and product
costs to increase significantly in future periods due to increased sales
activity and expected revenue growth.
SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Sales, marketing, general and administrative expenses were $140.4 million
for the year ended December 31, 1999, $31.0 million for the year ended December
31, 1998 and $2.4 million for the year ended December 31, 1997. Sales, marketing
and general and administrative expenses consist primarily of salaries, expenses
for the development of our business, the development of corporate
identification, promotional and advertising materials, expenses for the
establishment of our management team, and sales commissions. The increase in
sales, marketing, general and administrative expense for all years is
attributable to growth in headcount in all areas of our Company, continued
expansion of our sales and marketing efforts, deployment of our network,
expansion of our facilities and building of our operating infrastructure. In
addition, in 1999, sales, marketing, general and administrative increased over
1998 due to our advertising campaign initiated in 1999. Sales, marketing,
general and administrative expenses are expected to increase significantly as we
continue to expand our business.
DEFERRED COMPENSATION
Through December 31, 1999, we recorded a total of approximately $15.6
million of deferred compensation, with an unamortized balance of approximately
$6.5 million remaining on our December 31, 1999 consolidated balance sheet.
Deferred compensation is a result of us granting stock options to our employees,
certain of our directors, and certain contractors with exercise prices per share
below the fair values per share for accounting purposes of our Common Stock at
the dates of grant. We are amortizing the deferred compensation over the vesting
period of the applicable option using a graded vesting method. Amortization of
deferred compensation was $4.8 million for the year ended December 31, 1999,
$4.0 million for the year ended December 31, 1998, and $295,000 for the year
ended December 31, 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes:
o depreciation of network costs and related equipment;
o depreciation of information systems, furniture and fixtures;
o amortization of improvements to central offices, regional data
centers and network operations center facilities and corporate
facilities;
o amortization of capitalized software costs; and
o amortization of intangible assets.
In January 1999, we recorded intangible assets of $28.7 million from the
issuance of preferred stock to AT&T Ventures, NEXTLINK and Qwest. Amortization
of these assets was $8.2 million during the year ended December 31, 1999, and is
included in depreciation and amortization on the accompanying consolidated
statement of operations. Annual amortization of these assets will be
approximately $8.4 million in each of the years in the two-year period ending
December 31, 2001, decreasing to approximately $1.2 million per year for each
subsequent year through the year ending December 31, 2004.
32
<PAGE>
Depreciation and amortization was approximately $37.6 million for the
year ended December 31, 1999, $3.4 million for the year ended December 31, 1998,
and $70,000 for the year ended December 31, 1997. The increase for both years
was due to the addition of equipment and facilities placed in service throughout
the year as well as amortization of intangible assets recorded in 1999. We
expect depreciation and amortization to increase significantly as we increase
our capital expenditures to expand our network.
NET INTEREST INCOME AND EXPENSE
Net interest income and expense consists primarily of interest income on
our cash balance, cash equivalents, and short term investments, offset by
interest expense associated with our debt. Net interest expense for the years
ended December 31, 1999, 1998, and 1997 was $23.8 million, $10.4 million and
($155,000), respectively. Net interest expense during these periods consisted
primarily of interest expense on our 13 1/2% Senior Discount Notes due 2008
issued in March 1998 (the "1998 notes") and our 12 1/2% senior notes due 2009
issued in February 1999 (the "1999 notes") and capital lease obligations. Net
interest expense was partially offset by interest income earned primarily from
the investment of the proceeds raised from the issuance of the 1998 notes and
the 1999 notes as well as our initial public offering and our issuance of
preferred stock to AT&T Ventures, NEXTLINK and Qwest. We expect interest expense
to increase significantly over time, primarily because the 1998 notes and 1999
notes mature in 2008 and 2009, respectively, and because we issued $425.0
million of new long-term debt in January 2000.
INCOME TAXES
Income taxes consist of federal, state and local taxes, where applicable.
We expect significant consolidated net losses for the foreseeable future which
should generate net operating loss carry forwards. However, our ability to use
net operating losses may be subject to annual limitations. In addition, income
taxes may be payable during this time due to operating income in certain tax
jurisdictions. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have expired, we may experience
significant tax expense. We made no provision for taxes because we operated at a
loss for the years ended December 31, 1999, 1998 and 1997.
QUARTERLY FINANCIAL INFORMATION
The following table presents certain unaudited consolidated statements of
operations data for our most recent eight quarters. This information has been
derived from our unaudited consolidated financial statements. In our opinion,
this unaudited information has been prepared on the same basis as the annual
consolidated financial statements and includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented. This information should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this prospectus. The operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
------ ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $ 186 $ 809 $ 1,565 $ 2,766 $ 5,596 $ 10,833 $ 19,141 $ 30,918
Operating Expenses:
Network and products
costs................. 203 758 1,355 2,246 4,960 10,565 16,694 23,128
Sales, marketing, general
and administrative.... 1,944 4,606 10,681 13,812 18,113 24,976 37,697 59,586
Amortization of deferred
compensation.......... 227 631 1,837 1,302 1,653 1,234 1,008 873
Depreciation and
amortization.......... 164 446 738 2,058 4,647 8,671 10,593 13,691
------ ------- ------- ------- ------- ------- ------- -------
Total operating expenses. 2,538 6,441 14,611 19,418 29,373 45,446 65,992 97,278
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations..... (2,352) (5,632) (13,046) (16,652) (23,777) (34,613) (46,851) (66,360)
Net interest income
(expense)............. (429) (3,291) (3,511) (3,208) (5,127) (7,239) (7,254) (4,176)
------ ------- ------- ------- ------- ------- ------- -------
Net loss................. $ (2,781) $(8,923) $(16,557) $(19,860) $(28,904) $(41,852) $(54,105) $(70,536)
====== ======= ======= ======= ======= ======= ======= =======
Net loss per share....... $ (0.39) $ (1.11) $ (1.84) $ (1.83) $ (0.56) $ (0.61) $ (0.70) $ (0.80)
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
33
<PAGE>
We have generated increasing revenues in each of the last eight quarters,
reflecting increases in the number of customers and end-users. Our network and
product costs have increased in every quarter, reflecting costs associated with
customer and end-user growth and the deployment of our network in existing and
new regions. Our selling, marketing, general and administrative expenses have
increased in every quarter and reflect sales and marketing costs associated with
the acquisition of customers and end-users, including sales commissions, and the
development of regional and corporate infrastructure. Depreciation and
amortization has increased in each quarter, primarily reflecting the purchase of
equipment associated with the deployment of our networks. We have experienced
increasing net losses on a quarterly basis as we increased operating expenses
and increased depreciation as a result of increased capital expenditures, and we
expect to sustain increasing quarterly losses for at least the next several
years. See "Risk Factors--We have a history of losses and expect increasing
losses in the future." Our annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors. Factors that may
affect our operating results include:
o the willingness, timing and ability of traditional telephone
companies to provide us with central office space;
o the rate at which traditional telephone companies can provide us
telephone wires over which we sell our service;
o the rate at which customers subscribe to our services;
o decreases in the prices for our services due to competition,
volume-based pricing and other factors;
o our ability to retain Internet service provider, enterprise and
telecommunications carrier customers and limit end-user churn
rates;
o the success of our relationships with strategic partners, and
other potential third parties in generating significant subscriber
demand;
o the ability to deploy on a timely basis our services to adequately
satisfy end-user demand;
o 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;
o the mix of line orders between consumer end-users and business
end-users (which typically have higher margins);
o the amount and timing of capital expenditures and other costs
relating to the expansion of our network;
o the ability to develop and commercialize new services by us or our
competitors;
o the impact of regulatory developments, including interpretations
of the 1996 Telecommunications Act; and
o our ability to successfully operate our network.
Many of these factors are outside of our control. In addition, we plan to
increase operating expenses to fund operations, sales, marketing, general and
administrative activities and infrastructure, including increased expenses
associated with our relationships with strategic partners. If these expenses are
not accompanied by an increase in revenues, we could experience a material
adverse effect on our business, prospects, operating results and financial
condition and our ability to service and repay our indebtedness. See "Risk
Factors--Our operating results are likely to fluctuate in future periods and,
therefore, are difficult to predict."
LIQUIDITY AND CAPITAL RESOURCES
Our operations have required substantial capital investment for the
procurement, design and construction of our central office cages, the purchase
of telecommunications equipment and the design and development of our network.
Capital expenditures were approximately $208.2 million for the year ended
December 31, 1999. We expect that our capital expenditures will be substantially
higher in future periods in connection with the purchase of infrastructure
equipment necessary for the development and expansion of our network and the
development of new regions. We started a branding campaign in October 1999 to
increase recognition of our name which we expect will incur substantial
additional expenses over the next twelve months.
34
<PAGE>
From our inception through December 31, 1999, we financed our operations
primarily through private placements of $10.6 million of equity securities,
$129.3 million in net proceeds raised from the issuance of the 1998 notes,
$150.2 million in net proceeds raised from our initial public offering, $60.0
million in net proceeds raised from strategic investors, $205.0 million in net
proceeds raised from the issuance of the 1999 notes and $568.8 million in net
proceeds from a secondary offering. As of December 31, 1999, we had an
accumulated deficit of $246.1 million, and cash and cash equivalents and
short-term investments of $767.4 million.
On January 28, 2000, the Company completed a private placement of $425.0
million aggregate principal amount of the old notes. The Company is now offering
to exchange its new notes for any and all outstanding old notes. The old notes
are unsecured senior obligations of the Company maturing on February 15, 2010
and are redeemable at the option of the Company any time after February 15, 2005
at stated redemption prices plus accrued and unpaid interest thereon. Net
proceeds from the old notes were approximately $413.3 million, after discounts,
commissions and other transaction costs of approximately $11.7 million. The
discount and debt issuance costs are being amortized over the life of the notes.
Net cash used in our operating activities was $102.8 million for the year
ended December 31, 1999. The net cash used for operating activities during this
period was primarily due to net losses and increases in current assets, offset
by non-cash expenses and increases in accounts payable and accrued liabilities.
Net cash used in our investing activities was $736.1 million for the year ended
December 31, 1999. The net cash used for investing activities during this period
was primarily due to purchases of property and equipment, the purchase of $74.1
million of restricted investments which were hedged as collateral for the
payment of the first six scheduled interest payments on the1999 notes, and an
aggregate of $32.2 million in equity investments made in WebMD, Inc., Efficient
Networks, Inc., Akamai Inc., Ibeam Broadcasting Corporation, and Cedent
Corporation.
Net cash provided by financing activities for the year ended December 31,
1999 was $990.5 million which primarily related to the following:
o Equity investments of $25 million from AT&T Ventures, $20 million
from NEXTLINK and $15 million from Qwest, representing an
aggregate equity investment of $60 million.
o Net proceeds of $150.2 million from our initial public offering of
13,455,000 split-adjusted shares our Common Stock at a
split-adjusted initial public offering price of $12.00 per share.
o Net proceeds of $205.0 million from the issuance of the 1999 notes
with an aggregate principal amount of $215.0 million.
o Net proceeds of $568.8 million from the issuance of 13,655,000
shares of stock in our secondary offering of $43.00 per share.
Net cash provided by financing activities was partially offset by an
estimated $680,000 in offering costs applicable to our secondary offering of
7,500,000 shares in June 1999 for which we received no proceeds. We believe that
our current cash and cash equivalents and short-term investments will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months.
We expect to experience substantial negative cash flow from operating
activities and negative cash flow before financing activities for at least the
next several years due to continued development, commercial deployment and
expansion of our network. We may also make investments in and acquisitions of
businesses that are complementary to ours to support the growth of our business.
Our future cash requirements for developing, deploying and enhancing our network
and operating our business, as well as our revenues, will depend on a number of
factors including:
o the number of regions entered, the timing of entry and services
offered;
o network development schedules and associated costs;
o the rate at which customers and end-users purchase our services
and the pricing of such services;
o the level of marketing required to acquire and retain customers
and to attain a competitive position in the marketplace;
o the rate at which we invest in engineering and development of
intellectual property with respect
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o existing and future technology; and
o unanticipated opportunities.
We will be required to raise additional capital, the timing and amount of
which we cannot predict. We expect to raise additional capital through debt or
equity financings, depending on market conditions, to finance the continued
development, commercial deployment and expansion of our network and for funding
operating losses or to take advantage of unanticipated opportunities. If we are
unable to obtain required additional capital or are required to obtain it on
terms less satisfactory than we desire, we may be required to delay the
expansion of our business or take or forego actions, any or all of which could
harm our business.
In addition, we have and may continue to selectively pursue possible
acquisitions of or investments in businesses, technologies or products
complementary to ours in the future in order to expand our geographic presence
and achieve operating efficiencies. We may not have sufficient liquidity, or we
may be unable to obtain additional debt or equity financing on favorable terms
or at all, in order to finance such acquisitions or investments.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
We have reviewed our internally developed information technology systems
and programs and believe that our systems are Year 2000 compliant and that there
are no significant Year 2000 issues within our systems or services. We have not
reviewed our non-information technology systems for Year 2000 issues relating to
embedded microprocessors. To the extent that such issues exist, these systems
may need to be replaced or upgraded to become Year 2000 compliant. We believe
that our non-information technology systems will not present any significant
Year 2000 issues, although there can be no assurance in this regard. In
addition, we utilize third-party equipment and software and interact with
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, which could have a material adverse effect on our business, prospects,
operating results and financial condition.
To date, we have not experienced any problems in complying with Year 2000
requirements, nor have we experienced any operational difficulties related to
Year 2000 issues.
FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in Section 27A of the
Securities Act and Section 21E of the Exchange Act), which can be identified by
the use of forward-looking terminology such as "estimates," "projects,"
"anticipates," "expects," "intends," "believes," or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Examples of such forward-looking
statements include but are not limited to:
o our plans to expand our existing networks or to commence service
in new metropolitan statistical areas;
o estimates regarding the timing of launching our service in new
metropolitan statistical areas;
o expectations regarding the time frames, rates, terms and
conditions for implementing "line sharing;"
o expectations regarding the extent to which enterprise customers
roll out our service;
o expectations regarding our relationships with our strategic
partners and other potential third parties;
o expectations as to pricing for our services in the future;
o expectations as to the impact of our TeleSurfer service offerings
on our margins;
o the possibility that we may obtain significantly increased sales
volumes;
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o the impact of our national advertising campaign on brand
recognition and operating results;
o plans to make strategic investments and acquisitions and the
affect of such investments and acquisitions;
o estimates of future operating results;
o plans to develop and commercialize value-added services;
o our anticipated capital expenditures;
o plans to enter into business arrangements with broadband-related
service providers;
o expectations regarding the commencement of our voice service;
o the effect of regulatory reform and regulatory litigation; and
o other statements contained in this prospectus regarding matters
that are not historical facts.
These statements are only estimates or predictions and cannot be relied
upon. We can give you no assurance that future results will be achieved. Actual
events or results may differ materially as a result of risks facing us or actual
results differing from the assumptions underlying such statements. Such risks
and assumptions that could cause actual results to vary materially from the
future results indicated, expressed or implied in such forward-looking
statements include our ability to:
o successfully market our services to current and new customers;
o generate customer demand for our services in the particular
regions where we plan to market services;
o achieve favorable pricing for our services;
o respond to increasing competition;
o manage growth of our operations; and
o access regions and negotiate suitable interconnection agreements
with the traditional telephone companies, all in a timely manner,
at reasonable costs and on satisfactory terms and conditions
consistent with regulatory, legislative and judicial developments.
All written and oral forward-looking statements made in connection with
this prospectus which are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the "Risk Factors" and other cautionary
statements included in this prospectus. We disclaim any obligation to update
information contained in any forward-looking statement.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risk, including changes in interest
rates and marketable equity security prices, relates primarily to our investment
portfolio and outstanding debt obligations. We typically do not attempt to
reduce or eliminate our market exposure on our investment securities because a
substantial majority of our investments are in fixed-rate, short-term
securities. We do not have any derivative instruments. The fair value of our
investments portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to
the fixed-rate, short-term nature of the substantial majority of our investment
portfolio. In addition, substantially all of our outstanding indebtedness at
December 31, 1999 including the notes on a pro forma basis, our 1998 notes and
our 1999 notes, is fixed-rate debt.
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BUSINESS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS. WE DISCLAIM ANY OBLIGATION TO UPDATE INFORMATION CONTAINED
IN ANY FORWARD-LOOKING STATEMENT. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FORWARD LOOKING STATEMENTS."
OVERVIEW
We are a leading provider of broadband communications services to
Internet service provider, enterprise telecommunications carrier and other
customers. These services include a range of high-speed, high capacity Internet
and network access services using digital subscriber line (DSL) technology, and
related value-added services. Internet service providers purchase our services
in order to provide high-speed Internet access to their business and consumer
end-users. Enterprise customers purchase our services directly or indirectly
from us to provide employees with high-speed remote access to the enterprise's
local area network (RLAN access), which improves employee productivity and
reduces network connection cost. Telecommunications carrier customers purchase
our services for resale to their Internet service provider affiliates, Internet
users and enterprise customers.
As of December 31, 1999, we believe we have the nation's largest DSL
network with more than 1,100 operational central offices passing over at least
29 million homes and businesses. As of December 31, 1999, we had installed
57,000 DSL based high-speed access lines and received orders for our services
from 295 Internet service provider, enterprise, and telecommunications carrier
customers, including AT&T, Concentric Network, Flashcom, MindSpring, Oracle,
Prodigy, PSINet, Qwest, Stanford University, Sun Microsystems, UUNET and Verio.
By February 29, 2000, we had deployed our network in a total of 62
metropolitan statistical areas. When our 100 metropolitan statistical area
(MSA's) build-out is completed, which we expect to be by the end of 2000, our
network will pass a total of 46 million homes and businesses, representing 40%
of homes and 45% of businesses in the United States.
We plan to continue to pursue rapid network expansion and installation of
high-speed access lines, and to develop a variety of services that are enhanced
or enabled by our expanding network, by entering into business arrangements with
broadband-related service providers in order to bring a variety of value-added
service offerings to our customers and their end-users.
INDUSTRY BACKGROUND
GROWING MARKET DEMAND FOR BROADBAND COMMUNICATIONS BANDWIDTH SERVICES
High-speed connectivity has become important to small- and medium-sized
businesses and consumers due to the dramatic increase in Internet usage.
According to International Data Corporation, the number of Internet users
worldwide reached approximately 142 million in 1998 and is forecasted to grow to
approximately 502 million by 2003. The popularity of the Internet with consumers
has driven the rapid proliferation of the Internet as a commercial medium.
Businesses are increasingly establishing Web sites and corporate intranets and
extranets to expand their customer reach and improve their communications
efficiency. Consumers are increasingly using the Internet to carry out
commercial transactions. International Data estimates that the value of goods
and services sold world wide via the Internet will increase from $50 billion in
1998 to over $1.3 trillion in 2003. Accordingly, to remain competitive, small-
and medium-sized businesses increasingly need high-speed Internet connections to
maintain complex Web sites, access critical business information and communicate
more effectively with employees, customers and business partners. Broadband
connections are also becoming increasingly important to businesses and consumers
as rich Internet content--such as multi-media advertising, news and
entertainment--and on-line consumer transactions and e-commerce become more
widely available and widely used.
The demand for broadband communications services for RLAN access is also
growing rapidly. Over the past ten years, high-speed local area networks have
become increasingly important to enterprises to enable employees to share
information, send e-mail, search databases and conduct business. We believe that
a large majority of personal computers used in enterprises are connected to
local area networks. Enterprises are now seeking to extend this same high-speed
connectivity to employees accessing the local area networks from home to improve
employee
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productivity and reduce operating costs. The number of home office households on
the Internet grew from 12.0 million at the end of 1997 to an estimated 19.7
million by the end of 1999 and is expected to grow to 30.2 million households by
2002. Only 3.7% of these users currently access the Internet through a broadband
connection of any type.
As use of the Internet, intranets and extranets increases, we expect the
market size for both small- and medium-sized business and consumer Internet and
RLAN access to continue to grow rapidly causing the demand for broadband
communications services to also grow rapidly. However, the full potential of
Internet and local area network applications cannot be realized without removing
the performance bottlenecks of the existing public switched telephone network.
Increases in telecommunications bandwidth have significantly lagged improvements
in microprocessor performance over the last ten years. Since 1988,
microprocessor performance has improved nearly 80-fold, while the fastest
consumer modem connection has improved from 9.6 kilobits per second to 56.6
kilobits per second, a factor of six. According to industry analysts, there are
nearly 40 million personal computers in U.S. homes today, and most of them can
only connect to the Internet or their corporate local area network by low-speed
analog lines. Higher speed connections are available, including:
o INTEGRATED SERVICES DIGITAL NETWORKS--An ISDN line provides
standard interfaces for digital communication networks and is
capable of carrying data, voice, and video over digital circuits.
ISDN protocols are used worldwide for connections to public ISDN
networks or to attach ISDN devices to compatible PBX systems.
o T1 LINE AND FRACTIONAL T1--These are telephone industry terms for
a digital transmission link with a capacity of 1.544 megabits per
second or portions thereof.
o FRAME-RELAY--A high-speed packet-switched data communications
protocol.
o CABLE MODEM--Internet access over hybrid fiber coaxial cable.
While these services have recently experienced dramatic growth in the
U.S., they are frequently expensive, complex to order, install and maintain, and
in some cases are not as widely available as DSL technology.
EMERGENCE OF DSL TECHNOLOGY
DSL technology first emerged in the 1990s and is commercially available
today to address performance bottlenecks of the public switched telephone
network. DSL equipment, when deployed at each end of standard copper telephone
lines, increases the data carrying capacity of copper telephone lines from
analog modem speeds of 56.6 kilobits per second, for the fastest consumer
modems, and ISDN speeds of 128 kilobits per second to DSL speeds of up to 6
megabits per second depending on the length and condition of the copper line.
Recent advances in semiconductor technology and digital signal processing
algorithms and falling equipment prices have made the widespread deployment of
DSL technology more economical over time. We anticipate that equipment prices
will continue to fall as a result of continued advances in semiconductor
technologies and increases in equipment production volumes.
Because DSL technology reuses the existing copper plant, it is
significantly less expensive to deploy on a broad scale than alternative
technologies, such as cable modems, wireless data and satellite data. As a
result, a significant portion of the investment in a DSL network is
success-based, requiring a comparatively lower initial fixed investment.
Subsequent variable investments in DSL technology are directly related to the
number of paying customers.
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IMPACT OF REGULATORY DEVELOPMENTS
The passage of the 1996 Telecommunications Act created a legal framework
for competitive telecommunications companies to provide local analog and digital
communications services in competition with the traditional telephone companies.
The 1996 Telecommunications Act eliminated a substantial barrier to entry for
competitive telecommunications companies by enabling them to leverage the
existing infrastructure built by the traditional telephone companies, which
required a $200 billion investment by these telephone companies and their
ratepayers, rather than constructing a competing infrastructure at significant
cost. The 1996 Telecommunications Act requires traditional telephone companies,
among other things:
o to allow competitive telecommunications companies to lease
telephone wires on a line by line basis;
o to provide central office space for the competitive
telecommunications companies' DSL and other equipment required to
connect to the leased telephone wires;
o to lease access on their inter-central office fiber backbone to
link the competitive telecommunications companies' equipment; and
o to allow competitive telecommunications companies to
electronically connect into their operational support systems to
place orders and access their databases.
The 1996 Telecommunications Act, as interpreted by the Federal
Communications Commissions (FCC), in particular emphasized the need for
competition-driven innovations in the deployment of advanced telecommunications
services, such as DSL services.
OUR COMPETITIVE STRENGTHS
We were formed to capitalize on the substantial business opportunity
created by the growing demand for broadband Internet and network access, the
commercial availability of low-cost DSL technology and the passage of the 1996
Telecommunications Act. Key aspects of our solution to provide broadband
communications services include:
o an attractive value proposition that provides high-speed
connections at similar or lower prices than alternative high-speed
technologies currently available to customers;
o a rapid network deployment and service rollout with significant
increases in line installations to date;
o a widely available, continuously connected, secure network that
facilitates deployment of Internet and intranet applications; and
o a management team experienced in the data communications,
telecommunications and personal computer industries.
ATTRACTIVE VALUE PROPOSITION. We offer higher bandwidth digital
connections than alternative services at similar or lower prices that do not
vary with usage. For business Internet users, our high-end services offer
bandwidth comparable to that offered by T1 and frame-relay circuits at
approximately 25% of the cost. For the RLAN market, our mid-range services are
three to six times the speed of ISDN lines and up to ten times the speed of
analog modems at monthly rates similar to or lower than those for heavily used
ISDN lines. We believe that many of our enterprise customers can justify
deploying lines to their employees if their productivity improves by only a few
hours per month based on increases in the number of hours worked and decreases
in commute time and time spent waiting for information. For consumer Internet
users, our consumer services are comparably priced to current cable modem
services. Unlike cable modems, the speed of our service does not decrease when
more users are added.
WE HAVE LEVERAGED OUR FIRST-MOVER ADVANTAGE TO RAPIDLY EXPAND OUR NETWORK
AND GROW OUR NUMBER OF LINES INSTALLED. We were the first to widely roll out DSL
services on a commercial basis, making DSL service available for purchase in the
San Francisco Bay Area in December 1997. We believe that we have leveraged our
first-mover advantage to rapidly expand our network into our targeted
metropolitan regions and grow our number of line installations. We believe we
have the nation's largest DSL network with more than 1,100 operational central
offices passing over more than 29 million homes and businesses. As of December
31, 1999, we had installed a total of 57,000 lines nationwide.
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WIDELY AVAILABLE, ALWAYS-CONNECTED SECURE NETWORK. Our strategy of
providing blanket coverage in each region we serve is designed to ensure that
our services are available to the vast majority of our customers' end-users. Our
network provides 24-hour, always-on connectivity, unlike ISDN lines and analog
modems which require customers to dial-up each time for Internet or RLAN access.
Also, because we use dedicated connections from each end-user to the Internet
service provider or enterprise network, our customers can reduce the risk of
unauthorized access. These factors are important to our customers because any
Internet service they market to their end-users must actually be available for
them to purchase and be secure enough to not risk their own reputation or
business with any security lapses.
EXPERIENCED MANAGEMENT TEAM. Our management team includes individuals
with extensive experience in the data communications, telecommunications and
personal computer industries, including Robert Knowling, Jr., Chairman of the
Board, President and Chief Executive Officer (former Executive Vice President of
Operations and Technology at U S WEST Communications), Catherine Hemmer,
Executive Vice President and Chief Operations Officer (former Vice President,
Network Reliability and Operations at U S WEST Communications, Inc., former
General Manager, Network Provisioning at Ameritech Corporation and former Vice
President, Network Services at MFS),Robert Roblin, Executive Vice President,
Sales and Marketing (former Executive Vice President of Marketing at Adobe
Systems, Inc. and former Vice President and General Manager of Marketing,
Consumer Division at IBM Corporation), Timothy Laehy, Executive Vice President
and Chief Financial Officer (former Vice President of Corporate Finance and
Treasurer of Leasing Solutions, Inc.), Robert Davenport, III, Executive Vice
President, Business Development (former Senior Vice President and Chief
Operating Officer of Tele-Communication, Inc.'s Internet Services subsidiary
TCI.NET), Joseph Devich, Executive Vice President, Corporate Services (former
Vice President, Operations and Technologies Staff of U S WEST Communications),
Dhruv Khanna, Executive Vice President, General Counsel and Secretary, Jane
Marvin, Executive Vice President of Human Resources (former Vice President of
Human Resources for the General Business Services unit of Ameritech
Corporation), Terry Moya, Executive Vice President, External Affairs (former
Vice President & Chief Financial Officer, Capital Management, Network Operations
and Technologies at U S West Communications, Inc), and Michael Lach, Executive
Vice President, Business Integration (former Vice President, Customer
Provisioning and Maintenance of Ameritech Corporation).
BUSINESS STRATEGY
Our objective is to become the leading nationwide provider of broadband
services and a critical element in the proliferation of e-commerce and other
applications that are enabled or enhanced by broadband communications. The key
elements of our strategy to achieve this objective are as follows:
EXPAND OUR NETWORK AND ROLL OUT SERVICE RAPIDLY IN OUR TARGETED
METROPOLITAN STATISTICAL AREAS. As of February 29, 2000, we introduced our
services in 62 of the top metropolitan statistical areas nationwide. We plan to
expand our services to a total of 100 metropolitan statistical areas by the end
of 2000. In the aggregate, these 100 metropolitan statistical areas cover 40% of
homes and 50% of businesses in the United States. In addition, we have recently
begun to assess the regulatory and competitive environments in other countries.
PROVIDE PERVASIVE COVERAGE IN EACH METROPOLITAN STATISTICAL AREA. We are
pursuing a blanket coverage strategy of providing service in a substantial
majority of the central offices in each region that we enter since our Internet
service provider customers desire to market their Internet access services on
region-wide basis. Blanket coverage is also important to our enterprise
customers since most of them desire to offer RLAN access to all employees
regardless of where they reside. In addition, we believe our presence in 100
metropolitan statistical areas will allow us to better serve our Internet
service provider, enterprise, telecommunications carrier and other customers.
These customers are increasingly seeking a single supplier in multiple
metropolitan areas.
ESTABLISH AND MAINTAIN SALES AND MARKETING RELATIONSHIPS WITH LEADING
INTERNET SERVICE PROVIDERS, TELECOMMUNICATIONS CARRIERS AND OTHER DSL RESELLERS.
We principally target Internet service providers, telecommunications carriers
and other DSL resellers that can offer their end-users cost and performance
advantages for Internet access using our services. We primarily provide
connections to Internet service providers, which in turn offer high-speed
Internet access using our network. In other cases, we provide wholesale DSL and
Internet access services for resale by our customers such as Prodigy
Communications Corporation and Juno Online Services. In this way, we:
o carry the traffic of multiple Internet service providers,
telecommunications carriers and other customers in any region,
increasing our volume and reducing our costs;
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o leverage our selling efforts through the sales and support staff of
these Internet service providers, telecommunications carriers and
other customers;
o offer Internet service providers, telecommunications carriers and
other customers an alternative, since the traditional telephone
company typically provides its own retail Internet access services in
competition with our customers; and
o provide Internet service providers, telecommunications carriers and
other customers a high-speed service offering to compete with
cable-based Internet access.
DEVELOP A NATIONAL BRAND. We believe that we can enhance our competitive
position and increase demand for our services by actively developing a positive
brand and image for our Company and our services through a combination of
television, print and radio advertisements on both a national and local basis.
In October 1999, we commenced a significant national advertising campaign in
pursuit of this strategy. This branding strategy has created the opportunity
fours to provide end-user leads to our existing customers.
DEVELOP AND COMMERCIALIZE VALUE-ADDED SERVICES. We intend to introduce
value-added services to our customers and leverage the value of the network
access we offer today. Offering services such as voice over DSL, DSL plus
International Protocol (DSL + IP), and our Virtual Broadband Service Provider
(VBSP) offering will allow us to bundle service offerings to our customers and
improve the quality of content delivery to their end-users as well as reduce
costs. We believe this is an important part of our strategy and will allow us to
build upon our success to date in adding and retaining subscribers.
ACQUIRE AND ENTER INTO BUSINESS ARRANGEMENTS WITH NETWORK AND
BROADBAND-RELATED SERVICE PROVIDERS. We believe that the pace of deployment of
our network can be increased by acquiring and entering into business
arrangements with other network service providers, some of which may be located
outside of the United States. We also believe our network deployment will enable
the delivery of a variety of broadband-related services and content that are
desired by our customers. We expect to make these services available to our
customers through acquiring and entering into business arrangements with leading
providers of broadband-related services or content. For example, we recently
acquired Laser Link. Net, Inc. This acquisition will allow us to better provide
DSL and IP services on a wholesale basis and better enable us to serve customers
who do not wish to maintain any network facilities.
TAKE ADVANTAGE OF NEW REGULATORY DEVELOPMENTS. In late 1999, the FCC
required the major local phone companies to provide us, and other competitive
local carriers, with "line sharing." This would allow us to provide our services
over the same telephone wire used by the traditional telephone companies to
provide analog voice services. In addition, some of the Ameritech/SBC merger
conditions adopted by the FCC in October 1999 also contain provisions on line
sharing and provide for reductions in costs for telephone wires in certain
circumstances. In many cases, line sharing would allow us to provision our
asymmetric DSL services on the same telephone wire as the existing local phone
companies' voice service. Currently, we provide our DSL services over a separate
additional telephone wire. Asymmetric DSL and standard telephone service can
exist on a single line and most, if not all, of the traditional telephone
companies provision their own asymmetric services on the same line as existing
voice services.
We see line sharing as an extremely important opportunity for us for
three primary reasons. First, line sharing should significantly reduce the
monthly recurring charges we incur for telephone wires. Second, line sharing
should reduce the time it takes traditional telephone companies to deliver
telephone wires because the telephone wire will already exist. Third, line
sharing should resolve lack of telephone wire problems that we have encountered
when ordering telephone wires in some areas of the country. We have signed
interim line-sharing agreements with BellSouth and U S WEST. We are negotiating
arrangements with and in arbitration or other proceedings against the other
major incumbent local telephone carriers. We have also implemented line sharing
on a trial basis in one state. We expect all of the major traditional local
phone companies to implement line sharing on a wide scale later this year.
OUR SERVICE OFFERINGS
We offer six business-grade services under the TeleSpeed brand to connect
our customers' end-users to our regional data centers and two consumer-grade
service offerings called TeleSurfer and TeleSurfer Pro. In March 2000, we
introduced two new services--DSL+IP and VBSP. We also offer business consumers
Virtual Private
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Network (VPN) technology over DSL. In addition, Internet service provider and
enterprise customers may purchase backhaul services from us to connect their
facilities to our regional data centers.
TELESPEED SERVICES
Our TeleSpeed services connect individual end-users on conventional
telephone wires to our DSL equipment in their serving central office and from
there to our network serving that metropolitan statistical area. A traditional
telephone company's infrastructure consists of numerous central offices which
are connected by a fiber optic backbone to a regional office that routes local
and long distance traffic. Each central office collects the individual telephone
wires from end-users' premises in the neighborhood.
The particular TeleSpeed service available to an end-user depends in
large part on the user's distance to the central office. We believe that
substantially all, if not all, of our potential end-users in our target markets
generally can be served with one of our services. We estimate that approximately
70% of end-users are within 18,000 feet of a central office and can be served by
at least our TeleSpeed 384 service. However, the specific number of potential
end-users for the higher speeds will vary by central office and by region and
will be affected by line quality. The chart below compares the performance and
markets for each of our intraregional end-user services as of December 31, 1999:
<TABLE>
<CAPTION>
MAXIMUM MAXIMUM
SPEED TO SPEED FROM RANGE*
INTRAREGIONAL SERVICES END-USER END-USER (FEET) MARKET USAGE
<S> <C> <C> <C> <C>
TeleSpeed 144........................ 144 Kbps 144 Kbps 35,000 ISDN replacement
TeleSpeed 192........................ 192 Kbps 192 Kbps 18,000 Business Internet, RLAN
TeleSpeed 384........................ 384 Kbps 384 Kbps 18,000 Business Internet, RLAN
TeleSpeed 768........................ 768 Kbps 768 Kbps 13,500 Business Internet
TeleSpeed 1.1........................ 1.1 Mbps 1.1 Mbps 12,000 Business Internet
TeleSpeed 1.55....................... 1.5 Mbps 1.5 Mbps 15,000 High-speed Web access
</TABLE>
* Estimated maximum distance from the end-user to the central office.
- --------------
Prices for our end-user services may vary depending upon the performance
level of the service. For example, our TeleSpeed 144 and 192 services are our
lowest priced end-user services and our TeleSpeed 1.1 and 1.5 services are our
highest priced end-user services. Our prices also vary across regions and for
high volume customers that are eligible for volume discounts. See "Risk
Factors--We may experience decreasing prices for our services, which may impair
our ability to achieve profitability or positive cash flow" for a discussion of
the risks associated with our ability to sustain current price levels in the
future.
TELESPEED 144. Our TeleSpeed 144 service operates at up to 144 kilobits
per second in each direction, which is similar to the performance of an ISDN
line. This service, which can use existing ISDN equipment at the end-user site,
is targeted at the ISDN replacement market where its per month flat rate can
compare favorably to ISDN services from the traditional telephone company when
per-minute usage charges apply. It is also the service that we offer on
telephone wires that are either too long to carry our higher speed services or
are served by digital loop carrier systems or similar equipment where a
continuous copper connection is not available from the end-user site to a
central office.
TELESPEED 192. This service provides one and a half to three times the
performance of ISDN lines at similar or lower price points to heavily-used ISDN
lines.
TELESPEED 384. This service provides three to six times the performance
of ISDN lines at similar price points to heavily-used ISDN lines.
TELESPEED 768. This service provides one-half the bandwidth of a T1 data
circuit at substantially less than one-half of the monthly price that we
estimate is typical for T1 service. The target market for the TeleSpeed 768
service is small businesses needing moderate speed access to the Internet but
who have previously been unable to afford the price of such service. The service
also competes favorably from a price/performance standpoint with traditional
fractional T1 and frame-relay services for these same customers.
TELESPEED 1.1. This service provides over two-thirds the bandwidth of a
T1data circuit at less than one-half of the monthly price that we estimate is
typical for T1 service. The target market for the TeleSpeed 1.1 service is small
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businesses needing T1-level access to the Internet which have previously been
unable to afford the price of such service. The service also competes favorably
from a price/performance standpoint with traditional fractional T1 and
frame-relay services for these same customers.
TELESPEED 1.55. This service provides bandwidth comparable to a T1 data
circuit of less than one-half of the monthly price that we estimate is typical
for T1 service. The service also provides the highest performance of any
TeleSpeed service to stream video or other multimedia content to end-user
locations.
TELESPEED REMOTE. TeleSpeed Remote provides high-speed network access for
end-users located in remote regions to their corporate networks. This service is
targeted at businesses that want high-speed remote office connections at a lower
cost than ISDN or frame-relay services. For example, this service can provide a
corporation's employees located in Boston high-speed access to their corporate
network located in San Francisco.
TELESURFER SERVICES
<TABLE>
<CAPTION>
MAXIMUM MAXIMUM
SPEED TO SPEED FROM RANGE*
INTRAREGIONAL SERVICES END-USER END-USER (FEET) MARKET/USAGE
<S> <C> <C> <C> <C>
Telesurfer ADSL............................... 608 Kbps 128 Kbps 12,000 Consumer
TeleSurfer Pro ADSL........................... 1.5 Mbps 384 Kbps 12,000 Consumer
</TABLE>
* Estimated maximum distance from the end-user to the central office.
- --------------
TELESURFER ADSL. This consumer-grade service is an asymmetric service,
offering up to 608 kilobits per second downstream and up to 128 kilobits per
second upstream. This service is the base consumer service. The target market
for this service is consumers using either dial-up analog or ISDN connections
for web browsers.
TELESURFER PRO ADSL. This is a premium consumer-grade asymmetric service,
offering up to 1.5 megabits per second downstream and up to 384 kilobits per
second upstream. The target market for this service is consumers using analog or
ISDN connections for web browsers.
DSL + IP. This service currently bundles Internet protocol services with
our existing TeleSurfer services. We also plan to offer it with our TeleSpeed
services. The additional Internet protocol services include end-user
authentication, authorization and accounting, Internet protocol address
assignment and management, domain name service and Internet protocol routing and
connectivity.
VBSP. We plan to offer this additional service which provides a complete
solution for organizations and businesses that want to offer broadband Internet
services to their customers without having to develop their own Internet
capabilities. We will provide Internet services to end-users under the brand
name of our customer. Our Internet services will be a turnkey solution that
includes registration, connection and Internet software, web sites, network
authentication, electronic mail, billing and reporting, news and personal
web-space for end-users and end-user service and technical support.
VPN OVER DSL
In August 1999 we introduced our VPN over DSL service. This service uses
the public Internet backbone or a private data network, combined with DSL
connections, as a channel for sharing information and applications within a
closed circle of users in different locations. We offer two levels of VPN over
DSL service.
COVAD BRANCH OFFICE. This service is available for remote or branch
offices that require high-speed inter-office connectivity across multiple
locations.
COVAD TELEWORKER. This service is available for telecommuters and other
remote users who secure access to their corporate network and the Internet from
home.
OTHER SERVICES
We also provide a DS3 backhaul service from our regional network to an
Internet service provider or enterprise customer site. This service aggregates
all individual end-users in a metropolitan statistical area and
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transmits the packet information to the customer on a single high-speed line.
The service utilizes an asynchronous transfer mode (ATM) protocol that
efficiently handles the high data rates involved and operates at up to 45
megabits per second. In addition to monthly service charges, we impose
non-recurring order set-up charges for Internet service provider and RLAN
end-users for our DS3 backhaul service. Customers must also purchase a DSL modem
from us or a third party for each end-user of our services.
CUSTOMERS
We offer our services to Internet service providers, enterprises,
telecommunications carriers and other DSL resellers. According to Claritas,
Inc., a leading provider of diagnostic databases, there are over 169,000
businesses in the U.S. with over 100 employees, of which we estimate
approximately 85,000 are in our 100 targeted metropolitan statistical areas. As
of December 31, 1999, we had installed 57,000 DSL lines and received orders for
our services from 295 Internet service provider, enterprise and
telecommunications carrier customers. The following is a list of selected
Internet service provider, enterprise, telecommunications carrier and other
customers:
<TABLE>
<CAPTION>
SELECTED INTERNET SERVICE PROVIDER CUSTOMERS SELECTED ENTERPRISE CUSTOMERS SELECTED TELECOMMUNICATIONS CARRIERS
- ------------------------------------------- ----------------------------- ------------------------------------
<S> <C> <C>
Concentric Network Corporation Apple Computer AT&T
Flashcom Inktomi e.spire
Juno Intel GST Telecommunications
MindSpring (Earthlink) Oracle Corporation IGC
PSINet Stanford University Qwest
Prodigy Sun Microsystems RCN Corporation
UUNET WebTV
Verio
</TABLE>
Our agreements with Internet service providers and other DSL resellers
generally have terms of one year and are nonexclusive. We do not require
Internet service providers to generate a minimum number of end-users and
generally grant volume discounts based on order volume. We serve Internet
service providers who provide their own Internet access service and have started
serving Internet service providers who choose to obtain access to the Internet
through us. In both cases, the Internet service providers purchase our service
son a wholesale basis and sell such services under their own brand.
Our practice with respect to our enterprise customers has been to enter
into an arrangement or a negotiated price to install the service initially to a
small number of end-users. An enterprise customer decides whether to implement
abroad rollout of our services after evaluating the results of this initial
phase of deployment. To date, a typical enterprise customer's initial phase of
deployment and its decision to roll out our service to additional end-users has
taken at least six months, and has generally taken longer than we originally
expected. As of December 31, 1999, a substantial majority of our enterprise
customers had not yet rolled out our services broadly to their employees.
We will not receive significant revenue from an enterprise customer until
and unless these rollouts occur. During the lengthy sales cycle for an
enterprise customer, we incur significant expenses in advance of the receipt of
revenues. We also enter into customer agreements with telecommunications
carriers, including competitive telecommunications companies and interexchange
carriers. Under these agreements our telecommunication carrier customers
typically resell our services to their new and existing customers. These
carriers currently market our Internet and RLAN services primarily to small,
medium and enterprise businesses that purchase voice services from them.
SALES AND MARKETING
BUSINESS AND CONSUMER INTERNET. For the business and consumer Internet
access markets, we sell our service to Internet service providers,
telecommunications carriers and others. These customers can either combine our
lines with their Internet access services, or purchase wholesale Internet access
services from us, and resell the combination to their existing and new
end-users. We address these markets through sales and marketing personnel
dedicated to the Internet service provider sales channel. We supplement our
sales efforts to Internet service providers through training programs and
marketing programs that include promotions and sales incentives designed to
encourage the Internet service providers to sell our services instead of those
of our competitors. As of December
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31, 1999, we had more than 225 Internet service provider and telecommunications
carrier customers with their own sales personnel marketing Internet services.
REMOTE LOCAL AREA NETWORK. We market our RLAN services to businesses
through a direct sales force, augmented by marketing programs with value-added
resellers and interexchange carriers. The sales force is directed to deal
directly with the chief information officer and the telecommunications manager
responsible for remote access within an enterprise. We augment our sales efforts
to RLAN customers through partnerships with value-added resellers, including
systems integrators that can offer our TeleSpeed service as part of a complete
work-at-home solution to businesses.
THIRD-PARTY RELATIONSHIPS. A key element of our strategy is to enter into
relationships with leading telecommunications companies, including competitive
telecommunications carriers and interexchange carriers, pursuant to which those
companies resell our TeleSpeed and TeleSurfer services to their customers. For
example, we have entered into commercial agreements with each of AT&T, GST
Telecommunications, Qwest and RCN Corporation providing for the purchase and
resale of our services, primarily to their small business and enterprise
customers. In addition, in May 1999, we entered into a strategic relationship
with WebMD in which 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 believe that
these indirect sales channels will enable us to penetrate our target markets
more rapidly and eventually will generate the majority of sales of our services.
BRANDING AND MARKETING PROGRAMS. In October 1999 we commenced a branding
and advertising effort to educate the market about our broadband service
offerings and increase recognition of our brand. This program, which uses
television, print and radio advertising on both a national and regional basis,
is intended to inform the market about the availability of our service,
differentiate the products and services offered by our Company and simplify the
process through which these products and services are ordered.
We are also pursuing several types of joint marketing arrangements with
our Internet service provider, telecommunications carrier customers and other
DSL resellers. In addition, certain of our equipment suppliers have promoted our
services through seminars to corporate information technology managers in the
San Francisco Bay Area. We also support our sales efforts with marketing efforts
that include advertising programs through radio and other popular media,
attendance at trade shows and presentations at industry conferences. See "Risk
Factors--Our business will suffer if our Internet service providers,
telecommunications carriers and other third parties are not successful in the
marketing and sale of our services."
SERVICE DEPLOYMENT AND OPERATIONS
Internet service providers, telecommunications carriers and corporate
information technology managers typically have had to assemble their digital
communications connections using multiple service and equipment suppliers,
leading to additional work, cost and coordination problems. With our services,
we emphasize a one-stop service solution for our customers. This service
solution includes:
o extending our network to customers and end-users with various
needs and configuration requirements;
o end-user premise wiring and DSL modem configuration;
o ongoing network monitoring and customer reporting;
o customer service and technical support; and
o operational support system.
EXTENDING OUR NETWORK TO CUSTOMERS AND END-USERS. We work with our
Internet service provider, enterprise, telecommunications carrier and other
customers to extend our network to each customer premise and each end-user
premise bordering circuits from the traditional telephone company or a
competitive telecommunications company, interconnecting the customers and
end-users to our network, testing the circuits, configuring customer routers or
switches and end-user routers and monitoring the circuits from the network
operations center.
END-USER PREMISES WIRING AND DSL MODEM CONFIGURATION. We use our own and
subcontracted field service crews and trucks to perform any required inside
wiring and to configure DSL modems at each end-user site.
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NETWORK MONITORING. We monitor our network from our network operations
center, which helps us to identify and correct network problems. We have also
developed network capability to provide Internet service provider, enterprise
and telecommunications carrier customers direct monitoring access of their
end-users for more efficient monitoring of their own network performance.
CUSTOMER REPORTING. We communicate regularly with our customers about the
status of their end-users. We also operate a toll-free customer care help line.
Additionally, we provide Web-based tools to allow individual Internet service
providers and enterprise information technology managers and telecommunications
carriers to monitor their end-users directly, to place orders for new end-users,
to enter trouble tickets on end-user lines and to communicate with us on an
ongoing basis.
CUSTOMER SERVICE AND TECHNICAL SUPPORT. We provide 24x7 on-line support
to our Internet service provider customers and enterprise information technology
managers. The Internet service provider and information technology manager and
telecommunications carriers serve as the initial contact for service and
technical support, and we provide the second level of support. For customers
using our VBSP offering, we will provide the first level of support for their
end users.
OPERATIONAL SUPPORT SYSTEM. We have developed what we believe to be the
industry-leading operational support system for DSL networks. Our operational
support system is based on web interfaces and is highly automated. These
features are intended to and should allow us to scale our businesses rapidly
because they eliminate many manual processes such as line testing, network path
configuration, equipment configuration, order taking and verification, billing
and telephone wire supplier management.
NETWORK ARCHITECTURE AND TECHNOLOGY
The key design principles of our network attempt to provide the following
attributes which we believe are important requirements of our existing and
potential customers:
ROBUST NETWORK SECURITY. Modem access to enterprise networks presents
significant security risks, since any telephone can be used to attempt to access
such a network simply by dialing the telephone number. As a result, enterprises
expend significant effort and resources to prevent unauthorized access.
Enterprises also typically limit remote access users to reading e-mail or other
non-sensitive applications. Our network is designed to ensure secure
availability of all internal applications and information for remote locations.
Our permanent virtual circuit network architecture connects individual end-users
at fixed locations to a single enterprise, which reduces the possibility of
unauthorized access and allows our customers to safely transmit sensitive
information and applications over our TeleSpeed lines.
CONSISTENT AND SCALABLE PERFORMANCE. We believe that eventually public
packet networks will evolve to replace the over 40 million modems currently
connected to circuit switched networks that have been deployed in the U.S. As
such, we designed our network for scalability and consistent performance to all
users as the networks grow. We have designed a "star topology" network similar
to the most popular local area network architecture currently used in
high-performance enterprise networks. In this model, new capacity is added
automatically as each new user receives a new line. We also use asynchronous
transfer mode equipment in our network that implements packet switching directly
in silicon circuits rather than slower router-based designs that implement
switching in router software.
INTELLIGENT END-TO-END NETWORK MANAGEMENT. Because the customers' and end
users' lines are continuously connected, they can also always be monitored. We
have visibility from the Internet service provider or enterprise site across the
network and into the end-user's home or business. Because our network is
centrally managed, we can identify and dynamically enhance network quality,
service and performance and address network problems promptly.
FLEXIBILITY. We have designed our network to be flexible in handling
various types of network traffic, starting with data, but able to accommodate
voice and video. This flexibility will allow us to directly offer, or enter into
arrangements with other entities to offer, not only value-added services such as
voice over DSL, but also control the prioritization of content delivery within
our national network.
The primary components of our network is the network operations center,
our high-speed private metropolitan networks, central office spaces, including
digital subscriber line access multiplexers (DSLAMs), copper telephone lines and
DSL modems.
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NETWORK OPERATIONS CENTER. Our entire network is managed from the network
operations center. We provide end-to-end network management using advanced
network management tools on a 24x7 basis, which enhances our ability to address
performance or connectivity issues before they affect the end-user experience.
From the network operations center, we can monitor the equipment and circuits in
each metropolitan network (including the asynchronous transfer mode equipment),
each central office (including DSLAMs) and potentially individual end-user lines
(including the DSL modems). Presently, our network operations center is located
in the San Francisco Bay Area. We are currently in the process of building a
second network operations center on the East Coast.
PRIVATE METROPOLITAN NETWORK. We operate our own private metropolitan
network in each region that we enter. The network consists of high-speed
asynchronous transfer mode communications circuits that we lease to connect our
asynchronous transfer mode hubs, our equipment in individual central offices and
our Internet service provider, enterprise and telecommunications carrier
customers. This network operates at a speed of 45 to 155 megabits per second.
CENTRAL OFFICE SPACES. Through our interconnection agreements with the
traditional telephone companies, we seek to secure space in every central office
where we intend to offer service. These central office spaces are designed to
offer the same high reliability and availability standards as the traditional
telephone company's other central office space. We require access to these
spaces for our equipment and for persons employed by, or under contract with,
us. We place DSLAMs in our central office spaces to provide the high-speed
DSLsignals on each copper line to our end-users. We expect to deploy up to 80
central office spaces in any metropolitan statistical area that we enter. As of
December 31, 1999, we had 1,100 central office spaces operational. In addition,
we have a significant number of additional spaces under construction as well as
other spaces on order from various traditional telephone companies. In December
1998, we entered into a professional service arrangement with Lucent
Technologies to augment and accelerate our ability to deploy our central office
facilities.
TELEPHONE WIRES. We lease the telephone wires running to end-users from
the traditional telephone companies under terms specified in our interconnection
agreements. We lease lines that, in numerous cases, must be specially
conditioned by the traditional telephone companies to carry digital signals,
usually at an additional charge relative to that for voice grade telephone
wires. The price we are obligated to pay for these lines currently varies from
$4 to $70 per month per line with additional one-time charges in some cases for
installation, modification or removal of lines.
DSL MODEMS AND ON-SITE CONNECTION. We buy our DSL modems from our
suppliers for resale to our Internet service provider or enterprise customers
for use by their end-users. We configure and install these modems along with any
required on-site wiring needed to connect the modem to the copper line leased
from the traditional telephone company. For the most part, the DSL modem and
DSLAM equipment used must come from the same vendor for all services, since
there aren't yet interoperability standards for the equipment used in our
higher-speed services. We are also pursuing a program of ongoing network
development. Our service development and engineering efforts focus on the design
and development of new technologies and services to increase the speed,
efficiency, reliability and security of our network and to facilitate the
development of network applications by third parties that will increase the use
of our network. See "Risk Factors--The scalability and speed of our network
remain largely unproven."
COMPETITION
The markets for business and consumer Internet access and network access
services are intensely competitive. We expect that these markets will become
increasingly competitive in the future. The principal bases of competition in
our markets include:
o price/performance;
o breadth of service availability;
o reliability of service;
o network security;
o ease of access and use;
o content bundling;
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o customer support;
o brand recognition;
o operating experience;
o relationships with Internet service providers and other third
parties; and
o capital resources.
We face competition from 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.
TRADITIONAL TELEPHONE COMPANIES. All of the largest traditional telephone
companies in our target markets have begun offering DSL services or have
announced their intention to provide DSL services in the near term. As a result,
the traditional telephone companies represent strong competition in all of our
target service areas, and we expect this competition to intensify. The
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, own the telephone wires themselves and can bundle digital
data services with their existing voice services to achieve economies of scale
in serving their customers. Certain of the traditional telephone companies have
aggressively priced their consumer DSL services as low as $19-$29 per month,
placing pricing pressure on our TeleSurfer services. The traditional telephone
companies are also in a position to offer service from central offices where we
are unable to secure space and offer service because of asserted or actual space
restrictions.
CABLE MODEM SERVICE PROVIDERS. Cable modem service providers such as
AT&T, Road Runner and MediaOne (and their respective cable partners) are
deploying high-speed Internet access services over hybrid fiber coaxial cable
networks. Hybrid fiber coaxial cable is a combination of fiber optic and coaxial
cable, and has become the primary architecture utilized by cable operators in
recent and ongoing upgrades of their systems. Where deployed, these networks
provide similar and in some cases higher-speed Internet access than we provide.
They also offer these services at lower price points than our TeleSurfer
services. We believe the cable modem service providers face a number of
challenges that providers of DSL services do not face. For example, different
regions within a metropolitan statistical area may be served by different cable
modem service providers, making it more difficult to offer the blanket coverage
required by potential business customers. Also, much of the current cable
infrastructure in the U.S. must be upgraded to support cable modems, a process
which we believe is significantly more expensive and time-consuming than the
deployment of DSL-based networks.
COMPETITIVE TELECOMMUNICATIONS COMPANIES. Many competitive
telecommunications companies such as NorthPoint Communications, Rhythms
NetConnections and Network Access Solutions offer high-speed digital 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.
Companies such as Teleport Communications Group, Inc. (acquired by AT&T), Brooks
Fiber Properties, Inc. (acquired by MCI WorldCom), MFS (acquired by MCI
WorldCom) and NEXTLINK Communications have extensive fiber networks in many
metropolitan areas, primarily providing high-speed digital and voice circuits to
large corporations. They also have interconnection agreements with the
traditional telephone companies pursuant to which they have acquired central
office space in many markets targeted by us. Further, certain of our customers
have made investments in our competitors.
NATIONAL LONG DISTANCE CARRIERS. Interexchange carriers, such as AT&T,
Sprint, MCI WorldCom and Qwest, have deployed large-scale Internet access
networks and ATM networks, sell connectivity to businesses and residential
customers, and have high brand recognition. They also have interconnection
agreements with many of the traditional telephone companies and a number of
spaces in central offices from which they are currently offering or could begin
to offer competitive DSL services.
INTERNET SERVICE PROVIDERS. Internet service providers such as BBN
(acquired by GTE), UUNET Technologies (acquired by MCI WorldCom), EarthLink
Network, Concentric Network Corporation, MindSpring Enterprises, Netcom On-Line
Communication Services (acquired by MindSpring Enterprises) and PSINet provide
Internet access to residential and business customers, generally using the
existing public switched telephone network at integrated services digital
network speeds or below. Some Internet service providers such as UCNET
Technologies in California and New York, HarvardNet Inc. and InterAccess have
begun offering DSL-based services. To the
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extent we are not able to recruit Internet service providers as customers for
our service, Internet service providers could become competitive DSL service
providers.
ON-LINE SERVICE PROVIDERS. On-line service providers include companies
such as AOL, CompuServe (acquired by AOL), MSN (a subsidiary of Microsoft Corp.)
and Web TV (a subsidiary of Microsoft Corp.) that provide, over the Internet and
on proprietary online services, content and applications ranging from news and
sports to consumer video conferencing. These services are designed for broad
consumer access over telecommunications-based transmission media, which enable
the provision of digital services to the significant number of consumers who
have personal computers with modems. In addition, they provide Internet
connectivity, ease-of-use and consistency of environment. Many of these on-line
service providers have developed their own access networks for modem
connections. If these on-line service providers were to extend their access
networks to DSL or other high-speed service technologies, they would become
competitors of ours.
WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Wireless and satellite
data service providers are developing wireless and satellite-based Internet
connectivity. We may face competition from terrestrial wireless services,
including two Gigahertz (Ghz) and 28 Ghz wireless cable systems (Multi-channel
Microwave Distribution System (MMDS) and Local Multi-channel Distribution System
(LMDS)), and 18 Ghz and 39 Ghz point-to-point microwave systems. For example,
the FCC is currently considering new rules to permit MMDS licensees to use their
systems to offer two-way services, including high-speed data, rather than solely
to provide one-way video services. The FCC also recently auctioned spectrum for
LMDS services in all markets. This spectrum is expected to be used for wireless
cable and telephony services, including high-speed digital services. In
addition, companies such as Teligent Inc., Advanced Radio Telecom Corp. and
WinStar Communications, Inc., hold point-to-point microwave licenses to provide
fixed wireless services such as voice, data and videoconferencing.
We also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Communications (a subsidiary of General Motors
Corporation), Teledesic and others have filed applications with the FCC for
global satellite networks which can be used to provide broadband voice and data
services, and the FCC has authorized several of these applicants to operate
their proposed networks.
INTERCONNECTION AGREEMENTS WITH TRADITIONAL TELEPHONE COMPANIES
A critical aspect of our business is our interconnection agreements with
the traditional telephone companies. These agreements cover a number of aspects
including:
o the price we pay to lease access to the traditional telephone
company's telephone wires;
o the special conditioning the traditional telephone company
provides on certain of these lines to enable the transmission of
digital signals;
o the price and terms of central office space for our equipment in
the traditional telephone company's central offices;
o the price we pay and access we have to the traditional telephone
company's transport facilities;
o the operational support systems and interfaces that we can use to
place orders, report network problems and monitor the traditional
telephone company's response to our requests;
o the dispute resolution process that we use to resolve
disagreements on the terms of the interconnection contract; and
o the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of the
traditional telephone company relationship.
As of December 31, 1999, we have entered into interconnection agreements
with or otherwise obtained interconnection rights from the different major
traditional telephone companies in all the states covering our metropolitan
statistical areas. Traditional telephone companies do not in many cases agree to
our requested provisions in interconnection agreements and we have not
consistently prevailed in obtaining all of our desired provisions in such
agreements either voluntarily or through the interconnection arbitration
process. We cannot be sure that we will be able to continue to sign
interconnection agreements with existing or other traditional telephone
companies. We are currently negotiating agreements with several traditional
telephone companies in order to expand our services into 100 targeted
metropolitan statistical areas. The traditional telephone companies are also
permitting
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competitive telecommunications companies to adopt previously signed
interconnection agreements. In certain instances, we have adopted the
interconnection agreement of another competitive telecommunications company.
Other competitive telecommunications companies have also adopted the same or
modified versions of our interconnection agreements, and may continue to do so
in the future.
Many of our interconnection agreements have a term of three years. We
will have to renegotiate these agreements when they expire. Although we expect
to renew the interconnection agreements that require renewal and believe the
1996 Telecommunications Act and the agreements themselves limit the ability of
traditional telephone companies not to renew such agreements, we may not succeed
in extending or renegotiating our interconnection agreements on favorable terms.
Additionally, disputes have arisen and will likely arise in the future as a
result of differences in interpretations of the interconnection agreements. For
example, we are in litigation proceedings with certain of the traditional
telephone companies. These disputes have delayed our deployment of our network.
They have also adversely affected our service to our customers and our ability
to enter into additional interconnection agreements with the traditional
telephone companies in other states. Finally, the interconnection agreements are
subject to state commission, FCC and judicial oversight. These government
authorities may modify the terms of the interconnection agreements in a way that
hurts our business.
GOVERNMENT REGULATION
OVERVIEW. Our services are subject to a variety of federal regulations.
With respect to certain activities and for certain purposes, we have submitted
our operations to the jurisdiction of state and local authorities who may also
assert more extensive jurisdiction over our facilities and services. The FCC has
jurisdiction over all of our services and facilities to the extent that we
provide interstate and international services. To the extent we provide
identifiable intrastate services, our services and facilities are subject to
state regulations. Rates for the services and network elements we purchase from
the traditional local telephone companies are generally determined by the states
consistent with federal law. In addition, local municipal government authorities
also assert jurisdiction over our facilities and operations. The jurisdictional
reach of the various federal, state and local authorities is subject to ongoing
controversy and judicial review, and we cannot predict the outcome of such
review.
FEDERAL REGULATION. We must comply with the requirements of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, as
well as the FCC's regulations under the statute. The 1996 Telecommunications Act
eliminates many of the pre-existing legal barriers to competition in the
telecommunications and video programming communications businesses, preempts
many of the state barriers to local telecommunications service competition that
previously existed in state and local laws and regulations, and sets basic
standards for relationships between telecommunications providers. The law
delegates to the FCC and the states broad regulatory and administrative
authority to implement the 1996 Telecommunications Act.
Among other things, the 1996 Telecommunications Act removes barriers to
entry in the local telecommunications market. It does this by preempting certain
state and local laws that are barriers to competition and by requiring
traditional telephone companies to provide nondiscriminatory access and
interconnection to potential competitors, such as cable operators, wireless
telecommunications providers, interexchange carriers and competitive
telecommunications companies such as us.
Regulations promulgated by the FCC under the 1996 Telecommunications Act
specify in greater detail the requirements of the 1996 Telecommunications Act
imposed on the traditional telephone companies to open their networks to
competition by providing competitors interconnection, central office space,
access to unbundled network elements, retail services at wholesale rates and
nondiscriminatory access to telephone poles, ducts, conduits, and rights-of-way.
The requirements enable companies such as us to interconnect with the
traditional telephone companies in order to provide local telephone exchange
services and to use portions of the traditional telephone companies' existing
networks to offer new and innovative services such as our TeleSpeed and
TeleSurfer services. In January 1999, the U.S. Supreme Court ruled on challenges
to the FCC regulations. Although the U.S. Supreme Court upheld most of the FCC's
authority and its regulations, it required the FCC to reexamine and redefine
which unbundled network elements the traditional telephone companies must offer.
The FCC issued its revised list of unbundled network elements in September 1999.
The 1996 Telecommunications Act also allows the Regional Bell Operating
Companies (RBOCs), which are the traditional telephone companies created by
AT&T's divestiture of its local exchange business, to enter the long
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distance market within their own local service regions upon meeting certain
requirements. The remaining RBOCs include BellSouth, Bell Atlantic Corporation,
Ameritech Corporation, U S WEST Communications, Inc. and SBC Communications,
Inc. The timing of the various RBOCs' entry into their respective in-region long
distance service businesses is extremely uncertain. In December 1999, Bell
Atlantic's application to provide in-region long distance services in New York
state was granted by the FCC. Given the FCC's grant of Bell Atlantic's
application, the FCC is likely to thereafter grant similar applications by Bell
Atlantic and the other RBOCs in other states. On January 10, 2000, Southwestern
Bell Telephone Company, a subsidiary of SBC, filed its application for FCC
approval to provide in-region long distance service in Texas. The FCC is
expected to act on the application in mid-2000. The timing of the various RBOCs'
in-region longdistance entry will likely affect the level of cooperation we
receive from each of the RBOCs. The approval of such entry will likely adversely
affect the level of cooperation.
In addition, the 1996 Telecommunications Act provides relief from the
earnings restrictions and price controls that have governed the local telephone
business for many years. Traditional telephone company tariff filings at the FCC
have been subjected to increasingly less regulatory review. However, precisely
when and to what extent the traditional telephone companies will secure pricing
flexibility or other regulatory freedom for their services is uncertain. For
example, under the 1996 Telecommunications Act, the FCC is considering
eliminating certain regulations that apply to the traditional telephone
companies' provision of services that are competitive with ours. The timing and
the extent of regulatory freedom and pricing flexibility and regulatory freedom
granted to the traditional telephone companies will affect the competition we
face from the traditional telephone companies' competitive services.
Further, the 1996 Telecommunications Act provides the FCC with the
authority to forbear from regulating entities such as us who are classified as
"non-dominant" carriers. The FCC has exercised its forbearance authority. As a
result, we are not obligated to obtain prior certificate approval from the FCC
for our interstate services or file tariffs for such services. We have
determined not to file tariffs for our interstate services. We provide our
interstate services to our customers on the basis of contracts rather than
tariffs. We believe that it is unlikely that the FCC will require us to file
tariffs for our interstate services in the future.
On March 18, 1999, the FCC announced that it was adopting rules to 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. However, in March
2000, the U.S. Court of Appeal for the District of Columbia issued a decision
casting doubt in whether new entrants will be able to locate certain kinds of
equipment in the traditional local telephone companies' central offices. The
FCC's rules on location of new entrant's equipment in central offices remain
somewhat uncertain, and have not been uniformly implemented. In the March 1999
announcement, the FCC provided notice of proposed rule-making to determine
whether carriers should be able to provide asymmetric DSL over the same line
over which traditional telephone companies provide voice service. The notice
sought comments on the operational, pricing, legal and policy ramifications of
mandating such line sharing. On November 18, 1999, the FCC required the
traditional local phone companies to provide us and other competitive local
carriers with line sharing access. If implemented by the traditional local phone
companies these rules could materially lower the price we pay to lease access to
the traditional telephone company's telephone wires. While we believe that these
rules are advantageous to us, the traditional telephone companies may balk at,
delay, or thwart the implementation of such rules.
In its March 2000 ruling, the federal appeals court struck portions of
the FCC's new rules concerning the location of new entrants' equipment in
traditional local telephone companies' central offices, and has required the FCC
to reconsider and review those rules. In particular, the appeals court has
required the FCC to revise its rules concerning the types of equipment that we
may collocate on the traditional telephone company premises and the steps that
traditional telephone companies may take to separate their equipment from our
equipment. The traditional telephone companies may implement the court's ruling
and any subsequent FCC rules in a manner that impairs our ability to obtain
collocation space and collocate the equipment of our choice on their premises.
Such actions by the traditional telephone companies could adversely affect our
business and disrupt our existing network design, configuration and services.
Any changes in applicable federal law and regulations, in particular,
changes in its interconnection agreements with traditional telephone companies,
the prospective entry of the RBOCs into the in-region long distance business and
grant of regulatory freedom and pricing flexibility to the traditional telephone
companies, could harm our business.
STATE REGULATION. To the extent we provide identifiable intrastate
services or have otherwise submitted ourselves to the jurisdiction of the
relevant state telecommunications regulatory commissions, we are subject to such
jurisdiction. In addition, certain states have required prior state
certification as a prerequisite for processing and
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deciding an arbitration petition for interconnection under the 1996
Telecommunications Act. As of December 31, 1999,we were authorized under state
law to operate as a competitive local exchange carrier in 34 states, and intend
to obtain authorization in the other states necessary to cover our 100 targeted
metropolitan statistical areas. We have pending arbitration proceedings in
different states for interconnection arrangements with the relevant traditional
telephone companies. We have concluded arbitration proceedings in a number of
states by entering into interconnection agreements with the relevant traditional
telephone companies. We have filed tariffs in certain states for intrastate
services as required by state law or regulation. We are also subject to periodic
financial and other reporting requirements of these states with respect to our
intrastate services.
The different state commissions have various proceedings to determine the
rates, charges and terms and conditions for unbundled network elements
(unbundled network elements are the various portions of a traditional telephone
company's network that a competitive telecommunications company can lease for
purposes of building a facilities-based competitive network, including telephone
wires, central office collocation space, inter-office transport, operational
support systems, local switching and rights of way), as well as the discount for
wholesale services that we purchase from the relevant traditional telephone
company. The rates set forth in our interconnection agreements are interim rates
and will be prospectively, and, in some cases, retroactively, affected by the
permanent rates set by the various state commissions for such unbundled network
elements as unbundled loops and interoffice transport. We have participated in
unbundled network element rate proceedings in several states in an effort to
reduce these rates. If any state commission decides to increase unbundled
network element rates our operating results could suffer. The applicability of
the various state regulations on our business and compliance requirements will
be further affected by the extent to which our services are determined to be
intrastate services. Jurisdictional determinations of our services as intrastate
services could harm our business.
LOCAL GOVERNMENT REGULATION. We may be required to obtain various permits
and authorizations from municipalities in which we operate our own facilities.
The issue of whether actions of local governments over the activities of
telecommunications carriers, including requiring payment of franchise fees or
other surcharges, pose barriers to entry for competitive telecommunications
companies which may be preempted by the FCC is the subject of litigation.
Although we rely primarily on the unbundled network elements of the traditional
telephone companies, in certain instances we deploy our own facilities,
including fiber optic cables, and therefore may need to obtain certain municipal
permits or other authorizations. The actions of municipal governments in
imposing conditions on the grant of permits or other authorizations or their
failure to act in granting such permits or other authorizations could harm our
business.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation affecting the
telecommunications industry. Other existing federal regulations are currently
the subject of judicial proceedings, legislative hearings and administrative
proposals, which could change, in varying degrees, the manner in which
communications companies operate in the U.S. The ultimate outcome of these
proceedings and the ultimate impact of the 1996 Telecommunications Act or any
final regulations adopted pursuant to the 1996 Telecommunications Act or our
business cannot be determined at this time but may well be adverse to our
interests. We cannot predict the impact, if any, that future regulation or
regulatory changes may have on our business and we can give you no assurance
that such future regulation or regulatory changes will not harm our business.
See "Risk Factors--Rejections of our applications for central office space by
traditional telephone companies are likely to delay the expansion of our network
and the rollout of our services" and "Our services are subject to government
regulation, and changes in current or future laws or regulations could adversely
affect our business."
INTELLECTUAL PROPERTY
We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. These methods
may not be sufficient to protect our technology. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, services or
technology without authorization, or to develop similar technology
independently.
Currently we have one patent and a number of patent applications pending,
and intend to prepare additional applications and to seek additional patent
protection for our systems and services to the extent possible. The pending and
any future patents may not be issued to us, and if issued, they may not protect
our intellectual property from competition which could seek to design around or
invalidate these patents.
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Further, effective patent, copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. The
global nature of the Internet makes it virtually impossible to control the
ultimate destination of our proprietary information. Steps taken by us may not
prevent misappropriation or infringement of our intellectual property rights,
and 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.
In addition, others may sue us 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." On February 18, 2000, we
were granted a summary judgement ruling in the Bell Atlantic lawsuit. The court
ruled that we had not infringed on Bell Atlantic's patent. We anticipate that
Bell Atlantic may appeal this decision and, while we expect that we would
prevail on appeal, the outcome of such an appeal is inherently uncertain. Such
lawsuits, including an appeal in the Bell Atlantic lawsuit, could significantly
harm our business.
EMPLOYEES
As of December 31, 1999, we had 848 employees, excluding temporary
personnel and consultants. None of our employees are represented by a labor
union, and we consider our relations with our employees to be good. Our ability
to achieve our financial and operational objectives depends in large part upon
the continued service of our senior management and key technical, sales,
marketing, legal and managerial personnel, and our continuing ability to attract
and retain highly qualified technical, sales, marketing, legal and managerial
personnel. Competition for such qualified personnel is intense, particularly in
software development, network engineering and product management. In addition,
in the event that our employees unionize, we could incur higher ongoing labor
costs and disruptions in our operations in the event of a strike or other work
stoppage.
PROPERTIES
We are headquartered in Santa Clara, California in facilities consisting
of approximately 62,000 square feet pursuant to a lease that will expire on or
before July 14, 2002. We also lease office space in many of the metropolitan
statistical areas in which we conduct operations.
We have recently expanded our headquarters space in Santa Clara by
leasing additional office space, and have expanded our operational space with a
new facility lease in Denver, Colorado. Through a subsidiary, we have also
acquired land and are currently building a 100,000 square foot network
operations center in Prince Williams County, Virginia. We also lease central
office space from the traditional telephone company in each region that we
operate or plan to operate under the terms of our interconnection agreements and
obligations imposed by state public utilities commissions and the FCC. While the
terms of these leases are perpetual, the productive use of our central office
space is subject to the terms of our interconnection agreements which expire on
or before March 2001. We will increase our central office space as we expand our
network geographically.
LEGAL PROCEEDINGS
We are engaged in a variety of negotiations, arbitrations and regulatory
and court proceedings with multiple traditional telephone companies. These
negotiations, arbitrations and proceedings concern the traditional telephone
companies' denial of physical central office space to us in certain central
offices, the cost and delivery of central office spaces, the delivery of
transmission facilities and telephone lines, billing issues and other
operational issues. For example, we are currently involved in commercial
arbitration proceedings with Pacific Bell over these issues. We have also filed
a lawsuit against Pacific Bell and certain of its affiliates, including SBC
Communications, in federal court. We are pursuing a variety of contract, tort,
and antitrust and other claims, such as violations of the Telecommunications
Act, in these proceedings. In November 1998, we prevailed in our commercial
arbitration proceeding against Pacific Bell. The arbitration panel found that
Pacific Bell breached its interconnection agreement with us and failed to act in
good faith on multiple counts. The arbitration panel ruled in favor of awarding
us direct damages, as well as attorneys' fees and costs of the arbitration.
Pacific Bell is currently attempting to have the decision vacated. Meanwhile,
the arbitration panel is evaluating our claim for additional damages.
We have also filed a lawsuit against Bell Atlantic and its affiliates in
federal court. We are pursuing antitrust and other claims in this lawsuit. In
addition, Bell Atlantic has separately filed suit against us asserting
infringement
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of a patent issued to them in September 1998 entitled "Variable Rate and
Variable Mode Transmission System." However, on February 18, 2000 the court
issued a summary judgment ruling holding that we had not infringed Bell
Atlantic's patent. We anticipate that Bell Atlantic may appeal this decision
and, while we expect that we would prevail on an appeal, the outcome of such an
appeal is inherently uncertain.
Several of our former employees have filed complaints against us in
court, alleging that they were terminated wrongfully and are
entitled to commissions and other amounts arising from their employment with us.
We believe that this employee resigned and that we do not owe him any money, but
litigation is unpredictable and there is no guarantee we will prevail. Another
group of our former employees have filed a complaint against us in California
Superior Court, alleging that they were terminated wrongfully and are entitled
to various amounts arising from their employment with us. We believe that we do
not owe these employees any money, but litigation is unpredictable and we cannot
guarantee that we will prevail in this matter. Failure to resolve these various
legal disputes and controversies without excessive delay and cost and in a
manner that is favorable to us could significantly harm our business.
We are not currently engaged in any other legal proceedings that we
believe could have a material adverse effect on our business, prospects,
operating results and financial condition. We are, however, subject to state
commission, FCC and court decisions as they relate to the interpretation and
implementation of the 1996 Telecommunications Act, the interpretation of
competitive telecommunications company interconnection agreements in general and
our interconnection agreements in particular. In some cases, we may be deemed to
be bound by the results of ongoing proceedings of these bodies or the legal
outcomes of other contested interconnection agreements that are similar to our
agreements. The results of any of these proceedings could harm our business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, and their respective ages as of
March 15, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert Knowling, Jr...................44 Chairman of the Board, President and
Chief Executive Officer
Timothy Laehy.........................43 Executive Vice President and Chief Financial Officer
Robert Davenport, III.................40 Executive Vice President, Business
Development
Catherine Hemmer......................41 Executive Vice President and Chief Operating Officer
Robert Roblin.........................47 Executive Vice President, Sales and
Marketing
Joseph Devich.........................42 Executive Vice President, Corporate
Services
Dhruv Khanna..........................40 Executive Vice President, General Counsel
and Secretary
Jane Marvin...........................40 Executive Vice President, Human Resources
Terry Moya............................41 Executive Vice President, External Affairs
Michael Lach..........................38 Executive Vice President, Business
Integration
Jimmy LaValley........................46 Executive Vice President, Community Relations
Robert Hawk...........................60 Director
Hellene Runtagh.......................51 Director
Daniel Lynch..........................58 Director
Frank Marshall........................53 Director
Rich Shapero..........................51 Director
Larry Irving..........................43 Director
Debra Dunn............................44 Director
</TABLE>
ROBERT KNOWLING, JR. has been our President, Chief Executive Officer and a
member of our board of directors since July 1998. As of September 1999, he also
became Chairman of the Board of Directors. From October 1997 through July 1998,
Mr. Knowling served as the Executive Vice President of Operations and
Technologies at U S WEST Communications, Inc., a regional telecommunications
service provider. In this capacity, Mr. Knowling was responsible for planning,
delivering and maintaining high-quality telecommunications services for more
than 25 million customers in 14 western and midwestern states. From March 1996
through September 1997, he served as Vice President of Network Operations at U S
WEST Communications, Inc. From November 1994 through March 1996, he served as
Vice President of Network Operations for Ameritech Corporation. Mr. Knowling
began his career in 1977 at Indiana Bell where he progressed through a variety
of assignments in operations, engineering and marketing. When Indiana Bell
became a part of Ameritech Corporation, Mr. Knowling assumed positions of
increasing responsibility in marketing, product development, large business
marketing and network operations, including service on Ameritech Corporation's
re-engineering breakthrough development team. As lead architect of the Ameritech
Corporation transformation, Mr. Knowling reported directly to the Chairman.
TIMOTHY LAEHY joined us in August 1997. He served as our Chief Financial
Officer, Treasurer and Vice President, Finance until February 1999 and currently
serves as our Executive Vice president and Chief Financial Officer. Prior to
joining us, Mr. Laehy served as Vice President, Corporate Finance and Treasurer
of Leasing Solutions, Inc., a computer equipment leasing company, from February
1991 to August 1997. From 1990 to 1991, Mr. Laehy served as a senior associate
with Recovery Equity Partners, a private venture capital investment fund. From
1985 to 1990, he served in various capacities at Guarantee Acceptance Capital
Corporation, an investment bank, Liberty Mutual Insurance Company and Union
Carbide Corporation.
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ROBERT R. DAVENPORT, III joined us in January 1999. He served as our Vice
President, Business Development until February 1999 and has served as our
Executive Vice President, Business Development since that date. Prior to joining
us, Mr. Davenport was Senior Vice President and Chief Operating Officer at
Tele-Communications, Inc.'s Internet Services subsidiary, TCI.NET from 1997 to
1999. Between 1995 and 1997, Mr. Davenport was with Tele-Communications, Inc.,
as Vice President, Finance and Development for the Telephony Services
subsidiary. From 1992 to 1995, he was Managing Partner of RD Partners, LLC, a
private investment firm focused on leveraged equity investments.
CATHERINE HEMMER joined us in August 1998. She served as our Vice
President, Operations until February 1999 and served as our President, Network
Services from February 1999 to September 1999, and currently serves as our
Executive Vice President and Chief Operating Officer. From 1996 to August 1998,
she was Vice President, Network Reliability and Operations at U S WEST
Communications, Inc. From 1995 to 1996, she served as General Manager, Network
provisioning at Ameritech Services, Inc., a telecommunications company. From
1987 to 1995, she served in various capacities, including Vice President,
Network Services, at MFS Telecom, Inc. From 1981 to 1987, she served in various
management roles at MCI Communications Inc. (now MCI Worldcom, Inc.), providing
management information systems support for the network operations organization.
ROBERT ROBLIN joined us in November 1998. He served as our Vice President,
Marketing until February 1999 and has served as our Executive Vice President,
Sales and Marketing since that date. Prior to joining us, he was Executive Vice
President of Marketing at Adobe Systems, Inc. from 1996 to November 1998. From
1994 to 1996, Mr. Roblin served as Vice President and General Manager of
Marketing of the Consumer Division of IBM Corporation. Between 1992 and 1994,
Mr. Roblin was the Vice President of Marketing of Pensoft, Inc., a start-up
pen-based software company that produced a database-driven personal information
manager.
JOSEPH DEVICH joined us in August 1998. He served as Vice President and
General Manager of our Western Region until February 1999 and served as
President and General Manager of the Western Region from February 1999 to
September 1999. Since September 1999, he has served as Executive Vice President,
Corporate Services. Prior to joining us, from November 1996 to August 1998, Mr.
Devich was Vice President, Operations and Technologies Staff of U S WEST
Communications, Inc., where he served on the strategic leadership council and
was responsible for leading staff support functions, methodical and procedural
process support, results reporting and analysis, systems planning and
integration, customer value analysis, disaster recovery/business continuity
planning, network security, supplier management and operations strategy
planning. From August 1986 to November 1996, Mr. Devich worked in several
capacities at Ameritech Corporation, including Manager of Product
Management--Technical Support, and Director in the areas of customer support in
the large business market, service reliability within custom business services,
process improvement of network operations and network provisioning.
DHRUV KHANNA is one of our founders. He served as our Vice President,
General Counsel and Secretary from October 1996 until February 1999 and has
served as our Executive Vice President, General Counsel and Secretary since that
date. He was an in-house counsel for Intel Corporation's communications products
division and its Senior Telecommunications Attorney between 1993 and 1996.
Between 1987 and 1993, Mr. Khanna was an associate at Morrison & Foerster, LLP,
where his clients included Teleport Communications Group (now AT&T Corp.), McCaw
Cellular Communications, Inc. (now AT&T Wireless), and Southern Pacific Telecom
(now Qwest Communications International, Inc.). Mr. Khanna has extensive
experience with regulatory matters, litigation and business transactions
involving the RBOCs and other telecommunications companies. While at Intel, he
helped shape the computer industry's positions on the Telecommunications Act of
1996 and the FCC's rules implementing the 1996 Act.
JANE MARVIN joined us in April 1999 as our Senior Vice President, Human
Resources. Prior to joining us, from August 1995 to April 1999, Ms. Marvin was
Vice President, Human Resources for the General Business, Small Business and
Enhanced Business Services units and Director, Leadership and Executive
Development of Ameritech Corporation. In these capacities, she re-engineered and
streamlined multiple HR processes and drove corporate-wide change initiatives.
From 1991 to 1995, Ms. Marvin was Human Resources Director with the Pepsi Cola
Company, a division of Pepsico Inc., where she improved business processes in
the areas of recruitment, selection, training, and compensation. From 1984 to
1991, Ms. Marvin worked in progressively broader HR leadership roles at
DataGeneral Corporation, a provider of enterprise hardware and software
solutions.
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TERRY MOYA joined us in July 1999 as our Senior Vice President, External
Affairs. Prior to joining us, from January 1999 to July 1999, Terry served as
Vice President & Chief Financial Officer, Capital Management, Network/Operations
and Technologies at U S WEST Communications, Inc. From August 1998 to January
1999, Terry served as Vice President, Operations for U S WEST Communications,
Inc., where he managed over $2 billion in capital expenditures and over $320
million in engineering and construction transaction costs. From February 1997 to
August 1998, Terry served as Vice President, Construction, Operations and
Technologies and led the outside plant construction contracting organization for
U S WEST Communications, Inc. From August 1992 to February 1997, Terry spent
time in over a half dozen foreign countries establishing and improving several
different lines of business for U S WEST Communications, Inc. These countries
include Poland, Russia, the Czech Republic, Hungary, Brazil and the United
Kingdom. Prior to August 1992, Terry was at KPMG Peat Marwick, LLP in New
Orleans.
MICHAEL LACH joined us in January 2000 as our Executive Vice President,
Business Integration. Prior to joining us, from May 1997 to December 1999, Mr.
Lach was Vice President, Customer Provisioning and Maintenance of Ameritech
Corporation, where he was responsible for the installation and repair of
residential phone lines across a five-state region. From October 1995 to May
1997, Mr. Lach was General Manager, Network Operations West of Ameritech
Corporation, where he was responsible for provisioning and maintaining central
offices and the transport network in a three state region. From September 1994
to October 1995, Mr. Lach was Division Manager, Technical Support of Ameritech
Corporation, where he supported the development and implementation of new
product for residential and business customers. From March 1993 to August 1994,
Mr. Lach was Director, Business Development for Siemens Stromberg-Carlson, Inc.
From January 1984 to February 1993, Mr. Lach served in various management roles
with Ameritech Corporation relating to its network.
JIMMY LAVALLEY joined us in April 2000 as Executive Vice President of
Community Relations. Prior to joining the Company, from June 1979 to April 2000,
Mr. LaValley was with U S WEST Communications, Inc. Most recently, from February
1999 to April 2000, Mr. LaValley was Vice President Human Resources, responsible
for Strategic Staffing Services and Management Development for U S WEST's 58,000
employees. From October 1997 to February 1999, Mr. LaValley was Vice President
Human Resources supporting Network Services, the largest U S WEST Business Unit.
In this role, all aspects of Human Resources support were provided to 28,000
employees. Prior to these assignments, Mr. LaValley held leadership positions in
all aspects of the Human Resources disciplines at U S WEST. A former police
officer in Tahlequah Oklahoma, Mr. LaValley holds a bachelor's degree in
criminal justice/pre-law from Northeastern Oklahoma State University.
ROBERT HAWK has served as a member of our board of directors since April
1998. Mr. Hawk is President of Hawk Communications and recently retired as
President and Chief Executive Officer of U S WEST Multimedia Communications, a
regional telecommunications service provider, where he headed the cable, data
and telephony communications business from May 1996 to April 1997. He was
president of the Carrier Division of U S West Communications, Inc., from
September 1990 to May 1996. Prior to that time, Mr. Hawk was Vice President of
Marketing and Strategic Planning for CXC Corporation. Prior to joining CXC
Corporation, Mr. Hawk was director of Advanced Systems Development for
AT&T/American Bell. He currently serves on the boards of PairGain Technologies,
Inc., COM21, Inc., Concord Communications, Inc., Radcom, Ltd., Efficient
Networks, Inc. and several privately held companies.
DANIEL LYNCH has served as a member of our board of directors since April
1997. Mr. Lynch is also a founder of CyberCash, Inc. and has served on its board
of directors since August 1994. From December 1990 to December 1995, he served
as chairman of the board of directors of Softbank Forums, a provider of
education and conference services for the information technology industry. Mr.
Lynch founded Interop Company in 1986, which is now a division of ZD Comdex and
Forums. Mr. Lynch is a member of the Association for Computing Machinery and the
Internet Society. He is also a member of the Board of Trustees of the Santa Fe
Institute, the Bionomics Institute and CommerceNet. He previously served as
Director of the Information Processing Division for the Information Sciences
Institute in Marina del Rey, where he led the Arpanet team that made the
transition from the original NCP protocols to the current TCP/IP based
protocols. He has served as a member of the board of directors of Exodus
Communications since January 1998. Mr. Lynch previously served as a member of
the board of directors at UUNET Technologies, Inc., from April 1994 until August
1996.
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FRANK MARSHALL has served as a member of our board of directors since
October 1997. Mr. Marshall currently serves on the board of directors of
PMC-Sierra, Inc. and several private companies. Mr. Marshall also serves on the
technical advisory board of several high technology private companies. He is a
member of the InterWest Partners Advisory Committee and a Venture Partner at
Sequoia Capital. From 1992 to 1997, Mr. Marshall served as Vice President of
Engineering and Vice President and General Manager, Core Business Unit of Cisco
Systems, Inc. From 1982 to 1992, he served as Senior Vice President, Engineering
at Convex Computer Corporation.
RICH SHAPERO has served as a member of our board of directors since July
1997. Mr. Shapero has been a general partner of Crosspoint Venture Partners,
L.P., a venture capital investment firm, since April 1993. From January 1991 to
June 1992, he served as Chief Operating Officer of Shiva Corporation, a computer
network company. Previously, he was a Vice President of Sun Microsystems, Inc.,
Senior Director of Marketing at AST Research, Inc., and held marketing and sales
positions at Informatics General Corporation and UNIVAC's Communications
Division. Mr. Shapero serves as a member of the board of directors of Sagent
Technology, Inc., a provider of real-time eBusiness intelligence, and several
privately held companies.
HELLENE RUNTAGH has served as a member of our board of directors since
November 3, 1999. Ms. Runtagh has served as Executive Vice President of
Universal Studios since January 1999. In this capacity, she is responsible for
overseeing the activities of the Universal Studios Operations Group, Universal
Studios Consumer Products Group, Universal Studios Corporate Marketing and
Sponsorships, and the Spencer Gift retail operations, Universal Studios'
worldwide information technology, and Seagram's global sourcing and real estate
operations. From February 1997 to January 1999, she held the position of senior
vice president of reengineering effort at Universal. Previously, Ms. Runtagh
spent 25 years at General Electric, where she served as President and Chief
Executive Officer of GE Information Services from 1989 to 1996 and held general
management roles with GE's capital and software businesses.
LARRY IRVING has served as a member of our Board of Directors since April
2000. Mr. Irving is the President and CEO of UrbanMagic.com, an Internet portal
for the African American community scheduled to be launched later this year.
Prior to joining UrbanMagic.com, Mr. Irving served for almost seven years as
Assistant Secretary of Commerce for Communications and Information, where he was
a principal advisor to the President, Vice President and Secretary of Commerce
on domestic and international communications and information policy issues,
including the development of policies related to the Internet and Electronic
Commerce. He was a point person in the Administration's successful efforts to
reform the United States' telecommunications law, which resulted in the passage
of the Telecommunications Act of 1996. Mr. Irving is widely credited with
popularizing the term "Digital Divide" and was the principal author of the
landmark Federal survey, FALLING THROUGH THE NET, which tracked access to
telecommunications and information technologies, including computers and the
Internet, across racial, economic, and geographic lines. In recognition of his
work to promote policies and develop programs to ensure equitable access to
advanced telecommunication and information technologies, Irving was named one of
the fifty most influential persons in the "Year of the Internet" by Newsweek
Magazine. Prior to joining the Clinton-Gore Administration, Mr. Irving served
ten years on Capitol Hill, most recently as Senior Counsel to the U.S. House of
Representatives Subcommittee on Telecommunications and Finance. He also served
as Legislative Director, Counsel and Chief of Staff (acting) to the late
Congressman Mickey Leland (D-Texas). During the previous three years, Mr. Irving
was associated with the Washington, D.C. law firm of Hogan & Hartson,
specializing in communications law, antitrust law and commercial litigation.
DEBRA DUNN has served as a member of our Board of Directors since April
2000. Since late 1999, Ms. Dunn has been the vice president of Strategy and
Corporate Operations for Hewlett-Packard Company and has global responsibility
for driving the broad range of efforts required to reposition Hewlett-Packard.
She is responsible for corporate-wide functions including corporate strategy,
development, communications, philanthropy and government affairs. Ms. Dunn
joined Hewlett-Packard in 1983 as an executive development manager in
Hewlett-Packard's Corporate Training division in Palo Alto. She held a wide
range of development and marketing management positions from 1986 to 1992, and
was promoted to manufacturing manager for Hewlett-Packard's Video Communication
division in 1992, marketing manager in 1993 and was named general manager of the
division in 1996. Ms. Dunn was promoted to general manager of Hewlett-Packard's
executive committee in 1998 and led the Hewlett-Packard/Agilent split process
and Hewlett-Packard's new business creation function.
59
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
the Company's Common Stock as of April 1, 2000 by:
(i) the Named Executive Officers;
(ii) each of the Company's directors;
(iii) all of the Company's executive officers and directors as a group; and
(iv) all persons known to the Company who directly own 5% or more of the
Company's Common Stock.
Except as otherwise indicated, the address of each of the persons in this
table is as follows: c/o Covad Communications Group, Inc., 4250 Burton Drive,
Santa Clara, California 95054. As of April 1, 2000, there were 143,580,109
shares (on a post-split basis) of Common Stock outstanding. Share ownership in
each case includes shares issuable upon exercise of outstanding options and
warrants that are exercisable within 60 days of April 1, 2000 as described in
the footnotes below. Percentage ownership is calculated pursuant to SEC Rule
13d-3(d)(1). Such shares issuable pursuant to such options are deemed
outstanding for computing the percentage ownership of the person holding such
options but are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. All share numbers have been adjusted
in light of the 3-for-2 stock split, effected in the form of a stock dividend,
effective March 31, 2000.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED
- ---------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Putnam Investments, Inc.(1)................................................ 11,728,230 12.1%
Fidelity Management & Research Company(2).................................. 10,157,550 10.52%
Robert Knowling Jr.(3)..................................................... 1,666,808 1.1%
Robert Roblin(4)........................................................... 183,132 *
Catherine Hemmer(5)........................................................ 142,546 *
Joseph Devich(6)........................................................... 166,283 *
Robert Davenport, III(7)................................................... 100,780 *
Robert Hawk(8)............................................................. 234,232 *
Daniel Lynch(9)............................................................ 508,621 *
Frank Marshall(10)......................................................... 598,731 *
Rich Shapero(11)........................................................... 8,748 *
Hellene Runtagh(12)........................................................ 14,248 *
All current executive officers and directors as a group (15 persons)....... 10,215,964 6.3%
</TABLE>
- --------------
(1) Based on a Form 13G filed March 10, 2000 with the Securities and
Exchange Commission by Marsh & McLennan Companies, Inc. and its direct
and indirect wholly-owned subsidiaries, Putnam Investments, Inc.,
Putnam Investment Management, Inc. and The Putnam Advisory Company,
Inc.
(2) Based on a Form 13G filed April 7, 2000 with the Securities and
Exchange Commission by Fidelity International Limited and FMR Corp.
and its wholly-owned subsidiaries, Fidelity Management & Research
Company, Fidelity Management Trust Company and Strategic Advisers,
Inc.
(3) Includes 1,633,684 shares of Common Stock subject to options
exercisable within 60 days of April 1, 2000.
(4) Includes 181,122 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
(5) Includes 142,185 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
(6) Includes 95,145 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
(7) Includes 100,780 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
(8) Includes 28,998 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
(9) Includes 44,499 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
(10) Includes 49,248 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
(11) Includes 8,748 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
(12) Includes 7,498 shares of Common Stock subject to options exercisable
within 60 days of April 1, 2000.
60
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
On February 20, 1998, we entered into a Series C Preferred Stock and
Warrant Subscription Agreement (the "Subscription Agreement") with Warburg,
Pincus Ventures, L.P. ("Warburg") & Crosspoint Venture Partners 1996
("Crosspoint") and Intel Corporation ("Intel"). Under this agreement, Warburg
and Crosspoint unconditionally agreed to purchase an aggregate of 8,646,214
shares of our Series C Preferred Stock and warrants to purchase an aggregate of
7,094,250 shares of our Series C Preferred Stock for an aggregate purchase price
of $16.0 million at a date that we were to determine but, in any event, not
later than March 11, 1999. We agreed to either call this commitment or complete
an alternate equity financing of at least $16.0 million by March 11, 1999. A
proposed alternate equity financing providing for a price per share greater than
or equal to $1.8511 and including securities that were equal in right with, or
more favorable to us than, our Series C Preferred Stock as set forth in our
Amended and Restated Certificate of Incorporation required unanimous approval by
a majority of our disinterested directors. In consideration of this commitment,
we issued to Warburg and Crosspoint warrants to purchase an aggregate of
2,541,222 post-split shares of our Common Stock at a split-adjusted purchase
price of $0.0022 per share. The parties agreed that the stock purchases by AT&T
Ventures and NEXTLINK Communications Inc. constituted an alternate equity
financing (see below). As a result, we did not issue and sell our Series C
Preferred Stock to Warburg and Crosspoint. Messrs. Henry Kressel and Joseph
Landy, two of our former directors, are affiliated with Warburg, and Mr.
Shapero, one of our current directors, is affiliated with Crosspoint.
On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement to which we were a party along with Warburg,
Crosspoint and Mr. Hawk. By the terms of this agreement, Warburg and Crosspoint
assigned to Mr. Hawk their obligation to purchase 54,022 shares of our Series C
Preferred Stock and 44,338 warrants to purchase Series C Preferred Stock for an
aggregate purchase price of $100,001.65. On the same date, Mr. Hawk purchased
54,022 shares of our Series C Preferred Stock at a price per share of $1.8511.
As a result of this amendment, the aggregate obligation of Warburg and
Crosspoint to purchase our Series C Preferred Stock and warrants to purchase
Series C Preferred Stock was reduced from 8,646,214 shares to 8,592,192 shares
and from 7,094,250 shares to 7,049,911 shares, respectively, for an aggregate
purchase price of $15.9 million (reduced from $16.0 million). On the same date,
the Amended and Restated Stockholder Rights Agreement dated March 11, 1998 (the
"Stockholder Rights Agreement") was amended to add Mr. Hawk as a party.
The warrants to purchase our Common Stock issued upon the signing of the
Subscription Agreement had five-year terms (but had to be exercised prior to the
closing of our initial public offering), had split-adjusted purchase prices of
$0.0015 per share, were immediately exercisable and contained net exercise
provisions. Prior to our initial public offering, Warburg and Crosspoint
exercised their warrants to purchase Series C Preferred Stock for 3,048,907 and
762,364 post-split shares of our Common Stock.
On March 11, 1998, we amended the Stockholder Rights Agreement, to extend
the rights held by Warburg, Crosspoint, and Intel to our warrants to purchase
Common Stock, Series C Preferred Stock and warrants to purchase Series C
Preferred Stock issued or issuable to Warburg, Crosspoint and Intel pursuant to
the Subscription Agreement (see below).
THE INTEL STOCK PURCHASE
As provided in the Subscription Agreement, Intel purchased 540,216 shares
of our Series C Preferred Stock and warrants to purchase 443,250 shares of our
Series C Preferred Stock for an aggregate purchase price of $1.0 million
concurrently with the issuance of our 1998 notes in March 1998. We did not have
any obligation to issue the warrants to purchase Series C Preferred Stock to
Intel until such time as Warburg and Crosspoint funded their respective
commitments under the Subscription Agreement. The parties agreed that our
initial public offering constituted an alternate equity financing and,
therefore, we did not issue the warrants to purchase Series C Preferred Stock to
Intel. In connection with its agreement to purchase such Series C Preferred
Stock and warrants to purchase Series C Preferred Stock, we issued to Intel
warrants to purchase an aggregate of 238,167 post-split shares of our Common
Stock at a split-adjusted purchase price of $0.0015 per share. Prior to our
initial public offering, Intel exercised its warrants for 238,167 post-split
shares of our Common Stock.
61
<PAGE>
TRANSACTIONS IN CONNECTION WITH THE FORMATION OF THE DELAWARE HOLDING COMPANY
We were originally incorporated in California as Covad Communications
Company ("Covad California") in October 1996. In July 1997, we were incorporated
in Delaware as part of our strategy to operate through a holding company
structure and to conduct substantially all of our operations through
subsidiaries. To effect the holding company structure, in July 1997 we entered
into an Exchange Agreement with the existing holders of the Common Stock and
Series A Preferred Stock of Covad California to acquire all of such stock in
exchange for a like number of shares of our common and preferred stock, so that
after giving effect to the exchange Covad California became our wholly-owned
subsidiary. In addition, we entered into an Assumption Agreement pursuant to
which we assumed certain outstanding obligations of Covad California, including
a $500,000 demand note issued to Warburg and certain commitments to issue stock
options to two of our consultants.
In connection with the Exchange Agreement, two of our former officers,
Messrs. Charles McMinn and Charles Haas, and one of our current officers, Mr.
Khanna, each exchanged 6,750,000 shares of Common Stock of Covad California,
originally purchased for $0.0019 per share, for a like number of our pre-split
shares of Common Stock pursuant to restricted stock purchase agreements. In
addition, Mr. Lynch, one of our directors, exchanged 324,000 shares of Common
Stock of Covad California, originally purchased for $0.148 per share, for a
like number of our pre-split shares of Common Stock pursuant to a restricted
stock purchase agreement. The Common Stock issued to Messrs. McMinn, Khanna,
Haas and Lynch are generally subject to vesting over a period of four years.
This vesting is subject to acceleration upon a change of control involving a
merger, sale of all or substantially all our assets or a shift in 50% or more of
the voting power of our capital stock. Our repurchase rights lapse one year
after the change of control or earlier in the event the individual is
constructively terminated or terminated without cause, or in the event the
successor corporation refuses to assume the agreements.
ISSUANCE OF COMMON STOCK
On July 15, 1997, we issued 2,531,250 post-split shares of our Common Stock
to Mr. Rex Cardinale, one of our former officers, for a split-adjusted purchase
price of $0.148 per share. On August 30,1997, we issued 776,250 post-split
shares of our Common Stock to Mr. Laehy, one of our officers, for a
split-adjusted purchase price of $0.0222 per share. On October 14, 1997, we
issued 324,000 post-split shares of our Common Stock to Mr. Marshall, one of our
directors, for a split-adjusted purchase price of $0.0222 per share. On April
24, 1998, we issued 216,000 post-split shares of our Common Stock to Mr. Hawk,
one of our directors, for a split-adjusted purchase price of $0.296 per share.
On August 28, 1998, we issued 90,000 post-split shares of our Common Stock to
Mr. Hawk for a split-adjusted purchase price of $2.555 per share. The shares of
our Common Stock issued to Messrs. Cardinale, Laehy, Marshall, and Hawk were
issued pursuant to restricted stock purchase agreements which contain vesting
and change of control provisions similar to those contained in the
above-described restricted stock purchase agreements of Messrs. McMinn, Khanna,
Haas and Lynch.
ISSUANCE OF SERIES A PREFERRED STOCK
On June 30, 1997 Covad California issued 225,000 shares of Series A
Preferred Stock to each of Messrs. McMinn, Khanna and Haas and 450,000 shares of
Series A Preferred Stock to Mr. Lynch for a purchase price of $0.222 per share.
In July 1997, these shares were exchanged for a like number of our shares of
Series A Preferred Stock pursuant to the Exchange Agreement.
ISSUANCE OF SERIES B PREFERRED STOCK
In July 1997, we sold an aggregate of 25,500,001 shares of our Series B
Preferred Stock, of which 18,000,000 shares were sold to Warburg, 4,500,000
shares were sold to Crosspoint and 3,000,001 shares were sold to Intel. The
purchase price of our Series B Preferred Stock was $0.333 per share. A portion
of the purchase price of the Series B Preferred Stock was paid by cancellation
of a $500,000 demand note issued to Warburg in June 1997. Messrs. Kressel and
Landy, each of whom formerly served as members of our Board of Directors, are
affiliated with Warburg. Mr. Shapero, who currently serves on our Board of
Directors, is affiliated with Crosspoint. On February 12, 1998, we sold an
additional 150,003 shares of Series B Preferred Stock at a purchase price of
$0.666 per share to Mr. Marshall, one of our directors.
62
<PAGE>
THE STRATEGIC INVESTMENTS AND RELATIONSHIPS
In January 1999, we received equity investments from AT&T Ventures,
NEXTLINK Communications Inc. and Qwest Communications International, Inc. AT&T
Ventures purchased an aggregate of 2,250,874 shares of our Series C-1 Preferred
Stock at $1.8511 per share and an aggregate of 1,736,112 shares of our Series
D-1 Preferred Stock at $12.00 per share. These purchases represent an aggregate
investment of $25 million, of which $11 million was invested by AT&T Venture
Fund II, LP and $14 million was invested by two affiliated funds. NEXTLINK
Communications Inc. purchased 1,800,699 shares of our Series C-1 Preferred Stock
at $1.8511 per share and 925,926 shares of our Series D-1 Preferred Stock at
$12.00 per share, representing an investment of $20 million. Qwest
Communications International, Inc. purchased 1,350,523 shares of our Series C-1
Preferred Stock at $1.8511 per share and 1,041,667 shares of our Series D-1
Preferred Stock at $12.00 per share, representing an aggregate investment of $15
million. At the completion of our initial public offering, our Series C-1
Preferred Stock converted into our Class B Common Stock on a one-for-one basis.
The Series D-1 Preferred Stock also converted into our Class B Common Stock at
that time on a one-for-one basis. These strategic investors have agreed not to
transfer any of our Series C-1 Preferred Stock, Series D-1 Preferred Stock or
Class B Common Stock to any non-affiliated third party until January 2000. They
have also each agreed not to acquire more than 10% of our voting stock without
our consent until January 2002. In addition, until January 2002, they have
agreed to vote any voting securities they hold as recommended by our Board of
Directors. Since this time, all of our Class B Common Stock has been converted
into our Common Stock.
Concurrently with these strategic equity investments, we entered into
commercial agreements with AT&T Corp., NEXTLINK Communications Inc. and Qwest
Communications International, Inc. These agreements provide for the purchase,
marketing and resale of our services at volume discounts, our purchase of fiber
optic transport bandwidth at volume discounts, collocation of network equipment
and development of new DSL services. These agreements have terms ranging from
six months to several years subject to earlier termination in certain
circumstances. We cannot predict the number of line orders that AT&T Corp.,
NEXTLINK Communications Inc. or Qwest Communications International, Inc. will
generate, if any, whether line orders will be below our expectations or the
expectations of, AT&T Corp., NEXTLINK Communications Inc. or Qwest
Communications International, Inc. or whether AT&T Corp., NEXTLINK
Communications Inc. or Qwest Communications International, Inc. will discontinue
selling our services entirely.
EQUIPMENT LEASE FINANCING
Through December 31, 1999, we incurred a total of $865,000 of equipment
lease financing obligations (including principal and interest) through a sale
lease-back transaction with Charter Financial, Inc. ("Charter Financial").
Through December 31, 1999, we made total payments of approximately $525,000 to
Charter Financial on these obligations. Warburg, a principal stockholder of us
at the time this transaction was entered into, owns a majority of the capital
stock of Charter Financial. We believe that the terms of the lease financing
with Charter Financial were completed at rates similar to those available from
alternative providers. Our belief that the terms of the sale lease-back
arrangement are similar to those available from alternative providers is based
on the advice of its our officers who reviewed at least two alternative
proposals and who reviewed and negotiated the terms of the arrangement with
Charter Financial.
VENDOR RELATIONSHIP
Crosspoint, who was one of our principal stockholders, previously owned
approximately 12% of the capital stock of Diamond Lane, one of our vendors.
Payments to Diamond Lane in 1999 totaled approximately $51,539,000. We believe
that the terms of our transactions with Diamond Lane were completed at rates
similar to those available from alternative vendors. This belief is based on our
management team's experience in obtaining vendors and the fact that we sought
competitive bidders before entering into the relationship with Diamond Lane.
REGISTRATION RIGHTS
Certain holders of our Common Stock are entitled to registration rights.
Pursuant to the Stockholder Rights Agreement holders of 30,112,927 post-split
shares of Common Stock and holders of 6,379,177 shares of Class B Common Stock
(collectively, the "Rights Holders") are entitled to certain rights with respect
to the registration under the Securities Act of the shares of Common Stock held
by them or issuable upon conversion of the Class B
63
<PAGE>
Common Stock. Commencing January 2000, the Class B Common Stock became converted
into Common Stock at the election of the holder. As of April 2000, all Class B
Common Stock had been so converted.
The Rights Holders are entitled to demand, "piggy-back" and S-3
registration rights, subject to certain limitations and conditions. The number
of securities requested to be included in a registration involving the exercise
of demand and "piggy-back" rights are subject to a pro rata reduction based on
the number of shares of Common Stock held by each Rights Holder and any other
security holders exercising their respective registration rights to the extent
that the managing underwriter advises that the total number of securities
requested to be included in the underwriting is such as to materially and
adversely affect the success of the offering. The registration rights terminate
as to any Rights Holder at the later of (i) three years after our initial public
offering or (ii) such time as such Rights Holder may sell under Rule 144 in a
three month period all registrable securities then held by such Rights Holder.
Pursuant to the Warrant Registration Rights Agreement dated March 11, 1999,
between us and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated, holders
of the warrants that were issued in connection with our 1998 note offering in
March 1998 are entitled to certain registration rights with respect to the
shares of Common Stock issuable upon exercise of such warrants. The warrant
holders are entitled to demand and "piggy-back"registration rights, subject to
certain limitations and conditions. Like the Rights Holders, the number of
securities that a warrant holder may request to be included in a registration
involving an exercise of its demand or "piggy-back"rights is subject to a pro
rata reduction. Such a reduction will be based upon the number of shares held by
each warrant holder and any other security holders exercising their respective
registration rights to the extent that the managing underwriter advises us that
the total number of securities requested to be included in the underwriting is
such as to materially and adversely affect the success of the offering.
EMPLOYMENT AGREEMENTS
In 1998, we entered into a written employment agreement with Robert
Knowling, Jr., the Chairman of the Board of Directors, President and Chief
Executive Officer. The agreement provides that Mr. Knowling will receive
compensation in the form of a $400,000 annual base salary and a $250,000 minimum
annual bonus. Mr. Knowling received (i) a signing bonus of $1,500,000, one half
of which was paid when he began working for us, and the remaining half of which
was paid once he worked for us for one full year in July 1999, and (ii) stock
options to purchase 4,725,000 post-split shares of our Common Stock at a
split-adjusted exercise price of $ .45 per share. If we terminate Mr. Knowling's
employment relationship without cause (as that term is defined in the
agreement), or if Mr. Knowling resigns for good reason (as that term is defined
in the agreement), we must continue to pay Mr.Knowling's annual salary and
targeted bonus for a period of two years after the date of termination so long
as Mr. Knowling does not become employed by one of our direct competitors. Mr.
Knowling has agreed to be bound by customary confidentiality provisions. As
provided in the agreement, in August 1998 we loaned Mr. Knowling $500,000
pursuant to a Note Secured by Deed of Trust that bears no interest during his
employment. The loan has provisions for forgiveness based on continued
employment and matures in four years, subject to acceleration in certain events.
See "Certain Relationships and Related Transactions--Employee Loans."
With respect to all options granted under our 1997 Stock Plan, in the event
that we merge with or into another corporation resulting in a change of control
involving a shift in 50% or more of the voting power of our capital stock, or
the sale of all or substantially all of our assets, the options will fully vest
and become exercisable one year after the change of control or earlier in the
event the individual is constructively terminated or terminated without cause or
in the event the successor corporation refuses to assume the options. See
"--1997 Stock Plan."
We have also entered into restricted stock purchase agreements with certain
of the Company's officers and directors. The shares of the Company's Common
Stock issued pursuant to these restricted stock purchase agreements are subject
to the Company's right of repurchase which lapses in accordance with the vesting
schedule of the agreements. The agreements also include similar provisions to
the stock options, providing for accelerated vesting in the event of a change of
control. See "Certain Relationships and Related Transactions--Issuance of Common
Stock."
64
<PAGE>
EMPLOYEE LOANS
In August 1998, we loaned Robert Knowling, Jr., our Chairman of the Board,
President and Chief Executive Officer, pursuant to his employment agreement, the
principal amount of $500,000 pursuant to a Note Secured by Deed of Trust, which
was secured by certain real property of Mr.Knowling. The entire principal
balance of this note becomes due and payable in one lump sum on August 14, 2002.
No interest is charged on the note. This note has provisions for forgiveness
based on continued employment and is subject to acceleration in certain events.
In August 1998, we loaned Joseph Devich, one of our officers, the principal
amount of $200,000 pursuant to a Note Secured by Deed of Trust, which was
secured by certain real property of Mr. Devich. The outstanding principal
balance of this note becomes due and payable in four equal installments
commencing August 13, 1999, with the last installment due on August 13, 2002. No
interest is charged on the note. This note has provisions for forgiveness based
on continued employment and is subject to acceleration in certain events.
In October 1998, we loaned Catherine Hemmer, our Executive Vice President
and Chief Operating Officer, and her husband, one of the Company's employees,
the principal amount of $600,000 pursuant to a Note Secured By Deed of Trust,
which was secured by certain real property of the Hemmers. The outstanding
principal balance of this note becomes due in four equal annual installments
commencing August 10, 1999, with the last installment due on August 10, 2002. No
interest is charged on the note. This note has provisions for forgiveness based
upon continued employment of each of the Hemmers and is subject to acceleration
in certain events.
In April 2000, we loaned Jane Marvin, one of our officers, the principal
amount of $500,000 for the purchase of a principal residence. The loan is
secured by such principal residence. The principal balance of the loan is due
and payable in four equal annual installments beginning at the first year
anniversary of the commencement of Ms. Marvin's employment, and no interest will
be charged for the loan. Furthermore, the loan will be forgiven based upon her
continued employment and is subject to acceleration in certain events. In
addition, in December 1999, we loaned Ms. Marvin $80,705.46 pursuant to a note
secured by a pledge of shares of our Common Stock. The entire principal balance
of this note becomes due and payable in one lump sum on the earlier to occur of
October 2000 or the sale of the pledged shares. Interest is payable on the note
at a rate of 5.89% per annum, compounded semiannually.
In May 1999, we loaned Robert Davenport, one of our officers, the principal
amount of $600,000 for the purchase of a principal residence. The loan is
secured by such principal residence. The outstanding principal balance of this
note becomes due in four equal installments commencing January 20, 2000, with
the last installment due on January 20, 2003. No interest is charged on the
note. The note has provisions for forgiveness based upon continued employment
and is subject to acceleration in certain events.
In January 2000, we committed to extend a loan to Michael Lach, one of our
officers, in the principal amount of $200,000, for the purchase of a principal
residence. The loan will be secured by such principal residence. The loan will
provide that the principal balance will be due and payable in four equal annual
installments, beginning at the first year anniversary of the commencement of Mr.
Lach's employment. No interest will be charged on this loan. The loan will have
provisions for forgiveness based on continued employment and is subject to
acceleration in certain events.
65
<PAGE>
STOCK OPTIONS
The following table sets forth information regarding stock options granted
to Named Executive Officers during the fiscal year ended December 31, 1999.
During the last fiscal year, Mr. Davenport was the only Named Executive Officer
to receive any option grant and none of the Named Executive Officers received
stock appreciation rights during the year ended December 31, 1999. All share
numbers have been adjusted in light of the 3-for-2 stock split, effected in the
form of a stock dividend, effective March 31, 2000.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL VALUE AT ASSSUMED ANNUAL
NUMBER OF OPTIONS GRANTED RATES OF STOCK PRICE
SECURITIES EXERCISE APPRECIATION FOR
UNDERLYING TO EMPLOYEES OPTION TERM($)(3)
OPTIONS IN FISCAL PRICE PER EXPIRATION ----------------------------
NAME GRANTED(#)(1) 1999(%)(2) SHARE($) DATE 5% 10%
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Davenport, III 450,001 5.14% $7.53 1/20/2007 $1,623,354 $3,888,215
</TABLE>
- --------------
(1) The material terms of the option grant to Mr. Davenport during 1999 is as
follows: (i) the options consist of qualified and nonqualified stock
options; (ii) all have an exercise price equal to the fair market value
on the date of grant; (iii) all have an 8-year term and become
exercisable over a four-year period, with 12.5% of the option shares
vesting on the six-month anniversary of the grant date and the remainder
vesting in 42 equal monthly installments; (iv) the options are not
transferable and (v) all options are otherwise subject to the terms and
provisions of the Company's 1997 Stock Plan. See "--1997 Stock Plan."
(2) Based on options covering an aggregate of 8,750,826 shares
(split-adjusted) the Company granted during 1999 pursuant to the
Company's 1997 Stock Plan.
(3) These amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the option term. The potential
realizable values are calculated by assuming that the Company's Common
Stock appreciates at the annual rate shown, compounded annually, from the
date of grant until expiration of the granted options. The assumed 5% and
10% rates of stock price appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of future stock price growth.
66
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT
We issued the old notes on January 28, 2000 in a private placement. In
connection with this issuance, we entered into the indenture and the
registration rights agreement. These agreements require that we file a
registration statement under the Securities Act for the new notes, the
registered notes to be issued in the exchange offer and, upon the effectiveness
of the registration statement, offer to you the opportunity to exchange your old
notes for a like principal amount of new notes. The new notes will be issued
without a restrictive legend and, except as set forth below, may be reoffered
and resold by you without registration under the Securities Act. After we
complete the exchange offer, our obligations with respect to the registration of
the old notes will terminate, except as provided in the last paragraph of this
section. A copy of the indenture and the registration rights agreement have been
filed as exhibits to the registration statement of which this prospectus is a
part.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, if you are not our "affiliate" within
the meaning of Rule 405 under the Securities Act or a broker-dealer referred to
in the next paragraph, we believe that new notes to be issued to you in the
exchange offer may be offered for resale, resold and otherwise transferred by
you, without compliance with the registration and prospectus delivery provisions
of the Securities Act. We have not received our own no-action letter as to this
interpretation. This interpretation, however, is based on your representation to
us that:
o the new notes to be issued to you in the exchange offer are acquired
in the ordinary course of your business; and
o your are not engaging in and do not intend to engage in a distribution
of the new notes to be issued to you in the exchange offer; and
o you have no arrangement or understanding with any person to
participate in the distribution of the new notes to be issued to you
in the exchange offer.
If you tender in the exchange offer for the purpose of participating in a
distribution of the new notes to be issued to you in the exchange offer, you
cannot rely on this interpretation by the staff of the Commission. Under those
circumstances, you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Each broker-dealer that receives new notes in the exchange offer
for its own account, in exchange for old notes that were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of those new
notes. See "Plan of Distribution."
If you will not receive freely tradeable registered notes in the exchange
offer or are not eligible to participate in the exchange offer, you can elect,
by indicating on the letter of transmittal and providing certain additional
necessary information, to have your old notes registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act. In the event that we are obligated to file a shelf registration
statement, we will be required to keep the shelf registration statement
effective for a period of two years or such shorter period that will terminate
when all of the old notes covered by the shelf registration statement have been
sold pursuant to the shelf registration statement. Other than as set forth in
this paragraph, you will not have the right to require us to register your old
notes under the Securities Act. See "--Procedures for tendering."
CONSEQUENCES OF FAILURE TO EXCHANGE
After we complete the exchange offer, if you have not tendered your old
notes, you will not have any further registration rights, except as set forth
above. Your old notes will continue to be subject to certain restrictions on
transfer. Therefore, the liquidity of the market for your old notes could be
adversely affected upon completion of the exchange offer if you do not
participate in the exchange offer. If the liquidity of the trading market for
the old notes is adversely affected, you may be unable to sell or transfer your
old notes and the value of your old notes may decline.
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of new notes in exchange
for each $1,000 principal amount of old notes accepted in the exchange offer.
You may tender some or all of your old notes in the exchange offer. However, old
notes may be tendered only in integral multiples of $1,000 in principal amount.
The form and terms of the new notes are substantially the same as the form
and terms of the old notes, except that the new notes to be issued in the
exchange offer will have been registered under the Securities Act and will not
bear legends restricting their transfer. The new notes will be issued pursuant
to, and entitled to the benefits of, the indenture. The indenture also governs
the old notes. The new notes and the old notes will be deemed one issue of notes
under the indenture.
As of the date of this prospectus, $425.0 million aggregate principal
amount of the old notes were outstanding. This prospectus, together with the
letter of transmittal, is being sent to all registered holders of old notes as
of May 9, 2000 and to others believed to have beneficial interests in the old
notes. You do not have any appraisal or dissenters, rights in connection with
the exchange offer under the General Corporation Law of the State of Delaware or
the indenture. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of the
Commission promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered old notes when, as, and
if we have given oral or written notice of our acceptance to the exchange agent.
The exchange agent will act as our agent for the tendering holders for the
purpose of receiving the new notes from us. If we do not accept any tendered
notes because o an invalid tender, the occurrence of certain other events set
forth in this prospectus or otherwise, we will return certificates for any
unaccepted old notes without expense to the tendering holder as promptly as
practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer taxes," transfer taxes with respect to the
exchange of your old notes in the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "--Fees and expenses" below.
EXPIRATION DATE; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
___________________ 2000, unless we determine, in our sole discretion, to extend
the exchange offer. If we extend the exchange offer, it will expire at the later
date and time to which it is extended. We do not intend to extend the exchange
offer, although we reserve the right to do so. If we extend the exchange offer,
we will give oral or written notice of the extension to the exchange agent and
give each registered holder notice by means of a press release or other public
announcement of any extension prior to 9:00 a.m., New York City time, on the
next business day after the scheduled expiration date.
We also reserve the right, in our sole discretion,
o to delay accepting any old notes or, if any of the conditions set
forth below under "--Conditions" have not been satisfied or waived,
to terminate the exchange offer or
o to amend the terms of the exchange offer in any manner, by giving
oral or written notice of such delay or termination to the exchange
agent, and by complying with Rule 14e-1(d) under the Exchange Act to
the extent that rule applies.
We acknowledge and undertake to comply with the provisions of Rule 14e-1(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the old notes surrendered for exchange, promptly after the termination or
withdrawal of the exchange offer. We will notify you as promptly as we can of
any extension, termination or amendment.
INTEREST ON THE NOTES
The old notes will continue to accrue interest through (but not including)
the date of issuance of the new notes. Any old notes not tendered or accepted
for exchange will continue to accrue interest at the rate of 12% per
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annum in accordance with their terms. From and after the date of issuance of the
new notes, the new notes will accrue interest at the rate of 12% per annum,
payable in arrears on February 15 and August 15 of each year, commencing on
August 15, 2000.
PROCEDURES FOR TENDERING
To tender in the exchange offer, you must follow these steps:
(a) complete, sign and date the letter of transmittal, or a facsimile
of it;
(b) have the signatures on the letter guaranteed if required by
Instruction 3 of the letter of transmittal; and
(c) mail or otherwise deliver such letter of transmittal or such
facsimile, together with the old notes and any other required documents, to
the exchange Agent before to 5:00 p.m., New York City time, on the
Expiration Date.
If delivery of the old notes is to be made through book-entry transfer into
the exchange Agent's account at DTC, you must tender the old notes in accordance
with DTC's Automated Tender offer Program ("ATOP") procedures. See "--Book-Entry
Transfer; Delivery and Form."
Your tender of old notes will constitute an agreement between us in
accordance with the terms and subject to the conditions set forth in this
Prospectus and in the letter of transmittal.
You must deliver all documents for tender to the Exchange Agent at its
address set forth below. You may also request your brokers, dealers, commercial
banks, trust companies or nominees to effect the above transactions for you.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT YOUR OPTION AND YOUR SOLE RISK. DOCUMENTS ARE
DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, WE RECOMMEND REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED,
OR AN OVERNIGHT DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME
TO INSURE TIMELY DELIVERY.
Only a Holder of old notes may tender such old notes in the exchange offer.
The term "Holder" with respect to the exchange offer means any person in whose
name old notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
If your old notes are registered in the name of your broker, dealer,
commercial bank, trust company or other nominee and you wish to tender, you
should contact such registered Holder promptly and instruct such registered
Holder to tender on your behalf. If your old notes are so registered and you
wish to tender on your own behalf, you must, prior to completing and executing
the letter of transmittal and delivering your old notes, either make appropriate
arrangements to register ownership of the old notes in your name or obtain a
properly completed bond power from the registered Holder. The transfer of record
ownership may take considerable time.
Signatures on a letter of transmittal or notice of withdrawal must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., or a commercial bank or
trust company having an office or correspondent in the U.S. (an "Eligible
Institution"). Signatures do not need to be guaranteed if the old notes are
tendered (i) by a registered Holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on the letter
of transmittal or (ii) for the account of an Eligible Institution.
If the letter of transmittal is signed by a person other than the
registered Holder of any old notes listed on the letter, such old notes must be
endorsed or accompanied by appropriate bond powers signed as the name of the
registered Holder or Holders appears on the old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons must indicate their capacity when signing. Unless waived by the Company,
you must then submit evidence satisfactory to us of their authority to so act
with the letter of transmittal.
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We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of tendered old
notes and withdrawal of tendered old notes. Our determination will be final and
binding. We reserve the absolute right to reject any and all old notes not
properly tendered or any old notes of which would, in the opinion of our
counsel, be unlawful for us to accept. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within such time as we determine. No one is under any
duty to give notification of defects or irregularities with respect to tenders
of old notes, nor will any person incur any liability for failure to give such
notification. Old notes are not properly tendered until such irregularities have
been cured or waived. Any old notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders
of old notes, unless otherwise provided in the letter of transmittal, as soon as
practicable after the Expiration Date.
In addition, we reserve the right in our sole discretion:
o to purchase or make offers for any old notes that remain outstanding
after the Expiration Date;
o to terminate the exchange offer as described in "--Conditions"; and
o to the extent permitted by applicable law, purchase old notes in the
open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of
the exchange offer.
By tendering, you will represent to us, among other things, that:
o the new notes you acquire in the exchange offer are being obtained in
the ordinary course of your business;
o you have no arrangement with any person to participate in the
distribution of such new notes; and
o you are not an "affiliate," as defined under Rule 405 of the
Securities Act, of us.
If you are a Participating Broker-Dealer that will receive new notes for
your own account in exchange for old notes that were not acquired directly from
the Company, by tendering you will acknowledge that you will deliver a
prospectus in connection with any resale of such new notes. See "Plan of
Distribution."
BOOK-ENTRY TRANSFER; DELIVERY AND FORM
The old notes were initially represented:
o if initially purchased by "qualified institutional buyers" (as such
term is defined in Rule 144A under the Securities Act), by three
global old notes in fully registered form, all registered in the name
of a nominee of the DTC; and
o if initially purchased by persons other than U.S. persons relying upon
Regulation S under the Securities Act, by one global Regulation S old
note in fully registered form, all registered in the name of a nominee
of DTC for the accounts of Euroclear and Cedel Bank.
The new notes exchanged for the old notes represented by the global old
notes and global Regulation S old note will be represented:
o in the case of "qualified institutional buyers", by three global new
notes in fully registered form, registered in the name of the nominee
of DTC; and
o in the case of persons outside of the U.S., by one global Regulation S
new note in fully registered form, registered in the name of the
nominee of DTC for the accounts of Euroclear and Cedel Bank.
The global new notes and global Regulation S new note will be exchangeable
for definitive new notes in registered form, in denominations of $1,000
principal amount at maturity and integral multiples of $1,000. The new notes in
global form will trade in The Depository Trust Company's Same-Day Funds
Settlement System, and secondary market trading activity in such new notes will
therefore settle in immediately available funds.
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We understand that the Exchange Agent will make a request promptly after
the date of this prospectus to establish an account with respect to the old
notes at DTC for the purpose of facilitating the exchange offer. Subject to the
establishment of this account, any financial institution that is a participant
in DTC's system may make book-entry delivery of old notes by causing DTC to
transfer such old notes into the Exchange Agent's account with respect to the
old notes in accordance with DTC's ATOP procedures for such book-entry
transfers. Although delivery of the old notes may be effected through book-
entry transfer into the Exchange Agent's account at DTC, the exchange for old
notes so tendered will be made only after two conditions are met. First, the DTC
must timely confirm (a "Book-Entry Confirmation") such book-entry transfer of
the old notes into the Exchange Agent's account. Second, the Exchange Agent must
timely receive a Book-Entry Confirmation with a message, transmitted by DTC and
received by the Exchange Agent and forming part of the Book-Entry Confirmation,
which states that DTC has received express acknowledgment from a participant
tendering old notes that such participant has received and agrees to be bound by
the terms of the letter of transmittal, and that such agreement may be enforced
against such participant.
GUARANTEED DELIVERY PROCEDURES
If your old notes are not immediately available or if you cannot deliver
your old notes, the letter of transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date, you may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) before the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the old notes, the
certificate number or numbers of such old notes and the principal amount at
maturity of old notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the letter of transmittal (or facsimile of
such letter) together with the certificate(s) representing the old notes to
be tendered in proper form for transfer and any other documents required by
the letter of transmittal, or a Book-Entry Confirmation, as the case may
be, will be delivered by the Eligible Institution to the Exchange Agent;
and
(3) such properly completed and executed letter of transmittal (or
facsimile of such letter), as well as the certificate(s) representing all
tendered old notes in proper form for transfer and all other documents
required by the letter of transmittal, or a Book-Entry Confirmation, as the
case may be, are received by the Exchange Agent within three New York Stock
Exchange trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise described in this prospectus, tenders of old notes may
be withdrawn at any time before 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of old notes in the Exchange Offer, the Exchange
Agent must receive a written or facsimile transmission notice of withdrawal at
its address set forth in this prospectus before 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must:
(1) specify the name of the person having deposited the old notes to
be withdrawn (the "Depositor");
(2) identify the old notes to be withdrawn (including the certificate
number or numbers and principal amount at maturity of such old notes);
(3) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such old notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
old notes register the transfer of such old notes into the name of the
person withdrawing the tender; and
(4) specify the name in which any such old notes are to be registered,
if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by us. Our determination will be
final and binding on all parties. Any old notes so withdrawn will be
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deemed not to have been validly tendered for purposes of the exchange offer and
no new notes will be issued with respect thereto unless the old notes so
withdrawn are validly retendered. Any old notes which have been tendered but
which are not accepted for exchange will be returned to their Holder without
cost to such Holder as soon as practicable after withdrawal, rejection of tender
or termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures, described above under
"--Procedures for Tendering" at any time before the Expiration Date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes not
accepted for exchange, and may terminate or amend the exchange offer as provided
in this prospectus before the acceptance of such old notes, if any of the
following conditions exist:
(1) the exchange offer, or the making of any exchange by a Holder,
violates applicable law or any applicable interpretation of the SEC;
(2) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might impair our ability to proceed with the
exchange offer;
(3) any law, statute, rule or regulation is adopted or enacted which,
in our sole judgment, might materially impair our ability to proceed with
the exchange offer;
(4) a banking moratorium is declared by U.S. federal or California or
New York state authorities which, in our judgment, would reasonably be
expected to impair our ability to proceed with the exchange offer;
(5) trading on the New York Stock Exchange or generally in the U.S.
over-the-counter market is suspended by order of the SEC or any other
governmental authority which, in our judgment, would reasonably be expected
to impair our ability to proceed with the exchange offer; or
(6) a stop order is issued by the SEC or any state securities
authority suspending the effectiveness of the Registration Statement or
proceedings are initiated or, to our knowledge, threatened for that
purpose.
If any such conditions exist, we may
o refuse to accept any old notes and return all tendered old notes to
exchanging Holders;
o extend the exchange offer and retain all old notes tendered prior to
the expiration of the exchange offer, subject, however, to the rights
of Holders to withdraw such old notes (see "--Withdrawal of Tenders");
or
o waive certain of such conditions with respect to the exchange offer
and accept all properly tendered old notes which have not been
withdrawn or revoked.
If such waiver constitutes a material change to the exchange offer, we will
promptly disclose such waiver in a manner reasonably calculated to inform
Holders of old notes of such waiver.
The conditions described above are for our sole benefit. We may assert any
condition regardless of the circumstances giving rise to any such condition. We
may waive any condition in whole or in part at any time and from time to time in
our sole discretion. We are not waiving these rights by failing to exercise
them. These rights are ongoing and may be asserted at any time and from time to
time.
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EXCHANGE AGENT
We appointed the United States Trust Company of New York as Exchange Agent
for the exchange offer. Send letters of transmittal and Notices of Guaranteed
Delivery to the Exchange Agent addressed as follows:
<TABLE>
<S><C>
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER:
United States Trust Company of New York Attention:
P.O. Box 844, Cooper Station United States Trust Company of New York
Attention: Corporate Trust Services and by Hand delivery after 4:30 PM on
New York, New York 10276-0844 Expiration Date:
United States Trust Company of New York
BY HAND: 770 Broadway, 13th Floor
Attention: Corporate Trust Window
Attn: Corporate Trust Window New York, New York 10003
United States Trust Company of New York
Delivery to 4:30 PM: FACSIMILE INFORMATION:
United States Trust Company of New York Attention:
111 Broadway, Lower Level Corporate Trust Services
Attn: Corporate Trust Window 212-780-0582 or 212-420-6211
New York, New York 10006
Confirm by telephone:
800-548-6565
</TABLE>
FEES AND EXPENSES
We will pay the expenses of soliciting tenders. The principal solicitation
is being made by mail. Additional solicitation may be made by telegraph,
telephone or in person by officers and regular employees of the Company and its
affiliates.
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. We may also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of the old notes, and in handling or
forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the
exchange offer. We estimate these cash expenses will aggregate approximately
$75,000, including fees and expenses of the exchange agent and the Trustee under
the indenture and accounting and legal fees.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes in the exchange offer. The amount of any such transfer taxes (whether
imposed on the registered Holder or any other persons) will be payable by the
tendering Holder if:
(1) certificates representing new notes or old notes for principal
amounts at maturity no tendered or accepted for exchange are to be
delivered to, or are to be registered in the name of, any person other than
the registered Holder of the old notes tendered;
(2) tendered old notes are registered in the name of any person other
than the person signing the Letter of Transmittal; or
(3) a transfer tax is imposed for any reason other than the exchange
of old notes in the Exchange Offer.
In such circumstances, you must submit satisfactory evidence of payment of
such taxes or exception from such taxes with the Letter of Transmittal or the
amount of such transfer taxes will be billed directly to you.
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ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes,
which is face value as reflected in the Company's accounting records on the date
of the exchange offer. Accordingly, no gain or loss for accounting purposes will
be recognized upon completion of the exchange offer. The issuance costs incurred
in connection with the exchange offer will be capitalized and amortized over the
term of the new notes.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
1998 NOTES
The Company has outstanding $260.0 million in aggregate principal amount
at maturity of its 1998 notes. These 1998 notes mature on March 15, 2008 and are
accreting in value through March 15, 2003 at a rate of 13 1/2% per annum,
compounded semi-annually. After March 15, 2003, the Notes will bear interest at
a rate of 13 1/2% per annum, payable in cash semi-annually in arrears on March
15 and September 15 of each year until maturity commencing September 15, 2003.
The 1998 notes may be redeemed at the option of the Company, in whole or in
part, at any time on or after March 15, 2003, at a premium declining to par on
March 15, 2006, plus accrued and unpaid interest through the redemption date. In
the event of a change of control, the holders of the 1998 notes will have the
right to require the Company to purchase the 1998 notes at a price equal to 101%
of the aggregate principal amount or accreted value thereof, as applicable, plus
accrued and unpaid interest, if any, to the date of purchase.
The covenants set forth in the indenture relating to the 1998 notes are
similar to, but more restrictive in some instances than, those in the indenture
relating to the notes, including with respect to the covenant described below
under the caption "Description of Notes--Certain Covenants--Incurrence of Debt
and Issuance of Disqualified Stock." The indenture relating to the 1998 notes
contains certain covenants, that, among other things, limit the ability of the
Company and its Subsidiaries to make certain restricted payments, incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and leaseback transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its Subsidiaries,
conduct certain lines of business, issue or sell equity interests of the
Company's Subsidiaries or enter into certain mergers and consolidations. In
addition, under certain circumstances, the Company is required to offer to
purchase the 1998 notes at a price equal to 100% of the principal amount or
accreted value thereof, as applicable, plus accrued and unpaid interest, if any,
to the date of purchase, with the proceeds of certain asset sales.
1999 NOTES
The Company has outstanding $215.0 million in aggregate principal amount
of its 1999 notes. These 1999 notes mature on February 15, 2009 and bear
interest at a rate of 12 1/2% per annum, payable in cash semi-annually in
arrears on February 15 and August 15 of each year until maturity commencing
August 15, 1999. The 1999 notes may be redeemed at the option of the Company, in
whole or in part, at any time on or after February 15, 2004, at a premium
declining to par on February 15, 2007, plus accrued and unpaid interest through
the redemption date. In the event of a change of control, the holders of the
1999 notes will have the right to require the Company to purchase the 1999 notes
at a price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest, if any, to the date of purchase.
The covenants set forth in the indenture relating to the 1999 notes are
similar to, but more restrictive in certain instances than, those in the
indenture relating to the notes, including with respect to the covenants
described below under the captions "Description of Notes--Certain
Covenants--Incurrence of Debt and Issuance of Disqualified Stock," "--Restricted
Payments" and "--Liens." The indenture relating to the 1999 notes contains
certain covenants, that, among other things, limit the ability of the Company
and its Subsidiaries to make certain restricted payments, incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and leaseback transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its Subsidiaries,
conduct certain lines of business, issue or sell equity interests of the
Company's Subsidiaries or enter into certain mergers and consolidations. In
addition, under certain circumstances, the Company is required to offer to
purchase the 1999 notes at a price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase, with
the proceeds of certain asset sales.
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CERTAIN TERMS OF THE NEW NOTES
The terms of the new notes will be identical in all material respects to
those of the old notes described below, except that the new notes (i) will have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the old notes and (ii) will not
be entitled to certain registration rights under the registration rights
agreement, including the provision for Additional Interest of up to 2.00% on the
old notes. Holders of old notes should review the information set forth below in
this section for terms common to the new notes and the old notes.
Upon consummation of the exchange offer, the Company will have no further
obligation to register the old notes. Thereafter, any holder of old notes who
does not tender its old notes in the exchange offer, including any holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company which cannot tender its old notes in the exchange offer, will
continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished to TVN that such an exemption
is available.
The new notes are 12% Senior Notes and have a principal amount of $425.0
million. The new notes will mature on February 15, 2010. The new notes will pay
interest in cash at the rate of 12% per annum, payable on February 15 and August
15 of each year, commencing August 15, 2000.
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DESCRIPTION OF NOTES
GENERAL
You can find the definitions of certain terms used in this description
under the subheading "--Certain Definitions." In this description, the word
"Company" refers only to Covad Communications Group, Inc. and not to any of its
Subsidiaries.
The Company issued the old notes under an Indenture (the "Indenture")
between itself and United States Trust Company of New York, as trustee (the
"Trustee"). The terms of the notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(the "Trust Indenture Act"). The new notes and the old notes are referred to
collectively as the notes.
The following description is a summary of the material provisions of the
Indenture and the Registration Rights Agreement. It does not restate those
agreements in their entirety. We urge you to read the Indenture and the
Registration Rights Agreement because they, and not this description, define
your rights as holders of these Notes. You can find out how to obtain copies of
the Indenture and the Registration Rights Agreement under the subheading
"--Additional Information."
BRIEF DESCRIPTION OF THE NOTES
The notes:
o are senior obligations of the Company;
o rank equal in right of payment with all existing and future senior
Debt of the Company;
o rank senior in right of payment to any future subordinated Debt of the
Company; and
o are effectively subordinated to existing and future Debt and other
liabilities (including subordinated Debt and trade payables) of its
Subsidiaries.
The Indenture permits the Company and its Subsidiaries to incur substantial
additional Debt, subject to certain restrictions. See "Risk Factors--We rely
upon distributions from our subsidiaries to service our indebtedness, and our
indebtedness is effectively subordinated to the indebtedness of our
subsidiaries."
Assuming we had completed this offering on December 31, 1999 and applied
the proceeds as intended, these notes:
o would have ranked equally with $374.7 million of our senior Debt; and
o would have been effectively subordinated to $82.5 million of Debt and
other liabilities (including trade payables) of our subsidiaries.
The Company's operations are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. See "Risk
Factors--We rely upon distributions from our subsidiaries to service our
indebtedness, and our indebtedness is effectively subordinated to the
indebtedness of our subsidiaries."
The Company currently has three Subsidiaries, two of which will be
designated as Restricted Subsidiaries under the Indenture. Under certain
circumstances, the Company will be permitted to designate certain of its
Subsidiaries, including Subsidiaries that it creates or acquires in the future,
to be Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject
to many of the restrictive covenants in the Indenture. See "--Certain
Covenants--Restricted Payments."
PRINCIPAL, MATURITY AND INTEREST
The Company will limit the aggregate principal amount of the notes to
$475.0 million, of which $425.0 million aggregate principal amount of old notes
have been issued and $50.0 million aggregate principal amount of notes is
available for issuance in the future, subject to the covenant described under
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"--Certain Covenants--Incurrence of Debt and Issuance of Disqualified Stock." We
issued the old notes in denominations of $1,000 and integral multiples of
$1,000. The notes will mature on February 15, 2010.
Interest on the notes accrues at the rate of 12% per annum and is payable
in cash semi-annually in arrears on February 15 and August 15, commencing on
August 15, 2000, to the Holders of record of the Notes on the immediately
preceding February 1 and August 1.
Interest on the notes accrues from the date interest was most recently paid
or, if no interest has been paid, then the date the notes were issued. Interest
is computed on the basis of a 360-day year comprised of twelve 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to the Company, we will
make all principal, premium and interest payments on those Notes in accordance
with those instructions. All other payments on the Notes will be made at the
office or agency of the Paying Agent and Registrar within the City and State of
New York unless we elect to make interest payments by check mailed to the
Holders at their address set forth in the register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee is initially acting as Paying Agent and Registrar. We may
change the Paying Agent or Registrar without prior notice to the Holders of the
Notes, and we or any of our Subsidiaries may act as Paying Agent or Registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and we may require a
Holder to pay any taxes and fees required by law or permitted by the Indenture.
We are not required to transfer or exchange any note selected for redemption.
Also, we are not required to exchange or register the transfer of any note for a
period of 15 days before a selection of old notes to be redeemed.
The registered Holder of a note will be treated as its owner for all
purposes.
OPTIONAL REDEMPTION
At any time on or prior to February 15, 2003, we may on any one or more
occasions redeem up to an aggregate of 35% of the notes originally issued under
the Indenture at a redemption price of 112.00% of the aggregate principal amount
of the notes, plus accrued and unpaid interest to the redemption date, with the
net cash proceeds (but only to the extent such proceeds consist of cash or Cash
Equivalents) of one or more Public Equity Offerings; provided that
(1) at least $276.25 million of the aggregate principal amount of the
Notes remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by us and our Subsidiaries); and
(2) we must mail a notice of redemption no later than 30 days after
the related Public Equity Offering and must consummate the redemption
within 60 days of the closing of such Public Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at our option prior to February 15, 2005.
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On and after February 15, 2005, we may redeem all or a part of the notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon, if any, to the applicable redemption date, if redeemed
during the twelve-month period beginning on February 15 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2005........................................................................................... 106.000 %
2006........................................................................................... 104.000 %
2007........................................................................................... 102.000 %
2008 and thereafter............................................................................ 100.000 %
</TABLE>
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the Trustee
will select old notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of
the principal national securities exchange on which the notes are listed;
or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
such other method as the Trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the Holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
MANDATORY REDEMPTION
We will not be required to make mandatory redemption or sinking fund
payments with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of notes will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that Holder's notes pursuant to the Change of
Control Offer. In the Change of Control Offer, the Company will offer a Change
of Control Payment equal to 101% of the aggregate principal amount of notes
repurchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase. Within ten days following any Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the date
specified in such notice, pursuant to the procedures required by the Indenture
and described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all notes or portions thereof so tendered;
and
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(3) deliver or cause to be delivered to the Trustee the notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of notes or portions thereof being purchased by the
Company.
The Paying Agent will promptly mail to each Holder of notes so tendered the
Change of Control Payment for such Notes. The Trustee will promptly authenticate
and mail (or cause to be transferred by book entry) to each Holder a new note
equal in principal amount to any unpurchased portion of the notes surrendered,
if any; provided that each such new note will be in a principal amount of $1,000
or an integral multiple thereof.
We will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The provisions described above that require us to make a Change of Control
Offer following a Change of Control will be applicable regardless of whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the notes to require that the Company
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the Company and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of notes to require the Company to
repurchase such notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
ASSET SALES
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by the Company's board of
directors and evidenced by a resolution of the board of directors set forth
in an Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by the Company
or such Restricted Subsidiary is in the form of any combination of cash or
Cash Equivalents. For purposes of this provision, each of the following are
considered cash:
(a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or such
Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any
guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by the
Company or such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted
by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received in that conversion).
The Company and its Restricted Subsidiaries will be permitted to consummate
an Asset Sale without complying with clause (3) of the immediately proceeding
paragraph if:
(1) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the assets or other property sold, issued or otherwise
disposed of; and
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(2) at least 75% of the consideration for such Asset Sale constitutes
any combination of cash, Cash Equivalents and Productive Assets. Each of
the following shall be deemed to be Net Cash Proceeds subject to the
provisions of this paragraph:
(a) any cash consideration;
(b) any non-cash consideration not constituting Productive Assets
received by the Company or any of its Restricted Subsidiaries in
connection with such Asset Sale that is converted into or sold or
otherwise disposed of for cash or Cash Equivalents at any time within
365 days after such Asset Sale; and
(c) any Productive Assets constituting cash or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries in
connection with such Asset Sale.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company (or such Restricted Subsidiary, as the case may be) may apply such
Net Proceeds to:
(1) permanently reduce the amounts permitted to be borrowed by the
Company or such Restricted Subsidiary under the terms of any of its Debt
that is not subordinated Debt; or
(2) the purchase of Telecommunications Related Assets or Voting Stock
of any Person engaged in the Telecommunications Business in the U.S.
(provided that such Person concurrently becomes a Restricted Subsidiary of
the Company).
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds the greater of $10.0 million or 10%
of the Consolidated Tangible Net Worth of the Company, the Company will make an
Asset Sale Offer to all Holders of notes to repurchase the maximum principal
amount of notes that may be purchased out of the Excess Proceeds. The offer
price in any Asset Sale Offer will be equal to 100% of the principal amount of
the notes to be purchased, plus accrued and unpaid interest thereon, if any, to
the date of purchase, and will be payable in cash. If any Excess Proceeds remain
after consummation of an Asset Sale Offer, the Company may use such Excess
Proceeds for any purpose not otherwise prohibited by the Indenture. If the
aggregate principal amount of notes tendered pursuant to such Asset Sale Offer
exceeds the amount of Excess Proceeds, the Trustee shall select the notes to be
purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable to the repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or any
of its Restricted Subsidiaries) or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or to the Company
or a Restricted Subsidiary of the Company);
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(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company (other than any such Equity
Interests owned by the Company or any Restricted Subsidiary of the
Company);
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Debt that is
subordinated to the notes, except a payment of interest or principal at
Stated Maturity; or
(4) make any Restricted Investment (all such payments and other
actions set forth in clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence thereof; and
(2) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable two-quarter Measurement
Period, have been permitted to incur at least $1.00 of additional Debt
pursuant to the Debt to Annualized Cash Flow Ratio test set forth in the
first paragraph of the covenant described below under the caption
"--Incurrence of Debt and Issuance of Disqualified Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Closing Date (excluding Restricted Payments
permitted by clauses (2), (3), (4) and (6) of the next succeeding
paragraph), is less than the sum, without duplication, of
(a) 100% of the Consolidated Cash Flow of the Company for the
period (taken as one accounting period) from the beginning of the
first fiscal quarter commencing after the issue date of the 1999 notes
to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Cash Flow for such period
is a deficit, less 100% of such deficit), MINUS 150% of consolidated
interest expense for the period (treated as one accounting period)
from the issue date of the 1999 notes to the end of the most recent
fiscal quarter for which internal financial statements are available;
plus
(b) 100% of the aggregate net cash proceeds received by the
Company since the issue date of the 1999 notes as a contribution to
its common equity capital or from the issue or sale of Equity
Interests of the Company (other than Disqualified Stock) or from the
issue or sale of Disqualified Stock or debt securities of the Company
that have been converted into such Equity Interests (other than Equity
Interests (or Disqualified Stock or convertible debt securities) sold
to a Subsidiary of the Company); plus
(c) to the extent that any Restricted Investment that was made
after the issue date of the 1999 notes is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (i) the cash return of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (ii) the initial amount of such Restricted
Investment.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Debt or Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of, other
Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (3)(b) of the preceding
paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Debt with the net cash proceeds from an incurrence of
Permitted Refinancing Debt;
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(4) the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its common Equity Interests on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted Subsidiary
of the Company held by any member of the Company's or any of its Restricted
Subsidiaries' management; provided, that (a) the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed $250,000 in any twelve-month period and (b) no Default or Event
of Default shall have occurred and be continuing immediately after such
transaction; and
(6) other Restricted Payments not to exceed $10.0 million in the
aggregate at any time outstanding.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment will be determined by the board
of directors whose resolution with respect thereto shall be delivered to the
Trustee. The board of directors' determination must be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if the fair market value exceeds $5.0 million. Not later than
the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments by the Company and its Restricted Subsidiaries (except
to the extent repaid in cash or Cash Equivalents) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of the
designation and will reduce the amount available for Restricted Payments under
the "Restricted Payments" covenant. All such outstanding Investments will be
valued at their fair market value at the time of such designation. That
designation will be permitted only if such Restricted Payment would be permitted
at that time and if the Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary. Any designation by the board of directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to the designation and an Officers' Certificate
certifying that the designation complied with these conditions and was permitted
by the "Restricted Payments" covenant.
If, at any time, any Unrestricted Subsidiary would fail to meet the
requirements of the definition of an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Debt of the Subsidiary will be deemed to be incurred by a Restricted
Subsidiary of the Company as of that date (and, if such Debt is not permitted to
be incurred as of that date under the covenant described under the caption
"Incurrence of Debt and Issuance of Disqualified Stock," the Company will be in
default of such covenant).
The board of directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation will be deemed to be an incurrence of Debt by a Restricted
Subsidiary of the Company of any outstanding Debt of such Unrestricted
Subsidiary and such designation will be permitted only if (i) such Debt is
permitted under the covenant described under the caption "Incurrence of Debt and
Issuance of Disqualified Stock," calculated on a pro forma basis as if the
designation had occurred at the beginning of the two-quarter Measurement Period,
and (ii) no Default or Event of Default would be in existence following the
designation.
INCURRENCE OF DEBT AND ISSUANCE OF DISQUALIFIED STOCK
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Debt (including Acquired Debt) and
the Company will not issue any Disqualified Stock; provided, however, that the
Company may incur Debt (including Acquired Debt) or issue shares of Disqualified
Stock if the Company's Debt to Annualized Cash Flow Ratio is no greater than 6.0
to 1.0.
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The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Debt (collectively, "Permitted Debt"):
(1) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt under Credit Facilities; provided that the aggregate
principal amount (with letters of credit being deemed to have a principal
amount equal to the maximum reimbursement obligations of the Company
and/or any of its Restricted Subsidiaries thereunder) does not exceed the
greater of $250.0 million or the Borrowing Base, at any one time
outstanding, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the commitments with respect to such Debt
pursuant to the covenant described above under the caption "--Asset
Sales;"
(2) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Vendor Debt, provided that the aggregate amount of Vendor
Debt incurred does not exceed the total cost of the Telecommunications
Related Assets acquired and financed by such Vendor Debt (including
acquisitions of Capital Stock of a Person engaged in a Telecommunications
Business that is or becomes a Restricted Subsidiary of the Company);
(3) the incurrence by the Company and its Restricted Subsidiaries
of Existing Debt;
(4) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt in an aggregate principal amount that does not
exceed $50.0 million at any one time outstanding;
(5) the incurrence by the Company of Debt (other than secured
Acquired Debt) in an aggregate principal amount that does not exceed 2.5
times the sum of the net cash proceeds received by the Company after the
issue date of the 1999 notes in connection with any issuance and sale of
Equity Interests (other than Disqualified Stock), plus the fair market
value of Equity Interests (other than Disqualified Stock) issued after
consummation of a Public Equity Offering in connection with an
acquisition of a Telecommunications Business or Telecommunications
Related Assets; provided that such Debt does not mature prior to the
Stated Maturity of the notes or has an Average Life to Stated Maturity at
least equal to the notes;
(6) the incurrence by the Company of Debt represented by the
principal amount of notes originally issued under the Indenture;
(7) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Debt in exchange for, or the net
proceeds of which are used to refund, refinance or replace Debt (other
than intercompany Debt) that was permitted by the Indenture to be
incurred under the first paragraph hereof or clauses (3) or (6) of this
paragraph;
(8) the incurrence by the Company or any of its Wholly Owned
Restricted Subsidiaries of intercompany Debt; provided, however, that:
(a) any subsequent issuance or transfer of Equity Interests
that results in any such Debt being held by a Person other than
the Company or a Wholly Owned Restricted Subsidiary of the
Company; and
(b) any sale or other transfer of any such Debt to a Person
that is not either the Company or a Wholly Owned Restricted
Subsidiary of the Company shall be deemed, in each case, to
constitute an incurrence of such Debt by the Company or such
Restricted Subsidiary, as the case may be, that was not permitted
by this clause (8);
(9) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Debt that is permitted by the terms of the Indenture to be outstanding;
and
(10) the incurrence by the Company or any of its Restricted
Subsidiaries of Purchase Money Debt, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
development, construction, maintenance, enhancement or improvement of
Productive Assets; provided, however, that the aggregate principal amount
of Purchase Money Debt shall not exceed $25.0 million at any one time
outstanding, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the commitments with respect to such Debt
pursuant to the covenant described above under the caption "--Asset
Sales."
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For purposes of determining compliance with this "Incurrence of Debt and
Issuance of Disqualified Stock" covenant, in the event that an item of Debt
meets the criteria of more than one of the categories of Permitted Debt
described in clauses (1) through (10) above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Company will be permitted
to classify such item of Debt on the date of its incurrence in any manner that
complies with this covenant. Accrual of interest and accretion or amortization
of original issue discount will not be deemed to be an incurrence of Debt for
purposes of this covenant.
LIENS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries on its Capital Stock, or with respect
to any other interest or participation in, or measured by, its profits,
or pay any indebtedness owed to the Company or any of its Restricted
Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any
of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Debt as in effect on the Closing Date;
(2) the Indenture and the notes;
(3) applicable law;
(4) any instrument governing Debt or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Debt
was incurred in connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case
of Debt, such Debt was permitted by the terms of the Indenture to be
incurred;
(5) customary non-assignment provisions in contracts entered into
in the ordinary course of business;
(6) customary restrictions on encumbrance, transfer or disposition
of financed assets pursuant to agreements governing Purchase Money Debt
and Vendor Debt permitted by the Indenture on the property so acquired;
(7) any agreement for the sale of a Restricted Subsidiary that
restricts distributions by that Restricted Subsidiary pending its sale;
(8) Permitted Refinancing Debt, provided that the restrictions
contained in the agreements governing such Permitted Refinancing Debt are
no more restrictive, taken as a whole, than those contained in the
agreements governing the Debt being refinanced;
(9) secured Debt otherwise permitted to be incurred pursuant to the
provisions of the covenant described above under the caption "--Liens"
that limits the right of the debtor to dispose of the assets securing
such Debt;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar
agreements entered into in the ordinary course of business;
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(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business; and
(12) the terms of any Credit Facility if (A) the encumbrance
limits, but does not prohibit, the payment of dividends, (B) the
encumbrance or restriction is not more disadvantageous to the holders of
the Notes than is customary in comparable Credit Facilities, as
determined by the board of directors and (C) the board of directors of
the Company determines that any such encumbrance or restriction is not
reasonably expected to materially affect the Company's ability to satisfy
any payment obligations on the notes, the 1999 notes or the 1998 notes,
when the same may become due and payable, whether including payments made
in respect of principal, interest, premium, if any, repayment or Change
of Control.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Company and any of its Restricted Subsidiaries may not: (1)
consolidate or merge with or into another Person (whether or not the Company or
such Restricted Subsidiary is the surviving corporation); or (2) sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to another
corporation, Person or entity unless:
(1) either: (a) the Company or such Restricted Subsidiary is the
surviving corporation; or (b) the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company or
such Restricted Subsidiary) or to which such sale, assignment, transfer,
lease, conveyance or other disposition was made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(2) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company or such Restricted
Subsidiary) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition was made assumes all the
obligations of the Company under the notes, the Indenture, and the
Registration Rights Agreement pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of
Default exists; and
(4) except in the case of a merger of the Company with or into a
Wholly Owned Restricted Subsidiary of the Company, the Company or the
entity or Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition was made:
(a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of
the Company immediately preceding the transaction; and
(b) will have a Debt to Annualized Cash Flow Ratio of the
Company immediately after the transaction and after giving pro
forma effect thereto as if such transaction had occurred at the
beginning of the applicable two-quarter Measurement Period equal
to or less than the Debt to Annualized Cash Flow Ratio of the
Company immediately preceding the transaction.
Alternatively, clause (4) of the preceding sentence may be satisfied by
any other Person which:
(1) assumes or guarantees the obligations of the Company under the
notes, the Indenture and the Registration Rights Agreement pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee;
(2) would, as a result of the applicable transaction, properly
classify the Company or such Restricted Subsidiary as a consolidated
subsidiary in accordance with generally accepted accounting principles;
and
(3) would, if the conditions set forth in clauses (a) and (b) of
the preceding sentence were tested substituting such Person for the
Company, satisfy such conditions.
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TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less
favorable to the Company or such Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or
such Restricted Subsidiary with an unrelated Person; and
(2) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $1.0 million, a resolution of the board of directors
set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (1) above and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of the board of directors; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $5.0 million, an opinion as to the fairness to the
holders of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm
of national standing.
The following items will not be deemed to be Affiliate Transactions:
(1) any employment agreement and related arrangement entered into
by the Company or any of its Restricted Subsidiaries in the ordinary
course of business;
(2) transactions between or among the Company and/or its
Restricted Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company; and
(4) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments."
LIMITATIONS ON ISSUANCES OF GUARANTEES OF DEBT
The Company will not permit any Subsidiary, directly or indirectly, to
guarantee, assume or in any other manner become liable with respect to any Pari
Passu Debt or Subordinated Debt of the Company unless such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a guarantee of the notes on the same terms as the guarantee of
such Debt except that:
(1) such guarantee need not be secured unless required pursuant to
the caption "--Liens" above; and
(2) if such Debt is by its terms expressly subordinated to the
notes, any such assumption, guarantee or other liability of such
Subsidiary with respect to such Debt shall be subordinated to such
Subsidiary's guarantee of the notes at least to the same extent as such
Debt is subordinated to the notes; provided, that this paragraph does not
apply to any guarantee or assumption of liability of Debt permitted under
the Indenture described in clauses (1), (6), (7), (8) and (9) of the
second paragraph under "--Incurrence of Debt and Issuance of Disqualified
Stock."
Notwithstanding the preceding paragraph, any guarantee by a Subsidiary of
the notes will provide by its terms that it (and all Liens securing the same)
will be automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's Capital Stock in, or all or substantially all of the assets of,
such Subsidiary, which transaction is in compliance with the terms of the
Indenture and such Subsidiary is released from its guarantees of other Debt of
the Company or any of its Subsidiaries.
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LIMITATIONS ON ISSUANCES AND SALES OF EQUITY INTERESTS IN WHOLLY OWNED
RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Wholly Owned
Restricted Subsidiaries to, transfer, convey, sell, lease or otherwise dispose
of any Equity Interests in any Wholly Owned Restricted Subsidiary of the Company
to any Person (other than the Company or another Wholly Owned Restricted
Subsidiary), unless:
(1) such transfer, conveyance, sale, lease or other disposition is
of all of the Equity Interests in such Wholly Owned Restricted
Subsidiary; and
(2) the Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption "--Repurchase at the Option of Holders-- Asset
Sales."
In addition, the Company will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or another Wholly Owned
Restricted Subsidiary.
BUSINESS ACTIVITIES
The Company and its Restricted Subsidiaries may not, directly or
indirectly, engage in any business other than the Telecommunications Business.
LIMITATIONS ON SALE AND LEASEBACK TRANSACTIONS
The Company and its Restricted Subsidiaries will not, directly or
indirectly, enter into, assume, guarantee or otherwise become liable with
respect to any Sale and Leaseback Transactions; provided, that the Company or
any Restricted Subsidiary of the Company may enter into any such transaction if:
(1) the Company or such Restricted Subsidiary would be permitted
under the covenants described above under "--Incurrence of Debt and
Issuance of Disqualified Stock" and "--Liens" to incur secured Debt in an
amount equal to the Attributable Debt with respect to such transaction;
(2) the consideration received by the Company or such Restricted
Subsidiary from such transaction is at least equal to the Fair Market
Value of the property being transferred; and
(3) the Net Proceeds received by the Company or such Restricted
Subsidiary from such transaction are applied in accordance with the
covenant described above under the caption "--Asset Sales."
PAYMENTS FOR CONSENT
Neither the Company nor any of its Affiliates will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or agreed
to be paid to all Holders of the Notes that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
Whether or not required by the rules and regulations of the Commission,
so long as any Notes are outstanding, the Company will furnish to the Holders of
Notes and file with the Commission, in each case within the time periods
specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in
the footnotes thereto and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial condition
and results of operations of the Company and its Restricted Subsidiaries
separate from the financial condition and results of operations of the
Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants; and
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(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports.
In addition, for so long as any Notes are outstanding, the Company will
furnish to the Holders of the Notes, securities analysts, prospective investors
and beneficial owners of the Notes, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the
notes (including any Additional Interest);
(2) default in payment when due of the principal of or premium, if
any, on the notes;
(3) failure by the Company or any of its Restricted Subsidiaries to
comply with the provisions described under the captions "--Change of
Control," "--Asset Sales," "--Restricted Payments," "--Incurrence of Debt
and Issuance of Disqualified Stock" or "--Merger, Consolidation, or Sale
of Assets;"
(4) failure by the Company or any of its Restricted Subsidiaries
for 30 days after receiving notice to comply with any of its other
agreements in the Indenture or the notes;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Debt for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries), whether such Debt or guarantee now
exists or is created after the Closing Date, if that default
(a) is caused by a failure to pay principal of or premium, if
any, or interest on such Debt prior to the expiration of the grace
period provided in such Debt on the date of such default (a
"Payment Default"); or
(b) results in the acceleration of such Debt prior to its
express maturity, and, in each case, the principal amount of any
such Debt, together with the principal amount of any other such
Debt under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $5.0 million or more;
(6) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days; and
(7) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company, any Significant Subsidiary
or any group of Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding notes will become due and payable
without further action or notice. If any other Event of Default occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount at maturity of the then outstanding notes may declare all the notes to be
due and payable immediately.
Holders of the notes may not enforce the Indenture or the notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
notes, waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the notes pursuant to the
optional redemption provisions
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of the Indenture, an equivalent premium will also become and be immediately due
and payable to the extent permitted by law upon the acceleration of the notes.
If an Event of Default occurs prior to February 15, 2005 by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the Company
with the intention of avoiding the prohibition on redemption of the notes prior
to February 15, 2005, then the premium specified in the Indenture shall also
become immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, the Company is required to deliver to the Trustee a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, will have any liability for any obligations of the Company
under the notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of notes by accepting
a note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the notes. The waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations under the notes discharged ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding Notes to receive payments
in respect of the principal of, premium, if any, and interest on such
notes when such payments are due from the trust referred to below;
(2) the Company's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed,
lost or stolen notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company released with respect to certain covenants
that are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations will not constitute a Default or Event
of Default with respect to the notes. If Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer constitute
an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding notes on the stated maturity or
on the applicable redemption date, as the case may be, and the Company
must specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, the Company must deliver to
the Trustee an opinion of counsel in the United States confirming that
(a) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (b) since the date of the Indenture,
there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel
will confirm that, the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would
have been the case if such Legal Defeasance had not occurred;
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(3) in the case of Covenant Defeasance, the Company must deliver to
the Trustee an opinion of counsel in the United States confirming that
the Holders of the outstanding notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(4) no Default or Event of Default will have occurred and be
continuing either: (a) on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied
to such deposit); or (b) insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound;
(6) the Company must deliver to the Trustee an opinion of counsel
to the effect that (assuming that no Holder of any notes would be
considered an insider of the Company under applicable bankruptcy or
insolvency law) after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors rights
generally;
(7) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of notes over any other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(8) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been satisfied.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture
or the notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
Event of Default or compliance with any provision of the Indenture or the notes
may be waived with the consent of the Holders of a majority in principal amount
of the then outstanding notes (including, without limitation, consents obtained
in connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any notes held by a non-consenting holder):
(1) reduce the principal amount of notes whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any
note or alter the provisions with respect to the redemption of the notes
(other than provisions relating to the covenants described above under
the caption "--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest
on any Note;
(4) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the notes (except a rescission of
acceleration of the notes by the Holders of at least a majority in
aggregate principal amount at maturity of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of or premium, if any, or interest on the Notes;
(7) waive a redemption payment with respect to any note (other than
a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"); or
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(8) make any change in the preceding amendment and waiver
provisions.
Notwithstanding the provisions described above, without the consent of
any Holder of notes, the Company and the Trustee may amend or supplement the
Indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place
of certificated notes;
(3) to provide for the assumption of the Company's obligations to
Holders of notes in the case of a merger or consolidation or sale of all
or substantially all of the Company's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder;
(5) to comply with requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust
Indenture Act or otherwise to comply with applicable law; or
(6) to provide for the issuance of additional notes in accordance
with the limitations provided in the Indenture.
CONCERNING THE TRUSTEE
If the Trustee becomes a creditor of the Company, the Indenture limits
its right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(which is not cured or waived), the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of notes, unless such Holder offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Offering Memorandum may obtain a copy of the
Indenture and Registration Rights Agreement without charge by writing to Covad
Communications Group, Inc., 2330 Central Expressway, Santa Clara, California
95050, Attention: General Counsel.
REGISTRATION RIGHTS RELATING TO OLD NOTES; ADDITIONAL INTEREST
Pursuant to the Registration Rights Agreement, we agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act for a registered offer to exchange registered notes for
the old notes. The terms of the registered notes will be substantially identical
in all material respects to the terms of the old notes (except that the
registered notes will not contain terms with respect to transfer restrictions,
registration rights or payment of Additional Interest).
When the Exchange Offer Registration Statement is declared effective by
the Commission, the Company will offer to the Holders of Transfer Restricted
Securities who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for registered notes pursuant to
the exchange offer. If:
(1) the Company is not required to file the Exchange Offer
Registration Statement or permitted to consummate the exchange offer
because the exchange offer is not permitted by applicable law or
Commission policy;
(2) for any reason the exchange offer is not consummated within
210 days after the Closing Date;
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(3) any Holder of Transfer Restricted Securities notifies the
Company prior to the 20th day following consummation of the exchange
offer that:
(a) it is prohibited by law or Commission policy from
participating in the exchange offer; or
(b) that it may not resell the registered notes acquired by
it in the exchange offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such
resales; or
(c) that it is a broker-dealer and owns old notes acquired
directly from the Company or an affiliate of the Company, the
Company will file with the Commission a Shelf Registration
Statement to cover resales of the Transfer Restricted Securities
by the Holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to
cause the applicable registration statement to be declared
effective as promptly as possible by the Commission on or before
the 180th day after such obligation arises.
For purposes of the preceding paragraph, "Transfer Restricted Securities"
means each old note until:
(1) the date on which such old note has been exchanged by a person
other than a broker-dealer for a new note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer
of a Note for a new note, the date on which such new note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement;
(3) the date on which such old note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement; or
(4) the date on which such old note is distributed to the public
pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that:
(1) we will file an Exchange Offer Registration Statement with the
Commission on or prior to 60 days after the Closing Date;
(2) we will use its best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior
to 180 days after the Closing Date;
(3) unless the exchange offer would not be permitted by applicable
law or Commission policy, we will commence the exchange offer and use its
best efforts to issue, on or prior to 30 business days after the date on
which the Exchange Offer Registration Statement was declared effective by
the Commission, new notes in exchange for all Notes tendered prior
thereto in the exchange offer; and
(4) if obligated to file the Shelf Registration Statement, we will
use in our best efforts to file the Shelf Registration Statement with the
Commission on or prior to 30 days after such filing obligation arises and
to cause the Shelf Registration Statement to be declared effective by the
Commission on or prior to 180 days after such obligation arises.
Additional Interest will accrue on the old notes (in addition to the
stated interest on the old notes) if:
(1) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date
specified for such filing;
(2) any of such Registration Statements is not declared effective
by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date");
(3) the Company fails to consummate the exchange offer within 30
business days of the Effectiveness Target Date with respect to the
Exchange Offer Registration Statement; or
(4) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights
Agreement.
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Each such event referred to in clauses (1) through (4) in the preceding
sentence is a Registration Default. Additional Interest will begin accruing on
the date on which any such Registration Default shall occur, excluding the date
on which all Registration Defaults have been cured. Additional Interest will
accrue at a rate of 0.50% per annum during the 90-day period immediately
following the occurrence of any Registration Default and shall increase by 0.25%
per annum at the end of each subsequent 90-day period, but in no event shall
such Additional Interest exceed 2.00% per annum. Additional Interest will be
payable in cash, semiannually in arrears on each February 15 and August 15. All
references in this description and in the Indenture to "interest" on the old
notes and the new notes include any Additional Interest that may become payable
thereon according to the provisions of this paragraph.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the exchange offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Additional Interest set forth above.
BOOK-ENTRY; DELIVERY AND FORM
Notes sold in reliance on Rule 144A under the Securities Act are
represented by one or more permanent global notes in definitive, fully
registered form without interest coupons (each a "Restricted Global Note"). The
Restricted Global Note is registered in the name of Cede & Co., as nominee of
the Depositary (the "Global Note Holder"), and has been deposited with the
Trustee as custodian for Cede & Co.
Notes sold in offshore transactions in reliance on Regulation S under the
Securities Act are represented by one or more permanent global Notes in
definitive, fully registered form without interest coupons (each an
"Unrestricted Global Note"). The Unrestricted Global Notes are registered in the
name of a nominee of DTC for the accounts of Euroclear and Cedel Bank, and have
been deposited with the Trustee as custodian for such nominee. On or prior to
the 40th day after the later of commencement of the Offering and the Closing
Date (the "Restricted Date"), beneficial interests in the Unrestricted Global
Notes may be held only through Euroclear or Cedel Bank.
Notes transferred after the Closing Date to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7)) who are not
"qualified institutional buyers" (as defined in Rule 144A) will be represented
by an interest in one or more permanent global notes in definitive, fully
registered form without interest coupons (each an "Accredited Investor Global
Note" and together with the Restricted Global Notes and the Unrestricted Global
Notes, the "Global Notes") and will be registered in the name of Cede & Co., as
nominee of the Depositary, and will be deposited with the Trustee as custodian
for Cede & Co.
Interests in the Global Notes are subject to certain restrictions on
transfer. On or prior to the Restricted Date, an interest in an Unrestricted
Global Note may be transferred to a person who takes delivery in the form of an
interest in a Restricted Global Note only upon receipt by the Trustee of (A)
instructions from DTC directing the Trustee to effect the exchange or transfer
of an interest in an Unrestricted Global Note and (B) a written certification
(in the form provided for in the Indenture) from the transferor to the effect
that such transfer is being made to a person whom the transferor reasonably
believes to be a "qualified institutional buyer" within the meaning of Rule 144A
under the Securities Act and in accordance with any applicable securities law of
any state of the United States or any other jurisdiction. After the Restricted
Date, such certification from the transferor will no longer be required by
purposes of such transfers. Interests in a Restricted Global Note may be
transferred to a person who takes delivery in the form of an interest in an
Unrestricted Global Note, whether before, on or after the Restricted Date, only
upon receipt by the Trustee of, among other things, a written certification (in
the form provided for in the Indenture) from the transferor. Any interest in a
Global Note will, upon transfer, cease to be an interest in such Global Note and
become an interest in the other Global Note and, accordingly, will thereafter be
subject to all transfer restrictions and other procedures applicable to
beneficial interest in such other Global Note for as long as it remains such an
interest. Interests in the Notes represented by such Global Notes will be shown
on, and transfers thereof will be effected only through, records maintained by
DTC and its direct and indirect participants, including Euroclear and Cedel.
Except as set forth below regarding "Certificated Notes," owners of beneficial
interests in the Global Notes will not be entitled to receive physical delivery
of Certificated Notes (as defined below).
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The Depositary is a limited-purpose trust company that was created to
hold securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants. The
Depositary's Participants include securities brokers and dealers, banks and
trust companies, clearing corporations and certain other organizations. Access
to the Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect Participants"
or the Depositary's Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depositary only through the Depositary's Participants or the
Depositary's Indirect Participants.
We expect that pursuant to procedures established by the Depositary:
(1) upon deposit of the Global Notes, the Depositary will credit
the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of the Global Notes; and
(2) ownership of the Notes evidenced by the Global Notes will be
shown on, and the transfer of ownership thereof will be effected only
through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's
Participants and the Depositary's Indirect Participants.
We advise you that the laws of some states require that certain persons
take physical delivery in definitive form of securities that they own.
Consequently, your ability to transfer Notes evidenced by the Global Notes may
be limited.
So long as the Global Note Holder is the registered owner of any notes,
the Global Note Holder will be considered the sole Holder under the Indenture of
any notes evidenced by the Global Notes. Beneficial owners of any notes
evidenced by the Global Notes under the Indenture will not be considered the
owners or holders thereof under the Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. Neither we nor the Trustee will have any responsibility or
liability for any aspect of the Depositary's records or for maintaining,
supervising or reviewing any of the Depositary's records relating to the notes.
The Trustee will make payments of the principal of, premium, if any and
interest on any notes registered in the name of the Global Note Holder on the
applicable record date to or at the direction of the Global Note Holder in its
capacity as the registered Holder under the Indenture. We and the Trustee may
treat the persons in whose names notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither we nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of Notes. We
believe, however, that it is currently the Depositary's practice to immediately
credit the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant Note as shown on the Depositary's records. Payments by the Depositary's
Participants and the Depositary's Indirect Participants to the beneficial owners
of notes will be governed by standing instructions and customary practice and
will be the responsibility of the Depositary's Participants or the Depositary's
Indirect Participants.
CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Notes may, upon request to the trustee, exchange such beneficial
interest for Notes in registered form without interest coupons ("Certificated
Notes"). Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof).
(1) we notify the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and we are unable to locate
a qualified successor within 90 days; or
(2) we, at our option, notify the Trustee in writing that we elect
to cause the issuance of notes in the form of Certificated Notes under
the Indenture, then, upon surrender by the Global Note Holder of its
Global Notes, Certificated Notes will be issued to each person that the
Global Note Holder and the Depositary identify as being the beneficial
owner of the related notes.
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Neither we nor the Trustee will be liable for any delay by the Global
Note Holder or the Depositary in identifying the beneficial owners of notes and
we and the Trustee may conclusively rely on, and will be protected in relying
on, instructions from the Global Note Holder or the Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
We must make payments in respect of the notes represented by the Global
Notes (including principal, premium, if any, and interest, if any) by wire
transfer of immediately available funds to the accounts specified by the Global
Note Holder. We will make all payments of principal, premium, if any, interest,
if any, with respect to Certificated Notes by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. The notes represented by the Global Notes are expected to trade in the
Depositary's Same Day Funds Settlement System, and any permitted secondary
market trading activity in such notes will therefore be required by the
Depositary to be settled in immediately available funds. We expect that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
Subject to compliance with the transfer restrictions applicable to the
notes described above and under "Notice to Investors" below, cross-market
transfers between DTC, on the one hand, and direct or indirect Euroclear or
Cedel accountholders, on the other, will be effected in DTC, in accordance with
DTC's rules. Such cross-market transactions will require delivery of
instructions to Euroclear or Cedel by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines.
Euroclear or Cedel will, if the transaction meets its settlement requirements,
deliver instructions to its respective depository to take action to effect final
settlement on its behalf by delivering or receiving beneficial interests in the
relevant Global Note in DTC and making or receiving payment in accordance with
normal procedures for same-day funds settlement applicable to DTC. Euroclear
accountholders and Cedel accountholders may not deliver instructions directly to
the depositories for Euroclear or Cedel.
Because of time-zone differences, credits of securities received in
Euroclear or Cedel as a result of a transaction with a Depository participant
will be made during the securities settlement processing day dated the business
day following DTC's settlement date and such credits will be reported to the
relevant Euroclear or Cedel participant on such business day. Cash received in
Euroclear or Cedel as a result of sales of securities by or through a Euroclear
accountholders or a Cedel accountholders to a Depository participant will be
received with value on DTC's settlement date but will be available in the
relevant Euroclear or Cedel cash account only as of the business day following
DTC's settlement date. Settlement between Euroclear or Cedel accountholders and
Depository participants cannot be made on a delivery versus payment basis. The
arrangements for transfer of payments must be established separately from the
arrangements for transfer of securities, the latter being effected on a free
delivery basis. The customary arrangements for delivery versus payment between
Euroclear and Cedel accountholders or between Depository participants are not
affected.
Although DTC, Euroclear and Cedel have agreed to the procedures described
above in order to facilitate transfers of securities among participants of DTC,
Euroclear and Cedel, they are under no obligation to perform or continue to
perform such procedures and such procedures may be modified or discontinued at
any time. Neither we nor the Trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTAIN DEFINITIONS
Set forth below are certain defined terms which are used in the
Indenture. Reference is made to the Indenture for a full disclosure of all such
terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Debt of any other Person existing at the time such other Person
is merged with or into or becomes a Restricted Subsidiary of such
specified Person, including, without limitation, Debt incurred in
connection with, or in contemplation of, such other Person merging with
or into or becoming a Restricted Subsidiary of such specified Person; and
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(2) Debt secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets
or rights (including, without limitation, by way of a sale and leaseback)
other than sales of services in the ordinary course of business; provided
that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "--Change of Control" and/or
the provisions described above under the caption "--Merger,
Consolidation, or Sale of Assets" and not by the provisions of the Asset
Sale covenant; and
(2) the issue or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of less than $1.0 million;
or (b) results in net proceeds to the Company and its Subsidiaries of
less than $1.0 million;
(2) a transfer of assets by the Company to a Wholly Owned
Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary;
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary;
(4) a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments;"
(5) disposals or replacements of obsolete, uneconomical,
negligible, worn-out or surplus property in the ordinary course of
business; or
(6) a conveyance constituting or pursuant to a Permitted Lien.
"Attributable Debt" in respect of any Sale and Leaseback Transaction,
means, at the time of determination, the present value (discounted at a rate
consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the lease included in such
Sale and Leaseback Transaction (including any period for which such lease has
been extended or may, at the option of the lessee, be extended) or until the
earliest date on which the lessee may terminate such lease without penalty or
upon payment of a penalty (in which case the rental payments shall be calculated
to include such penalty), after excluding all amounts required to be paid on
account of maintenance and repairs, insurance, taxes, assessments, water,
utilities and similar charges.
"Average Life to Stated Maturity" means, as of any date of determination
with respect to any Debt, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from the date of determination to the date
or dates of each successive scheduled principal payment of such Debt multiplied
by (b) the amount of each such principal payment; by (ii) the sum of all such
principal payments.
"Beneficial Owner" has the meaning assigned to such term in Rules 13d-3
and 13d-5 under the Exchange Act (or any successor rules), including the
provision of such Rules that a Person shall be deemed to have beneficial
ownership of all securities that such Person has a right to acquire within 60
days; provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership:
(1) arises solely as a result of a revocable proxy delivered in
response to a proxy or consent solicitation made pursuant to, and in
accordance with, the Exchange Act; and
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(2) is not also then reportable on Schedule 13D or Schedule 13G (or
any successor schedule) under the Exchange Act.
"Borrowing Base" means an amount equal to the sum of 85% of the value of
accounts receivable (before giving effect to any related reserves) shown on the
Company's most recent consolidated balance sheet in accordance with generally
accepted accounting principles not more than 60 days past due.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on the balance sheet of the
lessee in accordance with generally accepted accounting principles.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or
distributions of assets of (other than distributions of assets in respect
of Debt), the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured
by the United States government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged
in support thereof) having maturities of not more than six months from
the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers
acceptances with maturities not continued exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500.0 million and a Thompson
Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Ratings Group and in
each case maturing within six months after the date of acquisition; and
(6) money market and mutual funds at least 95% of the assets of
which constitute Cash Equivalents of the kinds described in clauses (1)
through (5) of this definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, in
one or a series of related transactions, of all or substantially all of
the assets of the Company and its Restricted Subsidiaries, taken as a
whole, to any Person or group (as such term is used in Section 13(d)(3)
and 14(d)(2) of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or
dissolution of the Company;
(3) the consummation of any transaction (including by way of
merger, consolidation or otherwise) the result of which is that any
Person or group (as defined above) becomes the Beneficial Owner, directly
or indirectly, of more than 50% of the total Voting Stock or Total Common
Equity of the Company; or
(4) the first day on which a majority of the members of the Board
of Directors of the Company are not Continuing Directors.
"Closing Date" means the first date on which old notes are issued by the
Company.
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"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on Nasdaq National Market but the issuer
is a Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange Act) and the
principal securities exchange on which such shares are listed or admitted to
trading is a Designated Offshore Securities Market (as defined in Rule 902(b)
under the Securities Act), the average of the reported closing bid and asked
prices regular way on such principal exchange, or, if such shares are not listed
or admitted to trading on any national securities exchange or quoted on Nasdaq
National Market and the issuer and principal securities exchange do not meet
such requirements, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
is selected from time to time by the Company for that purpose and is reasonably
acceptable to the Trustee.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted.
"Common Stock" means the common stock, par value $0.001 per share, of the
Company.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale, to the extent such losses were
deducted in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person
and its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was included in computing such Consolidated Net
Income; plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if
any) pursuant to Hedging Obligations), to the extent that any such
expense was deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill
and other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses (excluding
any such non-cash expense to the extent that it represents an accrual of
or reserve for cash expenses in any future period or amortization of a
prepaid cash expense that was paid in a prior period) of such Person and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, in each case, on a consolidated basis and determined in
accordance with generally accepted accounting principles.
Notwithstanding the preceding, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash expenses of, a
Restricted Subsidiary of the referent Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent that a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior governmental approval (that
has not been obtained), and without direct or indirect restriction pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Debt" means, with respect to any Person as of any date of
determination, the sum, without duplication, of:
(1) the total amount of Debt of such Person and its Restricted
Subsidiaries; plus
(2) the total amount of Debt of any other Person, to the extent
that such Debt has been guaranteed by the referent Person or one or more
of its Restricted Subsidiaries; plus
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(3) the aggregate liquidation value of all preferred stock of
Restricted Subsidiaries of such Person, in each case, determined on a
consolidated basis in accordance with generally accepted accounting
principles.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with
generally accepted accounting principles; provided that:
(1) the Net Income (but not loss) of any Person that is not a Wholly
Owned Restricted Subsidiary shall be included only to the extent of the
percentage ownership interest in the Net Income of such Person owned on the
last day of such period by the referent Person or a Restricted Subsidiary
thereof; provided that the Net Income of any Person that is an Unrestricted
Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted
Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded; and
(4) the cumulative effect of a change in accounting principles shall
be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of:
(1) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as
of such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only
to the extent of any cash received by such Person upon issuance of such
preferred stock; less
(a) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going
concern business made within 12 months after the acquisition of such
business) subsequent to the Closing Date in the book value of any
asset owned by such Person or a consolidated Restricted Subsidiary of
such Person;
(b) all investments as of such date in unconsolidated
Subsidiaries and in Persons that are not Restricted Subsidiaries; and
(c) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in
accordance with GAAP.
"Consolidated Tangible Net Worth" means, with respect to any Person as of
any date, Consolidated Net Worth, after deducting therefrom amounts attributable
to goodwill, trade names, patents, unamortized debt discount and expense and any
other intangibles, all as set forth on the most recent consolidated balance
sheet of such Person.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of issuance;
or
(2) was nominated for election to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election or who was elected
or appointed in the ordinary course by Continuing Directors or other
directors so elected or appointed.
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"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities or commercial paper facilities with any
combination of banks, other institutional lenders and other Persons extending
financial accommodations or holding corporate debt obligations in the ordinary
course of their business, providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time
by the same or different institutional lenders.
"Debt" means, with respect to any Person, any indebtedness of such Person,
whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any
property or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent
any of the preceding items (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP. In addition, the term "Debt"
includes all Debt of others secured by a Lien on any asset of such Person
(whether or not such Debt is assumed by such Person, valued, if not
assumed, at the lesser of the Fair Market Value of the encumbered assets or
the amount of Debt so secured) and, to the extent not otherwise included,
the guarantee by such Person of any indebtedness of any other Person.
The amount of any Debt outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Debt issued with
original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Debt.
"Debt to Annualized Cash Flow Ratio" means, as of any date of
determination, the ratio of:
(1) the Consolidated Debt of the Company as of such date to
(2) two times the Consolidated Cash Flow of the Company for the two
most recent full fiscal quarters ending immediately prior to such date for
which internal financial statements are available (the "Measurement
Period"),
determined on a pro forma basis after giving effect to all acquisitions or
dispositions of assets made by the Company and its Restricted Subsidiaries
from the beginning of such two-quarter period through and including such
date of determination (including any related financing transactions) as if
such acquisitions and dispositions had occurred at the beginning of such
two-quarter period.
In addition, for purposes of calculating the Debt to Annualized Cash Flow
Ratio:
(1) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the two-quarter
Measurement Period or subsequent to such Measurement Period and on or prior
to the date of calculation shall be deemed to have occurred on the first
day of the two-quarter Measurement Period and Consolidated Cash Flow for
such Measurement Period shall be calculated without giving effect to clause
(3) of the proviso set forth in the definition of Consolidated Net Income;
and
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
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"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the notes mature. Notwithstanding the preceding sentence, any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require the Company to repurchase such Capital Stock
upon the occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "Certain Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor act), and the rules and regulations thereunder.
"Existing Debt" means Debt of the Company and its Restricted Subsidiaries
in existence on the Closing Date (including the 1999 notes and the accreted
value of the 1998 notes during the term such indebtedness is outstanding).
"Fair Market Value" means with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Closing Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means, with respect to any Person, without duplication, a
guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect, in any manner (including,
without limitation, by way of a pledge of assets or through letters of credit or
reimbursement agreements in respect thereof), of all or any part of any Debt of
another Person.
"Guarantor" means any Subsidiary which is a guarantor of the notes,
including any Person that is required after the date of the Indenture to execute
a guarantee of the notes pursuant to the "Limitations on Issuance of Guarantees
of Debt" covenant until a successor replaces such party pursuant to the
applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Holder" means a person in whose name a note is registered.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Debt, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Restricted Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary of the Company
such that, after giving effect to any such sale or disposition, such Person is
no longer a Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Equity
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Interests of such Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Measurement Period" shall have the definition set forth above under "Debt
to Annualized Cash Flow Ratio."
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale (including, without limitation, dispositions pursuant to sale
and leaseback transactions); or (b) the disposition of any securities by
such Person or any of its Restricted Subsidiaries or the extinguishment of
any Debt of such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary or nonrecurring gain (but not loss), together
with any related provision for taxes on such extraordinary or nonrecurring
gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, in each
case after taking into account any available tax credits or deductions and any
tax sharing arrangements, amounts required to be applied to the repayment of
Debt secured by a Lien on the asset or assets that were the subject of such
Asset Sale and any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Debt:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Debt), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Debt of the Company or any of its Restricted Subsidiaries to
declare a default on such other Debt or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Pari Passu Debt" means:
(1) any Debt of the Company that is equal in right of payment to the
Notes; and
(2) with respect to any guarantee, Debt which ranks equal in right of
payment to such guarantee.
"Permitted Investments" means:
(1) any Investment in the Company or in any Wholly Owned Restricted
Subsidiary of the Company;
(2) any Investment in Cash Equivalents;
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(3) any Investment by the Company or any Wholly Owned Restricted
Subsidiary of the Company in a Person if, as a result of such Investment:
(a) such Person becomes a Wholly Owned Restricted Subsidiary of
the Company; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its Debt, Equity
Interests or other securities to, or is liquidated into, the Company
or a Wholly Owned Restricted Subsidiary of the Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales;"
(5) any acquisition of assets to the extent acquired in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of the
Company;
(6) any Investment by the Company in joint ventures or one or more
Wholly Owned Unrestricted Subsidiaries of the Company; provided, however,
that the aggregate amount of Investments made pursuant to this clause (6)
shall not exceed the greater of $50.0 million and 10% of the Company's
Total Common Equity at any one time outstanding;
(7) accounts receivable created or acquired in the ordinary course of
business of the Company or any Restricted Subsidiary and on ordinary
business terms; and
(8) Investments arising from transactions by the Company or any
Restricted Subsidiaries with trade creditors or customers in the ordinary
course of business (including any such Investment received pursuant to any
plan of reorganization or similar arrangement pursuant to the bankruptcy or
insolvency of such trade creditors or customers or otherwise in settlement
of a claim).
"Permitted Liens" means:
(1) Liens in favor of the Company or holders of the Notes;
(2) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Restricted Subsidiary
of the Company; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company;
(3) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such acquisition;
(4) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(5) Liens existing on the Closing Date;
(6) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(7) Liens securing Vendor Debt or Purchase Money Debt permitted by the
Indenture, in each case, on the property together with proceeds, product,
accessions, substitutions and replacements thereof;
(8) Liens created by "notice" or "precautionary" filings in connection
with operating leases or other transactions pursuant to which no Debt or
Attributable Debt is Incurred by the Company or any Restricted Subsidiary;
(9) Liens on securities constituting "margin stock" within the meaning
of Regulation T, U or X promulgated by the Board of Governors of the
Federal Reserve System, to the extent that the Investment by the Company or
any Restricted Subsidiary in such margin stock is not prohibited by the
Indenture;
(10) Liens on Capital Stock of Unrestricted Subsidiaries;
(11) Liens in favor of the Trustee arising under the Indenture;
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(12) Liens incurred in the ordinary course of business of the Company
or any Subsidiary of the Company with respect to obligations that do not
exceed $2.0 million at any one time outstanding and that:
(a) are not incurred in connection with the borrowing of money or
the obtaining of advances or credit (other than trade credit in the
ordinary course of business); and
(b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary;
(13) Liens securing Debt and other obligations under Credit
Facilities, and related Hedging Obligations, and Liens on assets of
Restricted Subsidiaries securing Guarantees of such Debt, Hedging
Obligations and, in each case, other obligations relating thereto.
(14) Liens on reserve or escrow accounts (including, without
limitations, interest reserved accounts and any cash, Cash Equivalents or
securities deposited therein) securing payment of interest on any
Indebtedness.
"Permitted Refinancing Debt" means any Debt of the Company or any of its
Restricted Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Debt of the
Company or such Restricted Subsidiary (other than intercompany Debt); provided
that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Debt does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Debt so
extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith);
(2) such Permitted Refinancing Debt has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Debt being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Debt being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Debt has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the holders of notes as those contained in
the documentation governing the Debt being extended, refinanced, renewed,
replaced, defeased or refunded; and
(4) such Debt is incurred either by the Company or by the Restricted
Subsidiary who is the obligor on the Debt being extended, refinanced,
renewed, replaced, defeased or refunded.
"Productive Assets" means assets, including assets owned directly or
indirectly through Capital Stock of a Restricted Subsidiary, of a kind used or
usable in the Telecommunications Business of the Company.
"Public Equity Offering" means an underwritten offering of Common Stock
with gross proceeds to the Company of at least $35.0 million pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-8
or otherwise relating to equity securities issuable under any employee benefit
plan of the Company).
"Purchase Money Debt" means Debt of the Company (including Acquired Debt
and Debt represented by Capital Lease Obligations, mortgage financings and
purchase money obligations), including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time
incurred for the purpose of financing all or any part of the cost of
development, construction, acquisition or improvement by the Company or any
Restricted Subsidiary of the Company of any Productive Assets of the Company or
any Restricted Subsidiary of the Company.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. If no referent Person is
identified, the term "Restricted Subsidiaries" shall be deemed to refer to
Restricted Subsidiaries of the Company.
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"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary, or, in the case of the
Company, a Restricted Subsidiary of such Person and is thereafter leased back
from the purchaser or transferee thereof by such Person or one of its
Subsidiaries or, in the case of the Company, one of its Restricted Subsidiaries.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the Closing Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Debt, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation governing such
Debt, and shall not include any contingent obligations to repay, redeem or
repurchase any such interest or principal prior to the date originally scheduled
for the payment thereof.
"Subordinated Debt" means Debt of the Company or a Guarantor subordinated
in right of payment to the Notes or the guarantee of such Guarantor, as the case
may be.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership, limited liability company or similar pass-through
entity, (a) the sole general partner or the managing general partner or
managing member of which is such Person or a Subsidiary of such Person or
(b) the only general partners, managing members, or Persons, however
designated in corresponding roles, of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in the business of transmitting, or
providing services relating to the transmission of, voice or data through leased
transmission facilities (including facilities such as fiber, copper and
switches), and any business related, ancillary or complementary thereto (as
determined in good faith by the Board of Directors).
"Telecommunications Related Assets" means all assets, rights (contractual
or otherwise) and properties, whether tangible or intangible, real or personal,
used or to be used, in connection with a Telecommunications Business.
"Total Common Equity" of any Person means, as of any date of determination
the product of:
(1) the aggregate number of outstanding primary shares of Common Stock
of such Person on such day (which shall not include any options or warrants
on, or securities convertible or exchangeable into, shares of Common Stock
of such Person); and
(2) the average Closing Price of such Common Stock over the 20
consecutive Trading Days immediately preceding such day.
If no such Closing Price exists with respect to shares of any such class,
the value of such shares for purposes of clause (2) of the preceding sentence
shall be determined by the Board of Directors of the Company in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee.
"Trading Day", with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution,
but only to the extent that such Subsidiary:
(1) has no Debt other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be
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obtained at the time from Persons who are not Affiliates of the Company, unless
such agreement, contract, arrangement or understanding constitutes a Restricted
Payment permitted by the Indenture;
(3) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Debt of the Company or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries or has at least one executive officer that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries.
"Vendor Debt" means any Debt of the Company or any Restricted Subsidiary
incurred in connection with the acquisition or construction of
Telecommunications Related Assets.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
(C) (a) are made solely with assets managed by a qualified
professional asset manager and (b) satisfy the requirements and
conditions of Prohibited Transaction Class Exemption 84-14 issued by
the Department of Labor;
(D) are made solely with assets of a governmental plan, as
defined in Section 3(32) of ERISA, that is not subject to the
provisions of Section 4975 of the Tax Code;
(E) (a) are made solely with assets of an insurance company
general account and (b) satisfy the requirements and conditions of
Prohibited Transaction Class Exemption 95-60 issued by the Department
of Labor;
(F) (a) are made solely with assets managed by an in-house asset
manager and (b) satisfy the requirements and conditions of Prohibited
Transaction Class Exemption 96-23 issued by the Department of Labor;
or
(G) do not otherwise constitute a non-exempt prohibited
transaction.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S.
federal income tax considerations relating to the exchange offer and to the
purchase, ownership and disposition of the new notes. The discussion of the
federal income tax consequences set forth below is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), and judicial decisions and
administrative interpretations thereunder, as of the date hereof, and such
authorities may be repealed, revoked or modified or interpreted differently so
as to result in federal income tax consequences different from those discussed
below. We cannot assure you that the Internal Revenue Service will not
successfully challenge one or more of the tax consequences described herein, and
we have not obtained, nor do we intend to obtain, a ruling from the IRS or an
opinion of counsel with respect to the U.S. federal income tax consequences of
acquiring or holding new notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular holder in light of the
holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable to
all categories of investors, such as foreign person, dealers in securities,
banks, insurance companies, tax-exempt organizations, and persons holding new
notes as part of a hedging or conversion transaction or straddle or persons
deemed to sell new notes under the constructive sale provisions of the Code,
some of which may be subject to special rules. The discussion below is premised
upon the assumption that the new notes and old notes are held (or would be held
if acquired) as capital assets within the meaning of Section 1221 of the Code.
The discussion also does not discuss any aspect of state, local or foreign law.
Each holder or prospective holder of new notes is strongly urged to
consult its own tax advisor with respect to its particular tax situation
including the tax effects of any state, local, foreign, or other tax laws and
possible changes in the tax laws.
EXCHANGE OF NOTES
The exchange of old notes for new notes pursuant to the exchange offer
should not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a holder should have the same adjusted issue price, adjusted basis
and holding period in the new notes as it had in the old notes immediately
before the exchange.
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer receiving new notes for its own account
in connection with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. Participating
Broker-Dealers may use this prospectus during the period referred to below in
connection with resales of the new notes received in exchange for old notes if
such old notes were acquired by such Participating Broker-Dealers for their own
accounts. We agreed that this prospectus may be used by a Participating
Broker-Dealer in connection with resales of such new notes for a period ending
150 days after the effective date of the registration statement (subject to
extension under certain limited circumstances described herein) or, if earlier,
when all such new notes have been disposed of by such Participating
Broker-Dealer. See "The exchange offer--Terms of the exchange offer."
We will not receive any cash proceeds from the issuance of the new notes
offered by this prospectus. New notes received by participating Broker-Dealers
for their own accounts in connection with the exchange offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the new notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such new
notes. Any Participating Broker-Dealer that resells new notes that were received
by it for its own account in the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any profit on any such
resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver any
by delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4, of which this prospectus is a part, under the Securities
Act with respect to the exchange offer contemplated hereby. Statements contained
in this prospectus concerning the provisions of any document are not necessarily
complete. You should refer to the copy of these documents filed as an exhibit to
the periodic reports filed by us with the SEC for a more complete understanding
of the matter involved. Each statement concerning these documents is qualified
in its entirety by such reference.
We are also subject to the informational requirements of the Securities
Exchange Act of 1934. In accordance with the Exchange Act, we file reports,
proxy statements and other information with the SEC. The registration statement,
including the attached exhibits and schedules, may be inspected and copied at
the public reference facilities maintained by the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, New York, New
York 10048, and 500 West Madison Street, Chicago, Illinois 60661. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
rooms. The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. Copies of the registration statement and the reports, proxy and
information statements and other information that we file with the SEC may be
obtained from the SEC's Internet address at HTTP://WWW.SEC.GOV.
The SEC allows us to "incorporate by reference" into the prospectus the
information we have filed with them. The information incorporated by reference
is an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, after the initial filing of this
registration statement that contains this prospectus and prior to the time we
issue all the new notes offered by this prospectus:
o our Annual Report on Form 10-K for the fiscal year ended December
31, 1998;
o our Annual Report on Form 10-K for the fiscal year ended December
31, 1999;
o our Registration Statement on Form S-4 as originally filed on
April 27, 1998 and as subsequently amended.
o our Registration Statement on Form S-4 as originally filed on
April 9, 1999 and as subsequently amended.
You may request a copy of these documents, at no cost, by writing or telephoning
us at the following address:
Covad Communications Group, Inc.
Attention: Investor Relations
4250 Burton Drive
Santa Clara, California 95054
(408) 987-1000
LEGAL MATTERS
The validity of the new notes offered hereby will be passed upon for us
by Irell & Manella LLP, Los Angeles, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We've
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
110
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Annual Financial Statements
Report of Ernst & Young LLP, Independent Auditors...................................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999.............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999............. F-4
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the years ended
December 31, 1997, 1998 and 1999..................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............. F-6
Notes to Consolidated Financial Statements............................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Covad Communications Group, Inc.
We have audited the accompanying consolidated balance sheets of Covad
Communications Group, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to herein
present fairly, in all material respects, the consolidated financial position of
Covad Communications Group, Inc. as of December 31, 1998 and 1999, and the
consolidated 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.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
January 21, 2000, except for Note 9,
as to which the date is April 30, 2000
F-2
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
--------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 64,450 $ 216,038
Accounts receivable, net of allowances for uncollectibles of $220 and $2,857 at
December 31, 1998 and 1999....................................................... 1,933 15,393
Short-term investments.............................................................. -- 551,319
Unbilled revenue.................................................................... 663 5,419
Inventories, net of reserves of $0 and $735 at December 31, 1998 and 1999........... 946 8,547
Prepaid expenses.................................................................... 1,183 6,048
Other current assets................................................................ 514 1,219
--------- -----------
Total current assets............................................................. 69,689 803,983
PROPERTY AND EQUIPMENT:
Networks and communication equipment................................................ 55,189 233,260
Computer equipment.................................................................. 4,426 24,057
Furniture and fixtures.............................................................. 1,119 4,383
Leasehold improvements.............................................................. 1,887 6,884
Land................................................................................ -- 1,120
--------- -----------
62,621 269,704
Less accumulated depreciation and amortization...................................... (3,476) (32,162)
--------- -----------
Net property and equipment....................................................... 59,145 237,542
OTHER ASSETS:
Restricted cash..................................................................... 225 63,308
Deposits............................................................................ 337 1,131
Deferred debt issuance costs, net................................................... 8,112 12,369
Deferred charge, net................................................................ -- 20,529
Other long term assets.............................................................. 1,911 8,744
--------- -----------
Total other assets............................................................... 10,585 106,081
--------- -----------
Total assets..................................................................... $139,419 $1,147,606
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 14,975 $ 41,126
Unearned revenue.................................................................... 551 5,238
Accrued network costs............................................................... 1,866 8,798
Other accrued liabilities........................................................... 3,854 27,104
Current portion of capital lease obligations........................................ 263 268
--------- -----------
Total current liabilities........................................................ 21,509 82,534
Long-term debt, net of discount..................................................... 142,300 374,737
Long-term capital lease obligations................................................. 316 44
--------- -----------
Total liabilities................................................................ 164,125 457,315
Commitments and contingencies (see notes 4 and 8)
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Preferred stock ($0.001 par value):
Authorized shares--45,000,000 at December 1998, and 1999.......................... -- --
Issued and outstanding shares--27,369,243 at December 31, 1998 and 0 at December
31, 1999....................................................................... 18 --
Common Stock ($0.001 par value):
Authorized shares--97,500,000 at December 31, 1998 and 285,000,000 at December
31, 1999....................................................................... -- --
Issued and outstanding shares--26,491,494 at December 31, 1998 and 132,331,316 at
December 31, 1999.............................................................. 12 82
Common Stock--Class B ($0.001 par value)
Authorized shares--0 at December 31, 1998 and 10,000,000 at December 31, 1999..... -- --
Issued and outstanding shares--0 at December 31, 1998 and 6,379,177 at December
31, 1999....................................................................... -- 6
Additional paid-in capital.......................................................... 30,685 851,589
Deferred compensation............................................................... (4,688) (6,513)
Accumulated other comprehensive income, net of tax effect........................... -- 91,257
Accumulated (deficit)............................................................... (50,733) (246,130)
--------- -----------
Total stockholders' equity (net capital deficiency).............................. (24,706) 690,291
--------- -----------
Total liabilities and stockholders' equity (net capital deficiency).............. $139,419 $1,147,606
========= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ------------ -------------
<S> <C> <C> <C>
Revenues....................................................... $ 26 $ 5,326 $ 66,488
Operating expenses:
Network and product costs................................... 54 4,562 55,347
Sales, marketing, general and administrative................ 2,374 31,043 140,372
Amortization of deferred compensation....................... 295 3,997 4,768
Depreciation and amortization............................... 70 3,406 37,602
----------- ------------ -------------
Total operating expenses.................................. 2,793 43,008 238,089
----------- ------------ -------------
Loss from operations........................................... (2,767) (37,682) (171,601)
Interest income (expense):
Interest income............................................. 167 4,778 20,676
Interest expense............................................ (12) (15,217) (44,472)
----------- ------------ -------------
Net interest income (expense)............................... 155 (10,439) (23,796)
----------- ------------ -------------
Net loss....................................................... (2,612) (48,121) (195,397)
Preferred dividends............................................ -- -- (1,146)
----------- ------------ -------------
Net loss available to Common Stockholders...................... $ (2,612) $ (48,121) $ (196,543)
=========== ============ =============
Net loss per share - basic and diluted......................... $ (0.35) $ (3.75) $ (1.83)
=========== ============ =============
Weighted average shares used in computing net loss per share
- basic and diluted......................................... 7,360,978 12,844,203 107,647,812
=========== ============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(AMOUNTS IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
------------------------------ ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Initial issuance of Common
Stock .................. -- $ -- 27,000,000 $ 12 $ 38
Repurchase of Common Stock -- -- (5,423,166) (3) (7)
Issuance of Common Stock .. -- -- 3,985,875 2 66
Issuance of Series A
Preferred Stock ........ 1,125,000 1 -- -- 249
Issuance of Series B
Preferred Stock (net of
$43 of financing costs) 25,500,000 17 -- -- 8,440
Deferred compensation ..... -- -- -- -- 906
Amortization of deferred .. -- -- -- -- --
Net loss .................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances at December 31,
1997 ................... 26,625,002 18 25,562,709 11 9,692
Issuance of Common Stock .. -- -- 928,785 1 570
Issuance of Series B
Preferred Stock ........ 150,003 -- -- -- 100
Issuance of Series C
Preferred Stock ........ 594,238 -- -- -- 1,100
Issuance of Common Stock
warrants as part of
debt offering issuance
costs .................. -- -- -- -- 2,928
Issuance of Common Stock
warrants Pursuant to
debt offering .......... -- -- -- -- 8,221
Deferred compensation ..... -- -- -- -- 8,074
Amortization of deferred
compensation ........... -- -- -- -- --
Net loss .................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances at December 31,
1998 ................... (27,369,243) 18 26,491,494 12 30,685
Issuance of Common Stock .. -- -- 48,999,989 33 725,708
Issuance of Common Stock
upon exercise of
warrants ............... -- -- 15,652,382 10 (5)
Issuance of Series C and D
Preferred Stock ........ 9,568,766 6 -- -- 59,994
Deferred charge related to
issuance of Series C
and D Preferred
Stock .................. -- -- -- -- 28,700
Conversion of Series A,
Series B and Series C
Preferred Stock to
Common Stock ........... (27,369,243) (18) 41,053,864 27 (9)
Conversion of Series C1
and D1 Preferred stock . (9,568,766) (6) 6,379,177 6 --
Preferred dividends ....... -- -- 133,587 -- (77)
Conversion of convertible
Preferred Stock ........ -- -- -- -- --
Deferred compensation ..... -- -- -- -- 6,593
Amortization of deferred
compensation ........... -- -- -- -- --
Unrealized gains (losses)
on investments ......... -- -- -- -- --
Net loss .................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balances at December 31,
1999 ................... -- -- 138,710,493 $ 88 $ 851,589
=========== =========== =========== =========== ===========
<CAPTION>
ACCUMULATED OTHER TOTAL STOCKHOLDERS'
DEFERRED COMPREHENSIVE ACCUMULATED EQUITY (NET CAPITAL
COMPENSATION INCOME DEFICIT DEFICIENCY)
-------------- ----------------- ----------- -------------------
<S> <C> <C> <C> <C>
Initial issuance of Common
Stock .................. $ -- $ -- $ -- $ 50
Repurchase of Common Stock -- -- -- (10)
Issuance of Common Stock .. -- -- -- 68
Issuance of Series A
Preferred Stock ........ -- -- -- 250
Issuance of Series B
Preferred Stock (net of
$43 of financing costs) -- -- -- 8,457
Deferred compensation ..... (906) -- -- --
Amortization of deferred .. 295 -- -- 295
Net loss .................. -- -- (2,612) (2,612)
----------- ----------- ----------- -----------
Balances at December 31,
1997 ................... (611) -- (2,612) 6,498
Issuance of Common Stock .. -- -- -- 571
Issuance of Series B
Preferred Stock ........ -- -- -- 100
Issuance of Series C
Preferred Stock ........ -- -- -- 1,100
Issuance of Common Stock
warrants as part of
debt offering issuance
costs .................. -- -- -- 2,928
Issuance of Common Stock
warrants Pursuant to
debt offering .......... -- -- -- 8,221
Deferred compensation ..... (8,074) -- -- --
Amortization of deferred
compensation ........... 3,997 -- -- 3,997
Net loss .................. -- -- (48,121) (48,121)
----------- ----------- ----------- -----------
Balances at December 31,
1998 ................... (4,688) -- (50,733) (24,706)
Issuance of Common Stock .. -- -- -- 725,741
Issuance of Common Stock
upon exercise of
warrants ............... -- -- -- 5
Issuance of Series C and D
Preferred Stock ........ -- -- -- 60,000
Deferred charge related to
issuance of Series C
and D Preferred
Stock .................. -- -- -- 28,700
Conversion of Series A,
Series B and Series C
Preferred Stock to
Common Stock ........... -- -- -- --
Conversion of Series C1
and D1 Preferred stock . -- -- -- --
Preferred dividends ....... -- -- -- (77)
Conversion of convertible
Preferred Stock ........ -- -- -- --
Deferred compensation ..... (6,593) -- -- --
Amortization of deferred
compensation ........... 4,768 -- -- 4,768
Unrealized gains (losses)
on investments ......... -- 91,257 -- 91,257
Net loss .................. -- -- (195,397) (195,397)
----------- ----------- ----------- -----------
Balances at December 31,
1999 ................... $ (6,513) $ 91,257 $ (246,130) $ 690,291
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
----------- ------------ ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss..................................................................... $ (2,612) $ (48,121) $(195,397)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 70 3,406 37,602
Loss on disposition of equipment.......................................... -- -- 358
Amortization of deferred compensation..................................... 295 3,997 4,768
Accreted interest and amortization of debt discount and deferred debt
issuance costs.......................................................... -- 16,009 20,269
Net changes in operating assets and liabilities:
Accounts receivable..................................................... (25) (1,908) (13,460)
Unbilled revenue........................................................ (4) (659) (4,756)
Inventories............................................................. (43) (903) (7,601)
Prepaid expenses and other current assets............................... (369) (1,328) (5,570)
Accounts payable........................................................ 651 14,324 26,151
Unearned revenue........................................................ 7 544 4,687
Other current liabilities............................................... 135 5,585 30,182
----------- ------------ ----------
Net cash used in operating activities........................................ (1,895) (9,054) (102,767)
INVESTING ACTIVITIES:
Purchase of restricted investment............................................ (210) (15) (73,435)
Redemption of restricted investments......................................... -- -- 13,214
Purchase of investments...................................................... -- (460,062)
Deposits..................................................................... (31) (306) (794)
Long-term assets............................................................. -- (1,428) (6,833)
Purchase of property and equipment........................................... (2,253) (59,503) (208,186)
----------- ------------- ---------
Net cash used in investing activities........................................ (2,494) (61,252) (736,096)
FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and warrants.................... -- 129,328 205,049
Principal payments under capital lease obligations........................... (48) (238) (267)
Proceeds from Common Stock issuance, net of repurchase....................... 108 571 725,746
Proceeds from preferred stock issuance....................................... 8,707 1,200 60,000
Offering costs related to Common Stock offering.............................. -- (483) (77)
----------- ------------- ---------
Net cash provided by financing activities.................................... 8,767 130,378 990,451
----------- ------------- ---------
Net increase in cash and cash equivalents.................................... 4,378 60,072 151,588
Cash and cash equivalents at beginning of year............................... -- 4,378 64,450
----------- ------------- ---------
Cash and cash equivalents at end of year..................................... $ 4,378 $ 64,450 $ 216,038
=========== ============= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................................... $ 9 $ 99 $ 13,257
=========== ============= =========
SUPPLEMENTAL SCHEDULE ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchased through capital lease................................. $ 831 $ 34 $ --
=========== ============= =========
Warrants issued for equity commitment..................................... $ -- $ 2,928 $ --
=========== ============= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Covad Communications Group, Inc. (the "Company") is a high-speed Internet
and network access provider offering digital subscriber line ("DSL") services to
Internet Service Provider ("ISP") and enterprise customers. ISPs purchase the
Company's services in order to provide high-speed Internet access to their
business and consumer end-users. Enterprise customers purchase the Company's
services to provide employees with remote access to their Local Area Networks to
improve employee productivity and reduce operating costs. The Company's services
are provided over standard copper telephone lines at considerably faster speeds
than available through a standard modem.
The Company's operations are subject to significant risks and
uncertainties including competitive, financial, developmental, operational,
growth and expansion, technological, regulatory, and other risks associated with
an emerging business.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts
of all of its wholly-owned subsidiaries. There were no intercompany accounts and
transactions which required elimination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ materially from
those estimates.
INITIAL PUBLIC OFFERING
In January 1999, the Company completed an initial public offering of
20,182,500 shares of Common Stock at a purchase price of $12 per share. Net
proceeds to the Company aggregated approximately $150.2 million. In connection
with the offering, all of the preferred stock outstanding automatically
converted into 50,622,630 shares of Common Stock. The Company's Board of
Directors and stockholders also approved an amendment to the Company's Articles
of Incorporation to increase the total number of shares which the Company is
authorized to issue to 307,500,000 shares, of which 300,000,000 is Common Stock
and 7,500,000 is preferred stock.
REVENUE RECOGNITION
Revenue related to installation of service and sale of customer premise
equipment is recognized when equipment is delivered and installation is
completed. Revenue from monthly recurring service is recognized in the month the
service is provided. Revenue recognized for which the customer has not been
billed is recorded as unbilled revenue until the period such billings are made.
Amounts billed in advance of providing services are recorded as unearned revenue
until the period such services are provided. For the year ended December
31,1998, one customer accounted for approximately 17% of the Company's revenue.
For the year ended December 31, 1999, two customers accounted for 15% and 14%
percent of the Company's revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, with a maturity of
three months or less from the date of original issuance, to be cash equivalents.
F-7
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RESTRICTED CASH
As of December 31, 1998, the Company had $225,000, in commercial deposits
held in the Company's name but restricted as security for certain of the
Company's capital lease financing arrangements. As of December 31, 1999, the
Company had $63,308,000 (net of an unrealized loss of $918,000) in U.S. Treasury
investments and commercial deposits for the payment of interest on the Company's
1999 notes and as security for certain lease financing arrangements.
CONCENTRATION OF CREDIT RISK AND CREDIT RISK EVALUATIONS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, short-term investments and accounts receivable. The Company's
cash and investment policies limit cash equivalents, restricted cash and
short-term investments to short-term, investment grade instruments. Cash and
cash equivalents, restricted cash and short-term investments are held with
various domestic financial institutions with high credit standing. The Company
has not experienced any significant losses on its cash and cash equivalents,
restricted cash or short-term investments. The company conducts business with
companies in various industries, primarily in the United States. Concentrations
of credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's customer base. In addition, the
Company typically offers its customers credit terms. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. Allowances are maintained for potential credit
issues and such losses to date have been within management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or market and consist
primarily of customer premise equipment. Costs are based on the "first-in,
first-out" method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
Leasehold improvements.................... 15 years or life of the lease
Electronic communication equipment........ 2 to 5 years
Furniture and fixtures.................... 3 to 7 years
Computer equipment........................ 3 years
Office equipment.......................... 2 to 5 years
Computer software......................... 2 to 7 years
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally developed
software. In accordance with Financial Accounting Standard Board No. 86
"Software Development Costs" ("FAS 86") and Statement of Position 98-1
"Accounting for Costs of Computer Software Developed or Obtained for Internal
Use" ("SOP 98-1"), respectively. Costs incurred subsequent to the establishment
of technological feasibility are capitalized and amortized over the estimated
lives of the related products. Technological feasibility is established upon
completion of a working model. Capitalized external software costs include the
actual costs to purchase software from vendors. Capitalized internal software
costs generally include personnel and related costs incurred in the enhancement
and implementation of purchased software packages. Capitalized internal labor
costs for the years ending December 31, 1997, 1998 and 1999 were $139,000,
$3,063,000 and $15,733,000, respectively. Capitalized interest cost for the
years ending December 31, 1997, 1998 and 1999 were none, $908,000 and
$2,756,000, respectively.
F-8
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EQUIPMENT UNDER CAPITAL LEASES
The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of the
assets under lease, whichever is less. Assets under capital lease are amortized
over the lease term or useful life of the assets.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
and makes the pro forma disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS123")
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1997, 1998 and 1999 was $120,000,
$1,500,000 and $25,798,000, respectively.
INCOME TAXES
Due to the Company's overall loss position, there is no provision for
income taxes for 1997, 1998 or 1999.
The tax benefits associated with employee stock options provide a
deferred tax benefit of $14.5 million for the year-ended December 31, 1999. The
deferred tax benefit has been offset by a valuation allowance and will be
credited to additional paid-in capital when realized.
The reconciliation of income tax computed at the US federal statutory
rate to income tax expense is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Federal at 34%, statutory.............................. $(757,000) $(16,363,000) $(66,435,000)
Nondeductible interest................................. -- 911,000 2,050,000
Losses with no current benefits........................ 757,000 15,436,000 64,306,000
Other.................................................. -- 16,000 79,000
--------------- --------------- ---------------
Provision.............................................. $-- $-- $--
=============== =============== ===============
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 16,000,000 45,462,000
Accrued interest.............................................. -- 15,977,000
Other......................................................... 2,500,00 1,846,000
----------------- -----------------
Total Net deferred tax assets................................. 18,500,000 63,285,000
----------------- -----------------
Valuation allowance.............................................. (18,500,000) (26,782,000)
----------------- -----------------
Total tax deferred assets........................................ -- 36,503,000
Unrealized gain on investments................................... -- (36,503,000)
----------------- -----------------
Net deferred tax assets.......................................... $-- --
================= =================
</TABLE>
Realization of the Company's deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $8,282,000 during 1999.
F-9
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1999, the Company had federal net operating loss
carryforwards for federal tax purposes of approximately $219.5 million which
expire in the years 2012 through 2019, if not utilized. The Company also had net
operating losses carryforwards for state income tax purposes of approximately
$122.3 million expiring in year 2004, if not utilized.
The utilization of the net operating loss is subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986, as amended, and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization. Significant components of the Company's deferred tax assets
and liabilities for federal and state income taxes are as follows:
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value for financial instruments:
CASH, CASH EQUIVALENTS AND RESTRICTED CASH. The carrying amount
approximates fair value.
SHORT TERM INVESTMENT. The fair values of short-term investments were
estimated based on quoted market prices.
BORROWINGS. The fair values of borrowings, including long-term debt,
capital lease obligations and other obligations, were estimated based on quoted
market prices, where available, or by discounting the future cash flows using
estimated borrowing rates at which similar types of borrowing arrangements with
the same remaining maturities could be obtained by the Company. For all
borrowings outstanding at December 31, 1998 and 1999, fair value approximates
recorded value.
LOSS PER SHARE
Basic loss per share is computed by dividing income or loss applicable to
common shareholders by the weighted average number of shares of the Company's
Common Stock, after giving consideration to shares subject to repurchase,
outstanding during the period.
Diluted loss per share is determined in the same manner as basic loss per
share except that the number of shares is increased assuming exercise of
dilutive stock options and warrants using the treasury stock method. The diluted
loss per share amount is the same as basic loss per share which has not been
reported because the Company has a net loss and the impact of the assumed
exercise of the stock options and warrants and the assumed is not dilutive.
The consolidated financial statements applicable to the prior periods
have been restated to reflect a three-for-two stock split effective May 1999.
The following table presents the calculation of basic and diluted net
income (loss) per share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
-------------- -------------- --------------
(IN 000'S,EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss........................................................ $ (2,612) $ (48,121) $ (195,397)
Preferred dividends............................................. -- -- (1,146)
-------------- -------------- --------------
Net loss available to common stockholders....................... $ (2,612) $ (48,121) $ (196,543)
============== ============== ==============
Basic and diluted:
Weighted average shares of Common Stock outstanding.......... 24,797,854 25,886,940 115,675,656
Less: Weighted average shares subject to repurchase.......... 17,436,876 13,042,737 8,027,844
-------------- -------------- --------------
Weighted average shares used in computing basic and diluted net
loss per share............................................... 7,360,978 12,844,203 107,647,812
Basic and diluted net loss per share............................ $ (0.35) $ (3.75) $ (1.83)
============== ============== ==============
</TABLE>
F-10
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
If the Company had reported net income, the calculation of historical
diluted earnings per share would have included an additional 8,574,189,
43,282,296 and 26,517,674 common equivalent shares related to the outstanding
stock options and warrants not included above (determined using the treasury
stock method) for the years ended December 31, 1997, 1998 and 1999,
respectively.
KEY SUPPLIERS
The Company is dependent on limited source suppliers for certain
equipment used to provide its services. The Company has generally been able to
obtain an adequate supply of equipment. In addition, the Company believes that
there are alternative suppliers for the equipment used to provide its services.
However, an extended interruption in the supply of equipment currently obtained
from limited source suppliers could adversely affect the Company's business and
results of operations.
ACCOUNTS RECEIVABLE ALLOWANCE
The Company's reserve for uncollectible accounts receivable was $220,000
and $2,857,000 at December 31, 1998 and 1999, respectively. No significant
charges were made against this reserve as of December 31, 1999.
BUSINESS SEGMENTS
For management purposes, the Company is viewed as one entity with a Chief
Executive Officer ("CEO"), who is the Chief Operating Decision Maker. The
Company's management relies on an internal management accounting system.
Financial position and results of operations for the entity, are provided to the
CEO as noted in the Accompanying Financial Statement. The Company's management
makes financial decisions and allocates resources based on the information it
receives from this internal system.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which establishes accounting
and reporting standards for derivative instruments and activities. FAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company will be required to adopt FAS 133 effective January 1, 2001.
Management of the Company does not believe the adoption of this statement will
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
Staff Accounting Bulletin 101 "Revenue Recognition in Financial
Statements," ("SAB 101") which was issued in December 31, 1999 by the Securities
and Exchange Commission. SAB 101 provides that, in certain circumstances,
revenues which are received in the first month of a contract might have to be
recognized over an extended period of time, instead of in the first month of the
contract. Due to complications surrounding the implementation of SAB 101, the
SEC in March 2000 deferred the implementation date of certain provisions of SAB
101 until the quarter ended June 30, 2000, with retroactive application to
transactions entered into during the quarter ended March 31, 2000. This
extension will allow the Company and other companies impacted by this Bulletin
adequate time to fully understand the broader implications of SAB 101 and to
respond accordingly.
SHORT-TERM INVESTMENTS
At December 31, 1999, all of the Company's investments were classified as
available for sale. Investments were also classified as short-term, as their
maturing date was less than one year from the balance sheet date. Management
determines the appropriate classification of investments at the time of purchase
and reevaluates such designation at the end of each period. Unrealized gains and
losses on short-term investments as of December 31, 1999, are included as a
separate component of stockholders' equity, net of any related tax effect. The
amount of realized gains or losses for the years ended December 31, 1997, 1998
and 1999 was not significant.
F-11
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Company's investments:
<TABLE>
<CAPTION>
DECEMBER 31, 1999,
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(AMOUNT IN $000'S)
<S> <C> <C> <C> <C>
Commercial paper....................................... $373,007 $125 -- $373,132
Corporate notes........................................ 53,767 -- (596) 53,171
Equity securities...................................... 32,200 92,816 -- 125,016
---------- ---------- ---------- ----------
Total available for sale securities.................... $458,974 $92,941 $(596) $551,319
=========== =========== =========== ===========
</TABLE>
The company also had a net unrealized loss of $168,000 on cash and cash
equivalents and an unrealized loss of $918,000 on long term U.S. Treasury
investments, classified as Restricted Cash on the Company's balance sheet.
2. DEBT
On March 11, 1998, the Company completed a private placement (the "1998
Private Offering") through the issuance of 260,000 units (the "Units"), each
unit consisting of $1,000 in principal amount at maturity of 13 1/2% Senior
Discount Notes due 2008 (the "1998 notes") and one warrant, initially
exercisable to purchase 19.4376 shares of Common Stock, $0.001 par value, of the
Company (the "Unit Warrants"). Net proceeds from the 1998 Private Offering were
approximately $129.6 million, after transaction costs of approximately $5.5
million.
The principal amount of the 1998 notes will accrete from the date of
issuance at the rate of 13 1/2% per annum through March 15, 2003, compounded
semi-annually, and thereafter bear interest at the rate of 13 1/2% per annum,
payable semi-annually, in arrears on March 15 and September 15 of each year,
commencing on September 15, 2003. The 1998 notes are unsecured senior
obligations of the Company that will mature on March 15, 2008. The 1998 notes
will be redeemable at the option of the Company at any time after March 15, 2003
plus accrued and unpaid interest thereon, if any, to the redemption date.
The 1998 notes were originally recorded at approximately $126.9 million,
which represents the $135.1 million in gross proceeds less the approximate $8.2
million value assigned to the Unit Warrants, which is included in additional
paid-in capital. The value assigned to the Unit Warrants, representing debt
discount, is being amortized over the life of the 1998 notes. Debt issuance
costs were incurred through the issuance of additional warrants associated with
the commitment of equity by certain investors. The debt issuance costs are also
being amortized over the life of the 1998 notes. For the years ended December
31, 1998 and 1999, the accretion of the 1998 notes and the amortization of debt
discount and debt issuance costs was $16.0 million and $22.3 million,
respectively, of which $15.1 million and $21.0 million, respectively, is
included in interest expense and $900,000 and $1.3 million, respectively, is
capitalized in property, plant and equipment.
The Unit Warrants have ten year terms, have exercise prices of $0.0022
per share (subject to adjustment in certain events), contain net exercise
provisions and are currently exercisable.
On February 18, 1999, the Company completed the issuance of $215.0
million senior debt notes (the "1999 notes"). Net proceeds from the 1999 notes
were approximately $205.0 million after transaction costs of approximately $9.9
million, which are being amortized over the life of the notes. Amortization
expense related to the transaction cost was $827,000 for year ended December
31,1999. The principal amount of the 1999 notes bears interest at the rate of 12
1/2% per annum through February 15, 2009, compounded semi-annually, and
thereafter bears interest at the rate of 12 1/2% per annum, payable
semi-annually, in arrears on February 15 and August 15 of each year, commencing
on August 15, 1999. The 1999 notes are unsecured senior obligations of the
Company that will mature on February 15, 2009. The notes will be redeemable at
the option of the Company at any time after February 15, 2004 at stated
redemption prices plus accrued and unpaid interest thereon.
The Company purchased approximately $74.1 million of government
securities from the net proceeds, representing sufficient funds to pay the first
six scheduled interest payments on the 1999 notes. These government securities
are pledged as security for repayment of interest on the 1999 notes.
F-12
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 1, 1999, the Company completed an offer to exchange all
outstanding 12 1/2% senior notes due February 15, 2009 for 12 1/2% senior notes
due February 15, 2009, which have been registered under the Securities Act of
1933.
3. CAPITAL LEASES
The Company has entered into capital lease arrangements to finance the
acquisition of certain operating assets, two of which have bargain purchase
options. The principal value of these leases totaled $865,000 as of December 31,
1998 and 1999, and was equivalent to the fair value of the assets leased.
Future minimum lease payments under capital leases are as follows:
YEAR ENDING DECEMBER 31,
2000............................................... $ 294,000
2001............................................... 44,000
2002............................................... 4,000
Thereafter......................................... --
-----------
342,000
Less amount representing interest.................. (30,000)
Less current portion............................... (268,000)
-----------
Total long-term portion............................ $44,000
===========
Accumulated amortization for equipment under capital leases is reflected
in accumulated depreciation and amortization for property and equipment.
4. OPERATING LEASES
The Company leases vehicles, equipment, and office space under various
operating leases. Future minimum lease payments by year under operating leases
are as follows:
YEAR ENDING DECEMBER 31,
2000............................................. 5,852,000
2001............................................. 5,713,000
2002............................................. 5,023,000
2003............................................. 3,875,000
2004............................................. 3,292,000
Thereafter....................................... 2,326,000
--------------
Total..................................... $26,081,000
==============
Rental expense on operating leases totaled $131,000, $1,507,000 and
$4,302,000 for the years ended December 31, 1997, 1998, and 1999, respectively.
5. STOCKHOLDERS' EQUITY
COVAD COMMUNICATIONS GROUP, INC.
STRATEGIC INVESTMENT
In January 1999, the Company entered into strategic relationships with
AT&T Corp. ("AT&T"), NEXTLINK Communications, Inc. ("NEXTLINK") and Qwest
Communications Corporation ("Qwest"). As part of these strategic relationships,
the Company received equity investments totaling approximately $60 million. The
Company recorded intangible assets of $28.7 million associated with these
transactions which will be amortized over periods of three to six years. For the
year ended December 31, 1999, amortization expense totaled $8.2 million.
F-13
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INITIAL PUBLIC OFFERING
On January 27, 1999, the Company completed the initial public offering
(IPO) of 20,182,500 shares of the Company's Common Stock at a price of $8.00
per share. Net proceeds to the Company from the offering were $150.2 million
after deducting underwriting discounts and commissions and offering expenses
payable by the Company. As a result of the offering, 41,053,865 shares of the
Common Stock and 6,379,177 shares of the Class B Common Stock (which are
convertible into 14,353,148 shares of Common Stock) were issued upon the
conversion of Preferred Stock, 133,587 shares of Common Stock were issued for
cumulative but unpaid dividends on Series A and Series B Preferred Stock and
4,049,439 shares of Common Stock were issued upon the exercise of common
warrants.
SECONDARY OFFERING
On June 23, 1999, the Company completed a public offering of 12,937,500
shares of Common Stock sold by certain stockholders of the Company. The Company
did not sell any shares in this offering. Accordingly, there were no net
proceeds to the Company from this offering. The Company incurred offering
expenses of approximately $600,000.
On November 3, 1999 the Company completed a public offering of 22,425,000
shares of Common Stock sold by the Company and certain stockholders of the
Company. The net proceeds to the Company from this offering were $568.8 million
after deducting underwriting discounts and commissions and offering expenses.
COMMON STOCK
Shares of Common Stock outstanding at December 31, 1998, and December
31,1999, were 17,660,996 and 132,331,316 shares, respectively, of which
7,159,625 and 6,027,844 shares, respectively, remain subject to repurchase
provisions which generally lapse over a four-year period from the date of
issuance.
Common Stock reserved for future issuance as of December 31, 1999 is as
follows:
Outstanding options...................... 24,522,633
Options available for grant.............. 1,905,080
Employee stock purchase plan............. 2,872,836
Warrants outstanding..................... 1,995,041
--------------
Total............................. 31,295,590
==============
PREFERRED STOCK DIVIDENDS
The holders of Series A, Series B and Series C were entitled to receive
in any fiscal year, dividends at the rate of $0.0111 per share, $0.0267 per
share and $0.1487 per share, respectively, payable in preference and priority to
any payment of dividends on Common Stock. The rights to such dividends were
cumulative and accrue to the holders to the extent they were not declared or
paid and were payable, in cash or Common Stock, only in the event of a
liquidation, dissolution or winding up of the Company, or other liquidity event
(as defined in the Certificate of Incorporation). The cumulative dividends at
December 31, 1998 and December 31,1999 for Preferred Stock were approximately
$1,085,000 and $ 1,146,000, respectively, which were converted into 133,587
shares of Common Stock in connection with the IPO.
6. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
Effective September 1, 1997, the Company adopted a defined contribution
retirement plan under Section 401(k) of the Internal Revenue Code which covers
substantially all employees. Eligible employees may contribute amounts to the
plan, via payroll withholding, subject to certain limitations. The Company does
not match contributions by plan participants.
F-14
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1998 EMPLOYEE STOCK PURCHASE PLAN
In January 1999, the Company adopted the 1999 Employee Stock Purchase
Plan. The Company has reserved a total of 3,375,000 shares of Common Stock for
issuance under the plan. Eligible employees may purchase Common Stock at 85% of
the lesser of the fair market value of the Company's Common Stock on the first
day of the applicable twenty-four month offering period or the last day of the
applicable six month purchase period.
STOCK OPTION PLANS
In 1997, the Company adopted the Covad Communications Group, Inc. 1997
Stock Plan (the "Plan"). The Plan provides for the grant of stock purchase
rights and options to purchase shares of Common Stock to employees and
consultants from time to time as determined by the Board of Directors. The
options expire from two to eight years after the date of grant. As of December
31, 1999 the Plan has reserved 34,920,770 shares of the Company's Common Stock
for sale and issuance under the Plan at prices to be determined by the Board of
Directors.
The following table summarizes stock option activity for the year ended
December 31, 1997, 1998 and December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF OPTION PRICE
COMMON STOCK PER SHARE
--------------------- ------------------
<S> <C> <C> <C>
Granted.................................................. 8,648,438 $0.022 - $0.03
Exercised................................................ (13,500) -- - $0.02
Cancelled................................................ (60,750) $0.022 - $0.03
--------------------- ------------------
Balance as of December 31, 1997.......................... 8,574,188 $0.022 - $0.03
Granted.................................................. 21,077,955 $ 0.67 - $5.44
Exercised................................................ (466,863) $0.022 - $0.45
Cancelled................................................ (1,627,730) $0.022 - $5.29
--------------------- ------------------
Balance as of December 31, 1998.......................... 27,557,550 $0.022 - $ 5.44
Granted.................................................. 8,774,658 $0.0007 - $44.67
Exercised................................................ (8,012,683) $0.0007 - $38.17
Cancelled................................................ (3,796,892) $0.147 - $43.42
--------------------- ------------------
Balance as of December 31, 1999.......................... 24,522,633 $0.0007 - $44.67
===================== ==================
</TABLE>
The following is a summary of the status of stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------------------
EXERCISE NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
PRICE RANGE SHARES LIFE REMAINING EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------- --------------- ---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.007 - $6.22 16,509,627 6.1 $ 1.14 3,592,692 $ 1.05
$XX.33 - $12.67 1,704,315 7.0 $ 7.55 326,487 $ 7.55
$X2.67 - $19.00 25,614 7.1 $18.61 2,757 $18.61
$19.00 - $25.33 34,500 7.1 $20.96 5,502 $20.91
$25.33 - $31.67 2,944,256 7.4 $28.41 166,840 $28.38
$31.67 - $38.00 1,754,922 7.5 $34.50 65,499 $36.21
$38.00 - $44.33 1,534,774 7.3 $40.69 151,818 $40.23
$44.33 - $50.67 14,625 5.6 $44.67 2,432 $44.67
--------------- ---------------- ----------------- --------------- ----------------
24,522,633 6.5 $9.79 4,314,027 $4.57
=============== ================ ================= =============== ================
</TABLE>
During the year ended December 31, 1997, the Company recorded deferred
compensation of $906,000 as a result of granting stock options and issuing
restricted stock with exercise or issue prices per share below the revised fair
value per share of the Company's Common Stock at the date of grant or issuance.
This amount was recorded as a reduction of stockholders' equity and is being
amortized as a charge to operations over the vesting period of the applicable
options using a graded vesting method. Such amortization was $295,000 for the
year ended December 31, 1997. During the year ended December 31, 1998, the
company recorded additional deferred compensation of
F-15
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approximately $8.1 million. Amortization of deferred compensation during this
same period was approximately $4.0 million. During the year ended December 31,
1999, the Company recorded additional deferred compensation of approximately
$6.6 million. Amortization of deferred compensation during this same period was
approximately $4.8 million.
STOCK-BASED COMPENSATION
Pro forma information regarding the results of operations and net loss
per share is required by FAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options using
the fair value method of FAS 123. The fair value of each option granted is
estimated on the date of grant using the Black Scholes valuation model.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercised price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value of the estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For the years ended December 31, 1997, 1998 and 1999, the fair value of
the Company's stock-based awards to employees was estimated using the following
weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected life of options in years..................... 4.0 4.0 4.0
Volatility............................................ 123.5% 123.5% 123.5%
Risk-free interest rate............................... 7.0% 7.0% 7.0%
Expected dividend yield............................... 0.0% 0.00% 0.00%
</TABLE>
The weighted average fair value of stock options granted during the years
ended December 31, 1997, 1998 and 1999 was $0.11, $0.91 and $9.79 per share,
respectively. For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
which would result in an increase in net loss of approximately $12,000, $1.7
million and $35.2 million for the years ended December 31, 1997, 1998 and 1999,
respectively. The result of applying FAS 123 to the Company's option grants was
not material to the results of operations or loss per share for the year ended
December 31, 1997 and would have increased the net loss per share by $0.20 per
share and $0.49 per share for the year ended December 31, 1998 and 1999,
respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 1997, 1998, and 1999 is not representative of the effects on net
loss for future years, as future years will include the effects of additional
years of stock option grants.
7. RELATED PARTY TRANSACTIONS
The Company purchases equipment from a supplier which is partially owned
by an investor in the Company. Purchases from this supplier totaled $85,000,
$5,844,000 and $45,695,000 for the years ending December 31, 1997, 1998 and
1999, respectively. During 1999, an unrelated party acquired this supplier, as
such, the Company had no financial interest in them by year end December
31,1999. In addition, the Company acquired an interest in a new supplier.
Purchases from this new supplier totaled $3,401,000 for the year ended December
31, 1999.
F-16
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LEGAL PROCEEDINGS
The Company is engaged in a variety of negotiations, arbitrations and
regulatory and court proceedings with multiple traditional telephone companies.
These negotiations, arbitrations and proceedings concern the traditional
telephone companies' denial of physical central office space to the Company in
certain central offices, the cost and delivery of central office spaces, the
delivery of transmission facilities and telephone lines, billing issues and
other operational issues. For example, the Company is currently involved in
commercial arbitration proceedings with Pacific Bell over these issues. The
Company has also filed a lawsuit against Pacific Bell and certain of its
affiliates, including SBC Communications, in federal court. The Company is
pursuing a variety of contract, tort, and antitrust and other claims, such as
violations of the Telecommunications Act, in these proceedings. In November
1998, the Company prevailed in its commercial arbitration proceeding against
Pacific Bell. The arbitration panel found that Pacific Bell breached its
interconnection agreement with the Company and failed to act in good faith on
multiple counts. The arbitration panel ruled in favor of awarding the Company
direct damages, as well as attorneys fees and costs of the arbitration. Pacific
Bell is currently attempting to have the decision vacated. Meanwhile, the
arbitration panel is evaluating the Company's claim for additional damages.
The Company also filed a lawsuit against Bell Atlantic and its affiliates
in federal court and is pursuing antitrust and other claims in this lawsuit. In
addition, Bell Atlantic has separately filed suit against the Company asserting
infringement of a patent issued to them in September 1998 entitled "Variable
Rate and Variable Mode Transmission System." However, on February 18, 2000 the
court issued a summary judgement ruling holding that the Company had not
infringed Bell Atlantic's patent. The Company anticipates that Bell Atlantic may
appeal this decision and, while the Company expects that it would prevail on an
appeal, the outcome of such an appeal is uncertain.
A former employee of the Company has filed a complaint against the
Company in California Superior Court, alleging that he was terminated wrongfully
and is entitled to commissions and other amounts arising from his employment.
The Company believes that this employee resigned and that it does not owe him
any money, but litigation is unpredictable and there is no guarantee the Company
will prevail. Another group of former employees of the Company have filed a
Complaint against the Company in California Superior Court alleging that they
were terminated wrongfully and are entitled to other amounts arising from their
employment. The Company believes it has valid defenses and does not own them any
money, but litigation is unpredictable and there is no guarantee the Company
will prevail. Failure to resolve these various legal disputes and controversies
without excessive delay and cost and in a manner that is favorable, could
significantly harm the business.
The Company is not currently engaged in any other legal proceedings that
it believes could have a material adverse effect on the Company's business,
prospects, operating results and financial condition. The Company is subject to
state commission, FCC and court decisions as they relate to the interpretation
and implementation of the 1996 Telecommunications Act, the interpretation of
competitive telecommunications company interconnection agreements in general and
the Company's interconnection agreements in particular. In some cases, the
Company may be deemed to be bound by the results of ongoing proceedings of these
bodies or the legal outcomes of other contested interconnection agreements that
are similar to our agreements. The results of any of these proceedings could
harm the business.
9. SUBSEQUENT EVENTS
On January 28, 2000, the Company completed a private placement of $425.0
million aggregate principal amount of the Company's 12% senior notes (the "2000
notes") due 2010. The 2000 notes are unsecured senior obligations of the Company
maturing on February 15, 2010 and are redeemable at the option of the Company
any time after February 15, 2005 at stated redemption prices plus accrued and
unpaid interest thereon. Net proceeds from the 2000 notes were approximately
$413.3 million, after discounts, commissions and other transaction costs of
approximately $11.7 million. The discount and debt issuance costs are being
amortized over the life of the 2000 notes. These notes were sold in a private
placement under Rule 144A and Regulation S under the Securities Act of 1933, as
amended.
F-17
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has filed a registration statement covering an offer to
exchange new registered 12% senior notes due February 15, 2010 for all
outstanding 12% senior notes due February 15, 2010.
On February 15, 2000 the Company's Board of Directors adopted a
Stockholder Protection Rights Plan under which stockholders received one right
for each share of the Company's Common Stock or Class B Common Stock owned by
them. The rights become exercisable, in most circumstances, upon the
accumulation by a person or group of 15% or more of the Company's outstanding
shares of Common Stock. Each right entitles the holder to purchase from the
Company, as provided by the Stockholder protection Rights Agreement, one
one-thousandth of a share of Participating Preferred Stock, par value $.001 per
share, for $400.00, subject to adjustment.
On March 7, 2000, the Company announced a 3-for-2 stock split, which was
effectuated through a stock dividend. The Company's Common Stock began trading
on a split adjusted basis on April 3, 2000. All share and per share numbers in
the accompanying consolidated financial statements have been retroactively
adjusted to reflect this split.
On March 20, 2000 the Company completed the acquisition of Laser
Link.net, a leading provider of branded internet access, based in Media,
Pennsylvania in a transaction to be accounted for as a purchase. Under the
acquisition agreement, the Company issued 6.45 million shares of Common Stock
for all Laser Link.net outstanding shares, plus assumption of all outstanding
debt. The Company anticipates that this acquisition will allow the Company to
provide a turnkey broadband access solution to companies and affinity groups who
want to offer broadband internet services to their customers, members, or
affiliates. Laser Link.net currently provides a similar service using dial-up
access. The total consideration related to the acquisition approximates $372.0
million.
F-18
<PAGE>
APPENDIX I
ACCESS LINE--A circuit that connects a telephone end-user to the ILEC
Central Office.
ANALOG MODEM -- A telecommunications device that allows the communication
of digital information over analog telephone lines and through the public
switched telephone network by translating such information in a way that
simulates and uses only the bandwidth of normal voice transmissions.
ASYNCHRONOUS TRANSFER MODE (ATM)--A standard packet-switching protocol
that segments digital information into 53-byte cells (each cell has a 5-byte
standard packet-switching header and 48 bytes of data) that are switched very
quickly throughout a network over virtual circuits. ATM is able to accommodate
multiple types of media (voice, video, data).
BANDWIDTH--Refers to the maximum amount of data that can be transferred
through a computer's backplane or communication channel in a given time. It is
usually measured in Hertz for analog communications and bits per second for
digital communication.
CENTRAL OFFICE--ILEC facility where subscriber lines are joined to
switching equipment.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER)--Category of telephone service
provider (carrier) that offers services similar to those of the ILEC, as allowed
by recent changes in telecommunications law and regulation. A CLEC may also
provide other types of services such as long distance, Internet access and
entertainment.
COMMUNICATIONS ACT OF 1934--The federal legislation governing broadcast
and non-broadcast communications, including both wireless and wired telephone
service, and which established the FCC.
DSL--Digital Subscriber Line.
FCC (FEDERAL COMMUNICATIONS COMMISSION)--The U.S. government agency
charged with the oversight of communications originating in the U.S. and
crossing state lines.
FRAME-RELAY--A high-speed packet-switched data communications protocol.
HFC (HYBRID FIBER COAX)--A combination of fiber optic and coaxial cable,
which has become the primary architecture utilized by cable operators in recent
and ongoing upgrades of their systems. An HFC architecture generally utilizes
fiber optic wire between the headend and the nodes and coaxial wire from nodes
to individual end-users.
ILEC (INCUMBENT LOCAL EXCHANGE CARRIER)--The local exchange carrier that
was the monopoly carrier in a region, prior to the opening of local exchange
services to competition.
ILEC COLLOCATION--A location serving as the interface point for a CLEC
network's interconnection to that of the ILEC. Collocation can be (i) physical,
in which the CLEC places and directly maintains equipment in the ILEC Central
Office, or (ii) virtual, in which the CLEC leases a facility, similar to that
which it might build, to effect a presence in the ILEC Central Office.
INTERCONNECTION (CO-CARRIER) AGREEMENT--A contract between an ILEC and a
CLEC for the interconnection of the two networks and CLEC access to ILEC UNEs.
These agreements set out the financial and operational aspects of such
interconnection and access.
ISP (INTERNET SERVICE PROVIDER)--A vendor that provides subscribers
access to the Internet.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK)--ISDN provides standard
interfaces for digital communication networks and is capable of carrying data,
voice, and video over digital circuits. ISDN protocols are used worldwide for
connections to public ISDN networks or to attach ISDN devices to ISDN-capable
PBX systems (ISPBXs). Developed by the International Telecommunications Union,
ISDN includes two user-to-network interfaces: basic rate interface (BRI) and
primary rate interface (PRI). An ISDN interface contains one signaling channel
(D-channel) and a number of information channels ("bearer" or B channels). The
D-channel is used for call setup, control, and
I-1
<PAGE>
call clearing on the B-channels. It also transports feature information while
calls are in progress. The B-channels carry the voice, data, or video
information.
IXC (INTEREXCHANGE CARRIER)--Facilities-based long distance/interLATA
carriers (e.g., AT&T, MCI WorldCom and Sprint), who also provide intraLATA toll
service and may operate as CLECs.
KBPS (KILOBITS PER SECOND)--One thousand bits per second.
LATA (LOCAL ACCESS AND TRANSPORT AREA)--A geographic area inside of which
a local telephone company can offer switched telecommunications services,
including long distance (known as toll). There are 196 LATAs in the U.S.
MBPS (MEGABITS PER SECOND)--One million bits per second.
RBOCS (REGIONAL BELL OPERATING COMPANIES)--ILECs created by AT&T's
divestiture of its local exchange business. The remaining RBOCs include
BellSouth, Bell Atlantic Corporation, Ameritech Corporation, U S WEST
Communications, Inc. and SBC Communications, Inc.
T1--This is a Bell system term for a digital transmission link with a
capacity of 1.544 Mbps.
UNES (UNBUNDLED NETWORK ELEMENTS)--The various portions of an ILEC's
network that a CLEC can lease for purposes of building a facilities-based
competitive network, including copper lines, Central Office collocation space,
inter-office transport, operational support systems, local switching and rights
of way.
I-2
<PAGE>
<TABLE>
<S><C>
============================================================ ==================================================
We have not authorized any dealer, salesperson or $425,000,000
other person to give any information or represent anything
not contained in this offering memorandum. You must not
rely on any unauthorized information. This offering
memorandum does not offer to sell or buy any Notes in any [LOGO OMITTED]
jurisdiction where it is unlawful. The information in this
prospectus is current as of , 2000
COVAD COMMUNICATIONS
GROUP, INC.
OFFER TO EXCHANGE ALL
OUTSTANDING
12% SENIOR NOTES DUE 2010
FOR 12% SENIOR NOTES DUE 2010,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
-------------
PROSPECTUS
-------------
, 2000
============================================================ ==================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article X of our Amended and Restated Certificate of Incorporation
provides for the indemnification of our directors to the fullest extent
permissible under Delaware law.
Article VI of our Bylaws provides for the indemnification of our
officers, directors, employees and agents if such person acted in good faith and
in a manner reasonably believed to be in and not opposed to the best interest of
the corporation, and, with respect to any criminal action or proceeding the
indemnified party had no reason to believe his conduct was unlawful.
Section 145 of the Delaware General Corporation Law permits us to include
in its charter documents, and in agreements between the corporation and its
directors and officers, provisions expanding the scope of indemnification beyond
that specifically provided by the current law.
We have entered into indemnification agreements with our directors and
executive officers, and we intend to enter into indemnification agreements with
any new directors and executive officers in the future.
We maintain liability insurance coverage for all of our directors and
officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.1* Purchase Agreement dated as of January 21, 2000, by and among the Registrant, Bear, Stearns & Co.,
Inc. and Morgan Stanley & Co., Inc.
2.1(3) Agreement and Plan of Merger Among Covad Communications Group, Inc., LightSaber Acquisition Co. and
Laser Link.Net, Inc., dated as of March 8, 2000.
4.1(1) Indenture dated as of March 11, 1998 between the Registrant and The Bank of New York.
4.4(1) Warrant Registration Rights Agreement dated as of March 11, 1998 among the Registrant and Bear,
Stearns & Co. Inc. and BT Alex. Brown Incorporated.
4.5(1) Specimen 13 1/2% Senior Note Due 2008.
4.6(1) Amended and Restated Stockholders Rights Agreement dated January 19, 1999 among the Registrant and
certain of its stockholders.
4.7(2) Indenture dated as of February 18, 1999 among the
Registrant and The Bank of New York, including form of 12 1/2 %
Senior Note Due 2009.
4.8(2) Registration Rights Agreement dated as of February 18, 1999 among the Registrant and the Initial
Purchasers.
4.9(2) Specimen 12 1/2% Senior Note Due 2009.
4.10* Indenture dated as of January 28, 2000, between the Registrant and United States Trust Company of
New York.
4.11* Registration Rights Agreement dated as of January 28, 2000, between the Registrant and Bear,
Stearns & Co., Inc.
4.12 Specimen 12% Senior Note due 2010, Series A (unregistered).
4.13 Specimen 12% Senior Note due 2010, Series B (registered)
4.14(4) Stockholder Protection Rights Agreement dated February 15, 2000.
5.1 Opinion of Irell & Manella LLP.
10.1(2) Form of Indemnification Agreement entered into between the
Registrant and each of the Registrant's executive officers and
directors.
II-1
<PAGE>
10.5(2) Series C Preferred Stock and Warrant Subscription Agreement
dated as of February 20, 1998 among the Registrant, Warburg,
Pincus Ventures, L.P., Crosspoint Venture Partners 1996 and Intel
Corporation, as amended by the Assignment and Assumption Agreement
and First Amendment to the Series C Preferred Stock and Warrant
Subscription Agreement dated as of April 24, 1998 among the
Registrant, Warburg, Crosspoint and Robert Hawk.
10.6(2) Employment Agreement dated June 21, 1999 between the Registrant and Robert E. Knowling, Jr.
10.7(2) Sublease Agreement dated July 6, 1998 between Auspex Systems, Inc. and the Registrant with respect
to Registrant's facilities in Santa Clara, California.
10.8(2) 1998 Employee Stock Purchase Plan and related agreements, as currently in effect.
10.10(2) Form of Warrant to purchase Common Stock issued by the Registrant on February 20, 1998 to Warburg,
Pincus Ventures, L.P., Crosspoint Ventures Partners 1996 and Intel Corporation.
10.11(5) Note Secured by Deed of Trust dated October 7, 1998 issued by Catherine A. Hemmer and John J.
Hemmer in favor of the Registrant.
10.12(5) 1997 Stock Plan and related option agreement, as currently in effect.
10.13(5) Series C-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 among the Registrant,
AT&T Venture Fund II, LP and two affiliated funds.
10.14(5) Series D-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 among the Registrant,
AT&T Venture Fund II, LP and two affiliated funds.
10.15(5) Series C-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 between the Registrant
and NEXTLINK Communications, Inc.
10.16(5) Series D-1 Preferred Stock Purchase Agreement dated as of December 30, 1998 between the Registrant
and NEXTLINK Communications, Inc.
10.17(5) Series C-1 Preferred Stock Purchase Agreement dated as of January 19, 1998 between the Registrant
and U.S. Telesource, Inc.
10.18(5) Series D-1 Preferred Stock Purchase Agreement dated as of January 19, 1998 between the Registrant
and U.S. Telesource, Inc.
11.1(6) Statement of Computation of Per Share Earnings.
12.1(6) Statement of Computation of Ratios.
21.1(6) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1* Power of Attorney.
25.1 Statement of Eligibility of Trustee
27.1(6) Financial Data Schedules.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Exchange Agent Agreement.
</TABLE>
- --------------
(1) Incorporated by reference to the exhibit of corresponding number filed with
our registration statement on Form S-4 (No. 333-51097) and as subsequently
amended.
(2) Incorporated by reference to the exhibit of corresponding number filed with
our registration statement on Form S-4 (No. 333-75955) and as subsequently
amended.
(3) Incorporated by reference to the exhibit of corresponding number filed with
our Registration Statement on Form 8-K as originally filed on March 23,
2000 and as subsequently amended.
(4) Incorporated by reference to Exhibit 4.1 filed with our Registration
Statement on Form 8-A as originally filed on February 22, 2000 and as
subsequently amended.
(5) Incorporated by reference to the exhibit of corresponding number filed
with our Registration Statement on Form S-1 (File No. 333-63899) as
originally filed on September 21, 1998 and as subsequently amended.
II-2
<PAGE>
(6) Incorporated by reference to the exhibit of corresponding number filed with
our Report on Form 10-K as originally filed on March 30, 2000 and as
subsequently amended.
* Previously filed.
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the 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.
(2) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report, to security
holders that is incorporated by reference in the prospectus and furnished
pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X is
not set forth in the prospectus, to deliver, or cause to be delivered to
each person to whom the prospectus is sent or given, the latest quarterly
report that is specifically incorporated by reference in the prospectus
to provide such interim financial information.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
described in Item 15 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 of 1933 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 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 of 1933 and will be
governed by the final adjudication of such issue.
(4) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
be part of this registration statement as of the time it was declared
effective.
(5) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California on May 10, 2000.
COVAD COMMUNICATIONS GROUP, INC.
By: /S/ TIMOTHY LAEHY
-----------------------------------
Timothy Laehy
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert E. Knowling, Jr. and Timothy Laehy
and each of them his attorneys-in-fact, each with the power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto in all
documents in connection therewith, with the SEC, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons on the 10th day of May, 2000
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer and President
- --------------------------------------------------------- (Director and Principal Executive Officer)
(Robert E. Knowling, Jr.)
/s/ TIMOTHY LAEHY Executive Vice President and Chief Financial Officer
- --------------------------------------------------------- (Principal Financial and Accounting Officer)
(Timothy Laehy)
Director
- ---------------------------------------------------------
(Robert Hawk)
Director
- ---------------------------------------------------------
(Hellene Runtagh)
* Director
- ---------------------------------------------------------
(Daniel Lynch)
* Director
- ---------------------------------------------------------
(Frank Marshall)
* Director
- ---------------------------------------------------------
(Rich Shapero)
</TABLE>
*By: /S/ TIMOTHY LAEHY
- ---------------------------------------------------------
Timothy Laehy, attorney in-fact
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* Purchase Agreement dated as of January 21, 2000, by and among the
Registrant, Bear, Stearns & Co., Inc. and Morgan Stanley & Co., Inc.
2.1(3) Agreement and Plan of Merger Among Covad Communications Group, Inc.,
LightSaber Acquisition Co. and Laser Link.Net, Inc., dated as of March
8, 2000.
4.1(1) Indenture dated as of March 11, 1998 between the Registrant and The
Bank of New York.
4.4(1) Warrant Registration Rights Agreement dated as of March 11, 1998 among
the Registrant and Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated.
4.5(1) Specimen 13 1/2% Senior Note Due 2008.
4.6(1) Amended and Restated Stockholders Rights Agreement dated January 19,
1999 among the Registrant and certain of its stockholders.
4.7(2) Indenture dated as of February 18, 1999 among the Registrant and The
Bank of New York, including form of 12 1/2% Senior Note Due 2009.
4.8(2) Registration Rights Agreement dated as of February 18, 1999 among the
Registrant and the Initial Purchasers.
4.9(2) Specimen 12 1/2% Senior Note Due 2009.
4.10* Indenture dated as of January 28, 2000, between the Registrant and
United States Trust Company of New York.
4.11* Registration Rights Agreement dated as of January 28, 2000, between the
Registrant and Bear, Stearns & Co., Inc.
4.12 Specimen 12% Senior Note due 2010, Series A (unregistered).
4.13 Specimen 12% Senior note due 2010, Series B (registered).
4.14(4) Stockholder Protection Rights Agreement dated February 15, 2000.
5.1 Opinion of Irell & Manella LLP.
10.1(2) Form of Indemnification Agreement entered into between the Registrant
and each of the Registrant's executive officers and directors.
10.5(2) Series C Preferred Stock and Warrant Subscription Agreement dated as of
February 20, 1998 among the Registrant, Warburg, Pincus Ventures, L.P.,
Crosspoint Venture Partners 1996 and Intel Corporation, as amended by
the Assignment and Assumption Agreement and First Amendment to the
Series C Preferred Stock and Warrant Subscription Agreement dated as of
April 24, 1998 among the Registrant, Warburg, Crosspoint and Robert
Hawk.
10.6(2) Employment Agreement dated June 21, 1999 between the Registrant and
Robert E. Knowling, Jr.
10.7(2) Sublease Agreement dated July 6, 1998 between Auspex Systems, Inc. and
the Registrant with respect to Registrant's facilities in Santa Clara,
California.
10.8(2) 1998 Employee Stock Purchase Plan and related agreements, as currently
in effect.
10.10(2) Form of Warrant to purchase Common Stock issued by the Registrant on
February 20, 1998 to Warburg, Pincus Ventures, L.P., Crosspoint
Ventures Partners 1996 and Intel Corporation.
10.11(5) Note Secured by Deed of Trust dated October 7, 1998 issued by Catherine
A. Hemmer and John J. Hemmer in favor of the Registrant.
10.12(5) 1997 Stock Plan and related option agreement, as currently in effect.
10.13(5) Series C-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 among the Registrant, AT&T Venture Fund II, LP and two affiliated
funds.
10.14(5) Series D-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 among the Registrant, AT&T Venture Fund II, LP and two affiliated
funds.
<PAGE>
10.15(5) Series C-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 between the Registrant and NEXTLINK Communications, Inc.
10.16(5) Series D-1 Preferred Stock Purchase Agreement dated as of December 30,
1998 between the Registrant and NEXTLINK Communications, Inc.
10.17(5) Series C-1 Preferred Stock Purchase Agreement dated as of January 19,
1998 between the Registrant
and U.S. Telesource, Inc.
10.18(5) Series D-1 Preferred Stock Purchase Agreement dated as of January 19,
1998 between the Registrant and U.S. Telesource, Inc.
11.1(6) Statement of Computation of Per Share Earnings.
12.1(6) Statement of Computation of Ratios.
21.1(6) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1* Power of Attorney.
25.1 Statement of Eligibility of Trustee
27.1(6) Financial Data Schedules.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Exchange Agent Agreement.
- --------------
(1) Incorporated by reference to the exhibit of corresponding number filed
with our registration statement on Form S-4 (No. 333-51097) and as
subsequently amended.
(2) Incorporated by reference to the exhibit of corresponding number filed
with our registration statement on Form S-4 (No. 333-75955) and as
subsequently amended.
(3) Incorporated by reference to the exhibit of corresponding number filed
with our Registration Statement on Form 8-K as originally filed on March
23, 2000 and as subsequently amended.
(4) Incorporated by reference to Exhibit 4.1 filed with our Registration
Statement on Form 8-A as originally filed on February 22, 2000 and as
subsequently amended.
(5) Incorporated by reference to the exhibit of corresponding number filed
with our Registration Statement on Form S-1 (File No. 333-63899) as
originally filed on September 21, 1998 and as subsequently amended.
(6) Incorporated by reference to the exhibit of corresponding number filed
with our report on Form 10-K as originally filed on March 30, 2000 and as
subsequently amended.
* Previously filed.
<PAGE>
EXHIBIT 4.12
EXHIBIT A-l
(Face of Note)
================================================================================
CUSIP/CINS_____________
12% Senior Notes due 2010
No. ___ $__________
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to _____________________________________________________________
or registered assigns,
the principal sum of _____________________________________________________
Dollars on February 15, 2010.
Interest Payment Dates: February 15 and August 15
Record Dates: February 1 and August 1
A1-1
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
BY:
-------------------------------------
Name:
Title:
BY:
-------------------------------------
Name:
Title:
Dated: January 28, 2000
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
United States Trust Company of New York,
as Trustee
By:
-------------------------------
Authorized Signatory
================================================================================
A1-2
<PAGE>
(Back of Note)
12% Senior Notes due 2010
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER, SELL,
PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY, (2) PURSUANT
TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A, (4) PURSUANT TO OFFERS AND SALES
TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (5) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A),
(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT (AND BASED ON AN
OPINION
A1-3
<PAGE>
OF COUNSEL), OR (6) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (AND BASED ON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES TO
APPLICABLE JURISDICTION, AND (B) THAT IT WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
Capitalized terms used herein shall have the meanings assigned to
them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. Covad Communications Group, Inc., a Delaware
corporation (the "Company"), promises to pay interest on the principal amount of
this Note at 12% per annum. The Company shall pay interest and Additional
Interest, if any, semi-annually on February 15 and August 15, commencing on
August 15, 2000, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Closing Date; PROVIDED that if there is no
existing Default in the payment of interest, and if this Note is authenticated
between a record date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such next succeeding Interest
Payment Date; PROVIDED, FURTHER, that the first Interest Payment Date shall be
August 15, 2000. The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal and
premium, if any, from time to time on demand at a rate that is 1% per annum in
excess of the rate then in effect; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. All references
in this Note and in the Indenture to "interest" shall be deemed to include any
Additional Interest that may become payable thereon according to the provisions
of the Indenture.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on February 1 or August 1 preceding the Interest
Payment Date, even if such Notes are cancelled after such record date and on or
before such Interest Payment Date, except as provided in Section 2.12 of the
Indenture with respect to defaulted interest. The Notes will be payable as to
principal, premium and interest at the office or agency of the Company
maintained for such purpose within or without the City and State of New York,
or, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their addresses set forth in the register of Holders,
and provided that payment by wire transfer of immediately available funds will
be required with respect to principal of and interest, premium on, all Global
Notes and all other Notes the Holders of which shall have provided wire transfer
instructions to the Company or the Paying Agent. Such payment shall be in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, United States Trust
Company of New York, the Trustee under the Indenture, will act as Paying Agent
and Registrar. The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company or any of its Subsidiaries may act in any such
capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated
as of January 28, 2000 (the "Indenture") between the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and
Holders are
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<PAGE>
referred to the Indenture and such Act for a statement of such terms. To the
extent any provision of this Note conflicts with the express provisions of the
Indenture, the provisions of the Indenture shall govern and be controlling. The
Notes are obligations of the Company limited to $475,000,000 in aggregate
principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to February 15,
2005. Thereafter, the Company shall have the option to redeem the Notes, in
whole or in part, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon, if
any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on February 15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2005....................................................... 106.00%
2006....................................................... 104.00%
2007....................................................... 102.00%
2008 and thereafter........................................ 100.00%
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time prior to February 15, 2003, the Company, at its option,
may use the net cash proceeds (but only to the extent such proceeds consist of
cash or Cash Equivalents) of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the Notes issued on the Issue Date under the Indenture at
a redemption price of 112.00% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of redemption; PROVIDED
that at least $276.25 million of the aggregate principal amount of the Notes
remains outstanding immediately after the occurrence of such redemption. In
order to effect the foregoing redemption, the Company must mail a notice of
redemption no later than 30 days after the related Public Equity Offering and
must consummate such redemption within 60 days of the closing of such Public
Equity Offering.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall not be
required to make mandatory redemption payments with respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be required
to make an offer (a "Change of Control Offer") to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (the "Change of Control
Payment"). Within 10 days following any Change of Control, the Company shall
mail a notice to each Holder setting forth the procedures governing the Change
of Control Offer as required by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall commence an offer to all
Holders of Notes (an "Asset Sale Offer") pursuant to Section 3.09 of the
Indenture to purchase the maximum principal amount of Notes (including any
Additional Notes) that may
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<PAGE>
be purchased out of the Excess Proceeds at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
and Additional Interest thereon, if any, to the date fixed for the closing of
such offer, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Notes (including any Additional Notes)
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the
Company (or such Restricted Subsidiary) may use such deficiency for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a PRO RATA basis. Holders of Notes that are the
subject of an offer to purchase will receive an Asset Sale Offer from the
Company prior to any related purchase date and may elect to have such Notes
purchased by completing the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes or
portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a period of 15 days
before a selection of Notes to be redeemed or during the period between a record
date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note will be
treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes (and Additional Notes, if any) voting as a single class, and any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Notes (and Additional Notes, if any) voting as a single class.
Without the consent of any Holder of a Note, the Indenture or the Notes may be
amended or supplemented to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in case of a merger or consolidation or sale of all or substantially
all of the Company's assets, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act or to provide
for the Issuance of Additional Notes in accordance with the limitations set
forth in the Indenture.
12. DEFAULTS AND REMEDIES. Events of Default include: (i) default
for 30 days in the payment when due of interest on the Notes (including any
Additional Interest); (ii) default in payment when due of principal of or
premium, if any, on the Notes when the same becomes due and payable at maturity,
upon redemption (including in connection with an offer to purchase) or
otherwise; (iii) failure by the Company or any of its Restricted Subsidiaries to
comply with Section 4.07, 4.09, 4.10, 4.15 or 5.01 of the
A1-6
<PAGE>
Indenture; (iv) failure by the Company or any of its Restricted Subsidiaries for
30 days after notice to the Company by the Trustee or the Holders of at least
25% in principal amount of the Notes (including Additional Notes, if any) then
outstanding voting as a single class to comply with certain other agreements in
the Indenture or the Notes; (v) default under certain other agreements relating
to Debt of the Company which default is caused by a failure to pay principal of
or premium, if any, or interest on such Debt prior to the grace period provided
in such Debt on the date of such default (a "Payment Default") or results in the
acceleration of such Debt prior to its express maturity and, in each case, the
principal amount of any such Debt under which there has been a Payment Default
or the maturity of which has been so accelerated, aggregates $5.0 million or
more; (vi) certain final judgments for the payment of money that remain
undischarged for a period of 60 days; or (vii) certain events of bankruptcy or
insolvency with respect to the Company or any of its Restricted Subsidiaries. If
any Event of Default occurs and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the then outstanding Notes may declare all the
Notes to be due and payable immediately. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, all outstanding Notes will become due and payable without further
action or notice. Holders may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest. The Holders of a
majority in aggregate principal amount of the Notes then outstanding by notice
to the Trustee may on behalf of the Holders of all of the Notes waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of interest on,
or the principal of, the Notes. The Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required upon becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
15. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND
RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of
Notes under the Indenture, Holders of Restricted Global Notes and Restricted
Definitive Notes shall have all the rights set forth in the Registration Rights
Agreement dated as of January 28, 2000, between the Company and the parties
named on the signature pages thereof or, in the case of Additional Notes,
Holders of Restricted Global Notes and Restricted
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<PAGE>
Definitive Notes shall have the rights set forth in one or more registration
rights agreements, if any, between the Company and the other parties thereto,
relating to rights given by the Company to the purchasers of any Additional
Notes (collectively, the "Registration Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
19. GOVERNING LAW. This Note shall be governed by, and construed in
accordance with, the law of the State of New York.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Attention: Chief Financial Officer
A1-8
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date:
---------------------------
Your Signature:
-----------------------------
(Sign exactly as your name appears on
the face of this Note)
SIGNATURE GUARANTEE.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A1-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 or 4.15 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased: $_________
Date:
---------------------------
Your Signature:
-----------------------------
(Sign exactly as your name appears on
the face of this Note)
Tax Identification No:
----------------------
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A1-10
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE
The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a part
of another Global Note or Definitive Note for an interest in this Global Note,
have been made:
<TABLE>
<CAPTION>
Amount of Principal Amount Signature of
decrease in Amount of increase of this Global authorized
Principal Amount in Principal Note following officer of
of this Global Amount of this such decrease (or Trustee or Note
Date of Exchange Note Global Note increase) Custodian
- ---------------- ---------------- ------------------ ----------------- ---------------
<S> <C> <C> <C> <C>
</TABLE>
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<PAGE>
EXHIBIT A-2
(Face of Regulation S Temporary Global Note)
================================================================================
CUSIP/CINS_____________
12% Senior Notes due 2010
No. _____ $__________
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to _____________________________________________________________
or registered assigns,
the principal sum of _____________________________________________________
Dollars on February 15, 2010.
Interest Payment Dates: February 15 and August 15
Record Dates: February 1 and August 1
A2-1
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
BY:
-------------------------------------
Name:
Title:
BY:
-------------------------------------
Name:
Title:
Dated: January 28, 2000
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
United States Trust Company of New York,
as Trustee
By:
-------------------------------
Authorized Signatory
================================================================================
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<PAGE>
(BACK OF REGULATION S TEMPORARY GLOBAL NOTE)
12% Senior Notes due 2010
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS
SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE
BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED
TO RECEIVE PAYMENT OF INTEREST HEREON.
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER, SELL,
PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY,
(2) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER
THE SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
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<PAGE>
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A, (4) PURSUANT TO OFFERS AND SALES
TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (5) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A), (1),
(2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT IN A TRANSACTION MEETING
THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT (AND BASED ON AN OPINION
OF COUNSEL), OR (6) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (AND BASED ON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES TO
APPLICABLE JURISDICTION, AND (B) THAT IT WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
Capitalized terms used herein shall have the meanings assigned to
them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. Covad Communications Group, Inc., a Delaware
corporation (the "Company"), promises to pay interest on the principal amount of
this Note at 12% per annum. The Company shall pay interest and Additional
Interest, if any, semi-annually on February 15 and August 15, commencing on
August 15, 2000, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Closing Date; PROVIDED that if there is no
existing Default in the payment of interest, and if this Note is authenticated
between a record date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such next succeeding Interest
Payment Date; PROVIDED, FURTHER, that the first Interest Payment Date shall be
August 15, 2000. The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal and
premium, if any, from time to time on demand at a rate that is 1% per annum in
excess of the rate then in effect; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. All references
in this Note and in the Indenture to "interest" shall be deemed to include any
Additional Interest that may become payable thereon according to the provisions
of the Indenture.
Until this Regulation S Temporary Global Note is exchanged for one
or more Regulation S Permanent Global Notes, the Holder hereof shall not be
entitled to receive payments of interest hereon; until so exchanged in full,
this Regulation S Temporary Global Note shall in all other respects be entitled
to the same benefits as other Senior Subordinated Notes under the Indenture.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on February 1 or August 1 preceding the Interest
Payment Date, even if such Notes are cancelled after such record date and on or
before such Interest Payment Date, except as provided in Section 2.12 of the
Indenture with respect to defaulted interest. The Notes will be payable as to
principal, premium and interest at the office or agency of the Company
maintained for such purpose within or without the City and State of New York,
or, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their addresses set forth in the register of Holders,
and provided that payment by wire transfer of immediately available funds will
be required with respect to principal of and interest, premium on, all Global
Notes and all other Notes the Holders of which shall have provided wire transfer
instructions to the Company or the Paying
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<PAGE>
Agent. Such payment shall be in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts.
3. PAYING AGENT AND REGISTRAR. Initially, United States Trust
Company of New York, the Trustee under the Indenture, will act as Paying Agent
and Registrar. The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company or any of its Subsidiaries may act in any such
capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated
as of January 28, 2000 ("Indenture") between the Company and the Trustee. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and
Holders are referred to the Indenture and such Act for a statement of such
terms. To the extent any provision of this Note conflicts with the express
provisions of the Indenture, the provisions of the Indenture shall govern and be
controlling. The Notes are obligations of the Company limited to $475,000,000 in
aggregate principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to February 15,
2005. Thereafter, the Company shall have the option to redeem the Notes, in
whole or in part, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon, if
any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on February 15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2005................................................. 106.00%
2006................................................. 104.00%
2007................................................. 102.00%
2008 and thereafter.................................. 100.00%
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time prior to February 15, 2003, the Company, at its option,
may use the net cash proceeds (but only to the extent such proceeds consist of
cash or Cash Equivalents) of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the Notes issued on the Issue Date under the Indenture at
a redemption price of 112.00% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of redemption; PROVIDED
that at least $276.25 million of the aggregate principal amount of the Notes
remains outstanding immediately after the occurrence of such redemption. In
order to effect the foregoing redemption, the Company must mail a notice of
redemption no later than 30 days after the related Public Equity Offering and
must consummate such redemption within 60 days of the closing of such Public
Equity Offering.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall not be
required to make mandatory redemption payments with respect to the Notes.
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<PAGE>
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be required
to make an offer (a "Change of Control Offer") to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (the "Change of Control
Payment"). Within 10 days following any Change of Control, the Company shall
mail a notice to each Holder setting forth the procedures governing the Change
of Control Offer as required by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall commence an offer to all
Holders of Notes (an "Asset Sale Offer") pursuant to Section 3.09 of the
Indenture to purchase the maximum principal amount of Notes (including any
Additional Notes) that may be purchased out of the Excess Proceeds at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Additional Interest thereon, if any, to the date
fixed for the closing of such offer, in accordance with the procedures set forth
in the Indenture. To the extent that the aggregate amount of Notes (including
any Additional Notes) tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, the Company (or such Restricted Subsidiary) may use such
deficiency for general corporate purposes. If the aggregate principal amount of
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a PRO RATA basis. Holders of
Notes that are the subject of an offer to purchase will receive an Asset Sale
Offer from the Company prior to any related purchase date and may elect to have
such Notes purchased by completing the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes or
portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a period of 15 days
before a selection of Notes to be redeemed or during the period between a record
date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note will be
treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes (and Additional Notes, if any) voting as a single class, and any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Notes (and Additional Notes, if any) voting as a single class.
Without the consent of any Holder of a Note, the Indenture or the Notes may be
amended or supplemented to cure any ambiguity, defect or inconsistency, to
provide for uncertificated
A2-6
<PAGE>
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of the Notes in case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to make any change that would provide any additional rights or benefits
to the Holders of the Notes or that does not adversely affect the legal rights
under the Indenture of any such Holder, to comply with the requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act, or to provide for the Issuance of Additional
Notes in accordance with the limitations set forth in the Indenture.
12. DEFAULTS AND REMEDIES. Events of Default include: (i) default
for 30 days in the payment when due of interest on the Notes (including any
Additional Interest); (ii) default in payment when due of principal of or
premium, if any, on the Notes when the same becomes due and payable at maturity,
upon redemption (including in connection with an offer to purchase) or
otherwise; (iii) failure by the Company or any of its Restricted Subsidiaries to
comply with Section 4.07, 4.09, 4.10, 4.15 or 5.01 of the Indenture; (iv)
failure by the Company or any of its Restricted Subsidiaries for 30 days after
notice to the Company by the Trustee or the Holders of at least 25% in principal
amount of the Notes (including Additional Notes, if any) then outstanding voting
as a single class to comply with certain other agreements in the Indenture or
the Notes; (v) default under certain other agreements relating to Debt of the
Company which default is caused by a failure to pay principal of or premium, if
any, or interest on such Debt prior to the grace period provided in such Debt on
the date of such default (a "Payment Default") or results in the acceleration of
such Debt prior to its express maturity and, in each case, the principal amount
of any such Debt under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) certain
final judgments for the payment of money that remain undischarged for a period
of 60 days; or (vii) certain events of bankruptcy or insolvency with respect to
the Company or any of its Restricted Subsidiaries. If any Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding Notes may declare all the Notes to be
due and payable immediately. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, all
outstanding Notes will become due and payable without further action or notice.
Holders may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest. The Holders of a majority in aggregate
principal amount of the Notes then outstanding by notice to the Trustee may on
behalf of the Holders of all of the Notes waive any existing Default or Event of
Default and its consequences under the Indenture except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and the Company is required upon becoming aware
of any Default or Event of Default, to deliver to the Trustee a statement
specifying such Default or Event of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
A2-7
<PAGE>
15. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND
RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of
Notes under the Indenture, Holders of Restricted Global Notes and Restricted
Definitive Notes shall have all the rights set forth in the Registration Rights
Agreement dated as of January 28, 2000, between the Company and the parties
named on the signature pages thereof or, in the case of Additional Notes,
Holders of Restricted Global Notes and Restricted Definitive Notes shall have
the rights set forth in one or more registration rights agreements, if any,
between the Company and the other parties thereto, relating to rights given by
the Company to the purchasers of any Additional Notes (collectively, the
"Registration Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
19. GOVERNING LAW. This Note shall be governed by, and construed in
accordance with, the law of the State of New York.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Attention: Chief Financial Officer
A2-8
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date:
---------------------------
Your Signature:
-----------------------------
(Sign exactly as your name appears on the face of this Note)
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A2-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 or 4.15 of the Indenture, check the appropriate box
below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased: $_________
Date:_____________ Your Signature:_______________________________
(Sign exactly as your name appears on the face of this Note)
Tax Identification No:________________________
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A2-10
<PAGE>
SCHEDULE OF EXCHANGES OF REGULATION S TEMPORARY GLOBAL NOTE
The following exchanges of a part of this Regulation S Temporary
Global Note for an interest in another Global Note or for other Restricted
Global Notes for an interest in this Regulation S Temporary Global Note, have
been made:
<TABLE>
<CAPTION>
Amount of Principal Amount Signature of
decrease in Amount of increase of this Global authorized
Principal Amount in Principal Note following officer of
of this Global Amount of this such decrease Trustee or Note
Date of Exchange Note Global Note (or increase) Custodian
- ---------------- ---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
</TABLE>
A2-11
<PAGE>
EXHIBIT 4.13
FORM OF SERIES B NOTE
(Face of Note)
================================================================================
CUSIP/CINS_____________
12% Senior Notes due 2010
No. ___ $__________
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to _____________________________________________________________
or registered assigns,
the principal sum of _____________________________________________________
Dollars on February 15, 2010.
Interest Payment Dates: February 15 and August 15
Record Dates: February 1 and August 1
B1-1
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
BY:
-------------------------------------
Name:
Title:
BY:
-------------------------------------
Name:
Title:
Dated: ___________, 2000
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
United States Trust Company of New York,
as Trustee
By:
-------------------------------
Authorized Signatory
================================================================================
B1-2
<PAGE>
(Back of Note)
12% Senior Notes due 2010
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
B1-3
<PAGE>
Capitalized terms used herein shall have the meanings assigned to
them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. Covad Communications Group, Inc., a Delaware
corporation (the "Company"), promises to pay interest on the principal amount of
this Note at 12% per annum. The Company shall pay interest semi-annually on
February 15 and August 15, commencing on August 15, 2000, or if any such day is
not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the Closing
Date; PROVIDED that if there is no existing Default in the payment of interest,
and if this Note is authenticated between a record date referred to on the face
hereof and the next succeeding Interest Payment Date, interest shall accrue from
such next succeeding Interest Payment Date; PROVIDED, FURTHER, that the first
Interest Payment Date shall be August 15, 2000. The Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue principal and premium, if any, from time to time on demand at a rate
that is 1% per annum in excess of the rate then in effect; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the same rate to the extent lawful.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on February 1 or August 1 preceding the Interest
Payment Date, even if such Notes are cancelled after such record date and on or
before such Interest Payment Date, except as provided in Section 2.12 of the
Indenture with respect to defaulted interest. The Notes will be payable as to
principal, premium and interest at the office or agency of the Company
maintained for such purpose within or without the City and State of New York,
or, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their addresses set forth in the register of Holders,
and provided that payment by wire transfer of immediately available funds will
be required with respect to principal of and interest, premium on, all Global
Notes and all other Notes the Holders of which shall have provided wire transfer
instructions to the Company or the Paying Agent. Such payment shall be in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, United States Trust
Company of New York, the Trustee under the Indenture, will act as Paying Agent
and Registrar. The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company or any of its Subsidiaries may act in any such
capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated
as of January 28, 2000 (the "Indenture") between the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and
Holders are
B1-4
<PAGE>
referred to the Indenture and such Act for a statement of such terms. To the
extent any provision of this Note conflicts with the express provisions of the
Indenture, the provisions of the Indenture shall govern and be controlling. The
Notes are obligations of the Company limited to $475,000,000 in aggregate
principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to February 15,
2005. Thereafter, the Company shall have the option to redeem the Notes, in
whole or in part, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon, if
any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on February 15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2005....................................................... 106.00%
2006....................................................... 104.00%
2007....................................................... 102.00%
2008 and thereafter........................................ 100.00%
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time prior to February 15, 2003, the Company, at its option,
may use the net cash proceeds (but only to the extent such proceeds consist of
cash or Cash Equivalents) of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the Notes issued on the Issue Date under the Indenture at
a redemption price of 112.00% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of redemption; PROVIDED
that at least $276.25 million of the aggregate principal amount of the Notes
remains outstanding immediately after the occurrence of such redemption. In
order to effect the foregoing redemption, the Company must mail a notice of
redemption no later than 30 days after the related Public Equity Offering and
must consummate such redemption within 60 days of the closing of such Public
Equity Offering.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall not be
required to make mandatory redemption payments with respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be required
to make an offer (a "Change of Control Offer") to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (the "Change of Control
Payment"). Within 10 days following any Change of Control, the Company shall
mail a notice to each Holder setting forth the procedures governing the Change
of Control Offer as required by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall commence an offer to all
Holders of Notes (an "Asset Sale Offer") pursuant to Section 3.09 of the
Indenture to purchase the maximum principal amount of Notes (including any
Additional Notes) that may
B1-5
<PAGE>
be purchased out of the Excess Proceeds at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
and Additional Interest thereon, if any, to the date fixed for the closing of
such offer, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Notes (including any Additional Notes)
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the
Company (or such Restricted Subsidiary) may use such deficiency for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a PRO RATA basis. Holders of Notes that are the
subject of an offer to purchase will receive an Asset Sale Offer from the
Company prior to any related purchase date and may elect to have such Notes
purchased by completing the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes or
portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a period of 15 days
before a selection of Notes to be redeemed or during the period between a record
date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note will be
treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes (and Additional Notes, if any) voting as a single class, and any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Notes (and Additional Notes, if any) voting as a single class.
Without the consent of any Holder of a Note, the Indenture or the Notes may be
amended or supplemented to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in case of a merger or consolidation or sale of all or substantially
all of the Company's assets, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act or to provide
for the Issuance of Additional Notes in accordance with the limitations set
forth in the Indenture.
12. DEFAULTS AND REMEDIES. Events of Default include: (i) default
for 30 days in the payment when due of interest on the Notes (including any
Additional Interest); (ii) default in payment when due of principal of or
premium, if any, on the Notes when the same becomes due and payable at maturity,
upon redemption (including in connection with an offer to purchase) or
otherwise; (iii) failure by the Company or any of its Restricted Subsidiaries to
comply with Section 4.07, 4.09, 4.10, 4.15 or 5.01 of the
B1-6
<PAGE>
Indenture; (iv) failure by the Company or any of its Restricted Subsidiaries for
30 days after notice to the Company by the Trustee or the Holders of at least
25% in principal amount of the Notes (including Additional Notes, if any) then
outstanding voting as a single class to comply with certain other agreements in
the Indenture or the Notes; (v) default under certain other agreements relating
to Debt of the Company which default is caused by a failure to pay principal of
or premium, if any, or interest on such Debt prior to the grace period provided
in such Debt on the date of such default (a "Payment Default") or results in the
acceleration of such Debt prior to its express maturity and, in each case, the
principal amount of any such Debt under which there has been a Payment Default
or the maturity of which has been so accelerated, aggregates $5.0 million or
more; (vi) certain final judgments for the payment of money that remain
undischarged for a period of 60 days; or (vii) certain events of bankruptcy or
insolvency with respect to the Company or any of its Restricted Subsidiaries. If
any Event of Default occurs and is continuing, the Trustee or the Holders of at
least 25% in principal amount of the then outstanding Notes may declare all the
Notes to be due and payable immediately. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, all outstanding Notes will become due and payable without further
action or notice. Holders may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest. The Holders of a
majority in aggregate principal amount of the Notes then outstanding by notice
to the Trustee may on behalf of the Holders of all of the Notes waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of interest on,
or the principal of, the Notes. The Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required upon becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
15. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
B1-7
<PAGE>
17. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
18. GOVERNING LAW. This Note shall be governed by, and construed in
accordance with, the law of the State of New York.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Attention: Chief Financial Officer
B1-8
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date:
---------------------------
Your Signature:
-----------------------------
(Sign exactly as your name appears on
the face of this Note)
SIGNATURE GUARANTEE.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
B1-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 or 4.15 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased: $_________
Date:
---------------------------
Your Signature:
-----------------------------
(Sign exactly as your name appears on
the face of this Note)
Tax Identification No:
----------------------
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
B1-10
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE
The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a part
of another Global Note or Definitive Note for an interest in this Global Note,
have been made:
<TABLE>
<CAPTION>
Amount of Principal Amount Signature of
decrease in Amount of increase of this Global authorized
Principal Amount in Principal Note following officer of
of this Amount of this such decrease Trustee or Note
Date of Exchange Global Note Global Note (or increase) Custodian
- ---------------- ---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
</TABLE>
B1-11
<PAGE>
EXHIBIT 5.1
[IRELL & MANELLA LLP LETTERHEAD]
May 10, 2000
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Re: NEW 12% SENIOR NOTES DUE 2010
COVERED BY REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We are counsel to Covad Communications Group, Inc., a Delaware corporation
(the "Company"), in connection with the filing by the Company with the
Securities and Exchange Commission (the "Commission") of a registration
statement on Form S-4 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"). The Registration Statement relates to
the proposed issuance by the Company of $425 million in aggregate principal
amount of its new 12% Senior Notes due 2010, Series B (registered) (the "New
Notes") in connection with the proposed exchange of $1,000 principal amount of
the New Notes for each $1,000 principal amount of its outstanding 12% Senior
Notes due 2010, Series A (unregistered) (the "Old Notes"). The Old Notes are,
and the New Notes will upon issuance be, covered by that certain indenture dated
January 28, 2000 (the "Indenture") by and between the Company and The Bank of
New York, as trustee (the "Trustee"). This opinion letter is delivered in
accordance with the requirements of Item 601(b)(5) of Regulation S-K under the
Securities Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of: (i) the Registration
Statement, in the form filed with the Commission; (ii) the charter documents of
the Company, as currently in effect; (iii) the Indenture; (iv) the form of the
New Notes; and (v) resolutions of the Board of Directors of the Company relating
to, among other things, the issuance and exchange of the New Notes for the Old
Notes and the filing of the Registration Statement. We also have examined such
other documents as we have deemed necessary or appropriate as a basis for the
opinions set forth below.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents. As to certain facts
material to this opinion, we have relied without independent verification upon
oral or written statements and factual representations of officers and other
representatives of the Company and others.
<PAGE>
Covad Communications Group, Inc.
May 10, 2000
Page 2
Based upon the foregoing, and subject to the assumptions and limitations
set forth herein, we are of the opinion that, when (i) the Registration
Statement, as finally amended (including all necessary post-effective
amendments, if any), shall have become effective under the Securities Act and
(ii) the New Notes are duly executed, attested, issued and delivered by duly
authorized officers of the Company, and authenticated by the Trustee, all in
accordance with the terms of the Indenture and the prospectus contained in the
Registration Statement, against surrender and cancellation of a like principal
amount of Old Notes, the New Notes issued by the Company will be legally issued,
and the New Notes will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except to the
extent that enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance and other laws
relating to or affecting creditors' rights generally and (ii) general principles
of equity, whether such enforcement is considered in a proceeding in equity or
at law.
We observe that the Indenture and the New Notes purport to be governed by
the laws of the State of New York, and our opinion is accordingly limited to
such laws.
We have relied on the Form T-1 and the certificates delivered by the
Trustee as to the qualifications, authority, legal power and eligibility of the
Trustee to act as trustee under the Indenture and to perform in accordance with
the terms of the Indenture its duties thereunder.
This opinion is given in respect of the Indenture and the New Notes only,
and we express no opinion as to the legality, validity or binding effect of any
related document, instrument or agreement or any other matter beyond the matters
expressly set forth herein. This opinion speaks only as of its date, and we
affirmatively disclaim any obligation to update this opinion letter to disclose
to you facts, events or changes of law or interpretation of law occurring,
arising or coming to our attention after the date hereof.
This opinion is intended to be filed as an exhibit to the Registration
Statement for the benefit of the investors acquiring the New Notes to be issued
pursuant thereto and may not be otherwise used or relied upon and may not be
otherwise disclosed, quoted, filed with a governmental agency or otherwise
referred to without our prior written consent. However, we consent to the use of
our name under the caption "Legal Matters" in the Registration Statement and
prospectus and any amendments thereto. In giving such consent, we do not
<PAGE>
Covad Communications Group, Inc.
May 10, 2000
Page 3
admit that we are experts within the meaning of the Securities Act or the rules
and regulations thereunder or that this consent is required by Section 7 of the
Securities Act.
Very truly yours,
IRELL & MANELLA LLP
/s/ Irell & Manella LLP
MSJ/JCK/KI
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 21, 2000, except for Note 9, as to which the
date is March 20, 2000 in the Registration Statement (Form S-4) and related
Prospectus of Covad Communications Group, Inc. for the registration of
$425,000,000 of 12% Senior Notes due 2010, Series B.
/s/ Ernst & Young LLP
San Jose, California
May 9, 2000
<PAGE>
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
--------------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) _______
--------------------------
UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I. R. S. Employer
or organization Identification Number)
if not a U. S. national bank)
114 West 47th Street 10036-1532
New York, New York (Zip Code)
(Address of principal
executive offices)
--------------------------
Covad Communications Group, Inc.
(Exact name of OBLIGOR as specified in its charter)
Delaware
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
2330 Central Expressway 95050
Santa Clara, California (Zip code)
(Address of principal executive offices)
--------------------------
12% Senior Notes due 2010
(Title of the indenture securities)
===============================================================================
- 2 -
<PAGE>
GENERAL
1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System).
Federal Deposit Insurance Corporation, Washington, D. C.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
3,4,5,6,7,8,9,10,11,12,13,14 and 15.
The obligor is currently not in default under any of its outstanding
securities for which United States Trust Company of New York is Trustee.
Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and
15 of Form T-1 are not required under General Instruction B.
16. LIST OF EXHIBITS
T-1.1 -- Organization Certificate, as amended, issued by the State of New
York Banking Department to transact business as a Trust Company,
is incorporated by reference to Exhibit T-1.1 to Form T-1 filed
on September 15, 1995 with the Commission pursuant to the Trust
Indenture Act of 1939, as amended by the Trust Indenture Reform
Act of 1990 (Registration No.33-97056).
T-1.2 -- Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
- 3 -
<PAGE>
16. LIST OF EXHIBITS (continued)
T-1.4 -- The By-laws of the United States Trust Company of New York, as
amended, is incorporated by reference to Exhibit T-1.4 to Form
T-1 filed on September 15, 1995 with the Commission pursuant to
the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 (Registration No. 33-97056).
T-1.6 -- The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939, as amended by the Trust Indenture
Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the trustee
pursuant to law or the requirements of its supervising or
examining authority.
NOTE
As of March 23, 2000, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U. S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States
Trust Company of New York and its parent company, U. S. Trust Corporation.
In answering Item 2 in this statement of eligibility, as to matters
peculiarly within the knowledge of the obligor or its directors, the
trustee has relied upon information furnished to it by the obligor and will
rely on information to be furnished by the obligor and the trustee
disclaims responsibility for the accuracy or completeness of such
information.
---------------------
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, United States Trust Company of New York, a corporation organized
and existing under the laws of the State of New York, has duly caused this
statement of eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, and State of New
York, on the 23rd day of March, 2000.
UNITED STATES TRUST COMPANY OF
NEW YORK, Trustee
By: _______________________________________
Patricia Gallagher
Assistant Vice President
PST/pg(rv:052199)
<PAGE>
EXHIBIT T-1.6
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
September 1, 1995
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
By: /S/Gerard F. Ganey
--------------------------
Senior Vice President
<PAGE>
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
SEPTEMBER 30, 1999
($ IN THOUSANDS)
ASSETS
Cash and Due from Banks $ 193,236
Short-Term Investments 57,951
Securities, Available for Sale 489,135
Loans 2,423,223
Less: Allowance for Credit Losses 17,792
-----------
Net Loans 2,405,431
Premises and Equipment 56,406
Other Assets 123,784
-----------
TOTAL ASSETS $3,325,943
===========
LIABILITIES
Deposits:
Non-Interest Bearing $ 779,713
Interest Bearing 1,973,842
-----------
Total Deposits 2,753,555
Short-Term Credit Facilities 238,736
Accounts Payable and Accrued Liabilities 142,477
-----------
TOTAL LIABILITIES $3,134,768
===========
STOCKHOLDER'S EQUITY
Common Stock 14,995
Capital Surplus 53,041
Retained Earnings 124,916
Unrealized Loss on Securities
Available for Sale (Net of Taxes) (1,777)
--------------
TOTAL STOCKHOLDER'S EQUITY 191,175
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $3,325,943
I, Richard E. Brinkmann, Managing Director & Comptroller of the named bank do
hereby declare that this Statement of Condition has been prepared in conformance
with the instructions issued by the appropriate regulatory authority and is true
to the best of my knowledge and belief.
Richard E. Brinkmann, Managing Director & Controller
January 25, 2000
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
COVAD COMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE ITS NEW
12% SENIOR NOTES DUE 2010, SERIES B (REGISTERED)
FOR ANY AND ALL OUTSTANDING
12% SENIOR NOTES DUE 2010, SERIES A (UNREGISTERED)
PURSUANT TO THE PROSPECTUS, DATED __________, 2000.
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON [__________]
2000, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- -------------------------------------------------------------------------------
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
<S> <C> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY TO 4:30 PM: BY HAND DELIVERY AFTER 4:30 PM ON
EXPIRATION DATE:
United States Trust Company of United States Trust Company United States Trust Company
New York of New York of New York
P.O. Box 844, Cooper Station 111 Broadway, Lower Level 770 Broadway, 13th Floor
New York, New York 10276 New York, New York 10006 New York, New York 10003
Attn.: Corporate Trust Services Attn.: Corporate Trust Services Attn.: Corporate Trust Services
</TABLE>
For Information Call:
(800) 548-6565
Facsimile:
(212) 780-0592
(212) 420-6211
DELIVERY OF INSTRUMENTS TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
BY A METHOD NOT SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received the Prospectus,
dated [__________], 2000 (the "Prospectus") of Covad Communications Group, Inc.,
a Delaware corporation (the "Company"), and this Letter of Transmittal (this
"Letter of Transmittal"), which together constitute the Company's offer (the
"Exchange Offer") to exchange $1,000 in principal amount of its 12% Senior Notes
due 2010, Series B (Registered) (the "New Notes") for each $1,000 in principal
amount of its issued and outstanding 12% Senior Notes due 2010, Series A
(Unregistred) (the "Old Notes") from the holders thereof. Capitalized terms used
herein and not otherwise defined shall have the meanings herein as ascribed
thereto in the Prospectus.
1
<PAGE>
This Letter of Transmittal is to be used if certificates for the Old
Notes are to be forwarded herewith. If delivery of the Old Notes is to be made
through book-entry transfer into the Exchange Agent's account at The Depository
Trust Company ("DTC"), this Letter of Transmittal need not be delivered;
PROVIDED, HOWEVER, that tenders of the Old Notes must be effected in accordance
with DTC's Automated Tender Offer Program procedures and the procedures set
forth in the Prospectus under the caption "The Exchange Offer, Procedures for
Tendering" and ",Book-Entry Transfer; Delivery and Form."
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then interest ("Additional
Interest") will accrue on the Old Notes (in addition to the stated interest on
the Old Notes) from and including the date on which any such Registration
Default shall occur to but excluding the date on which all Registration Defaults
have been cured. Additional Interest will accrue at a rate of 0.50% per annum
over the rate at which interest is then otherwise accruing during the 90-day
period immediately following the occurrence of any Registration Default and
shall increase by 0.25% per annum at the end of each subsequent 90-day period,
but in no event shall such Additional Interest exceed 2.00% per annum. Holders
of Old Notes accepted for exchange will be deemed to have waived the right to
receive any other payments or accrued interest on the Old Notes.
The Company reserves the right, at any time or from time to time, to
extend the Exchange Offer at its discretion, in which event the term "Expiration
Date" shall mean the latest time and date to which the Exchange Offer is
extended. The Company shall notify the holders of the Old Notes of any extension
by means of a press release or other public announcement prior to 9:00 A.M., New
York City time, on the next business day after the previously scheduled
Expiration Date.
This Letter of Transmittal is to be completed by a holder of Old Notes if
certificates are to be forwarded herewith. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates and all other documents required by this Letter of Transmittal or
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's account at DTC (a "Book-Entry Confirmation") to the Exchange Agent on or
prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange Offer, Guaranteed
Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of
documents to DTC does not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
2
<PAGE>
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the certificate numbers and principal
amount of Old Notes should be listed on a separate signed schedule affixed
hereto.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES 1 2 3
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AGGREGATE PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) AMOUNT OF PRINCIPAL
(PLEASE FILL IN, IF BLANK) CERTIFICATE NUMBER(S) OLD NOTE(S) AMOUNT TENDERED*
------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
Total
------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unless otherwise indicated in this column, a holder will be deemed
to have transferred ALL of the Old Notes represented by the Old Notes
indicated in column 2. See Instruction 2. Old Notes tendered hereby must
be in denominations of principal amount of $1,000 and any integral
multiple thereof. See Instruction 1.
-----------------------------------------------------------------------------
TM CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Registered Holder(s)
-------------------------------------
Window Ticket Number (if any)
-------------------------------------
Date of Execution of Notice of Guaranteed Delivery
-----------------
Name of Institution which guaranteed delivery
-----------------------
TM CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
------------------------------------------------------------------------
Address:
---------------------------------------------------------------------
3
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY AND FOLLOW THE INSTRUCTIONS
BEGINNING ON PAGE 6 HEREOF.
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving each New Note, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes and that neither the holder of such Old Notes nor
any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
BY TENDERING EXISTING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (ii) ANY NEW NOTES TO BE RECEIVED BY THE UNDERSIGNED
ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (iii) THE UNDERSIGNED
HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN A
DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF NEW NOTES TO BE
RECEIVED IN THE EXCHANGE OFFER, AND (iv) IF THE UNDERSIGNED IS NOT A
BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE
IN, A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF SUCH NEW NOTES.
BY TENDERING EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS
LETTER OF TRANSMITTAL, A HOLDER OF EXISTING NOTES WHICH IS A BROKER-DEALER
REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY
THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE
COMMISSION TO THIRD PARTIES, THAT SUCH EXISTING NOTES WERE ACQUIRED BY SUCH
BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR
OTHER TRADING ACTIVITIES (SUCH A BROKER-DEALER WHICH IS TENDERING EXISTING NOTES
IS HEREIN REFERRED TO AS A "PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER
THE PROSPECTUS (AS, AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH NEW
NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH
PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE
REGISTRATION RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR
SUPPLEMENTED FROM TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER IN
CONNECTION WITH RESALES OF NEW NOTES RECEIVED IN EXCHANGE FOR EXISTING NOTES,
WHERE SUCH EXISTING NOTES WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING
ACTIVITIES, FOR A PERIOD OF ONE YEAR FROM THE EFFECTIVE DATE OF THE EXCHANGE
OFFER REGISTRATION STATEMENT ON FORM S-4 (I.E. THROUGH __________, 2001) OR, IF
EARLIER, UNTIL ALL SUCH NEW NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING
BROKER-DEALER. IN THAT REGARD, EACH PARTICIPATING BROKER-DEALER, BY TENDERING
SUCH EXISTING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON
RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE
DISCOVERY OF ANY FACT WHICH MAKES ANY
4
<PAGE>
STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY
MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED THEREIN, IN LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF
CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH
PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF NEW NOTES PURSUANT TO THE
PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO
CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE NEW NOTES MAY BE RESUMED, AS THE CASE MAY BE.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer, Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at DTC. Similarly,
unless otherwise indicated under the box entitled "Special Delivery
Instructions" below, please send the New Notes (and, if applicable, substitute
certificates representing Old Notes for any Old Notes not exchanged) to the
undersigned at the address shown above in the box entitled "Description of Old
Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD
NOTES" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE
TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
5
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Old Notes; Guaranteed Delivery
Procedures.
This Letter of Transmittal is to be completed by holders of Old Notes if
certificates are to be forwarded herewith. Certificates for all physically
tendered Old Notes as well as a properly completed and duly executed Letter of
Transmittal (or manually signed facsimile hereof) and any other documents
required by this Letter of Transmittal must be received by the Exchange Agent at
the address set forth herein on or prior to the Expiration Date, or the
tendering holder must comply with the guaranteed delivery procedures set forth
below. Old Notes tendered hereby must be in denominations of principal amount of
$1,000 and any integral multiple thereof.
Holders whose certificates for Old Notes are not immediately available or
who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer of the Old Notes into the Exchange Agent's
account at DTC on a timely basis, may tender their Old Notes pursuant to the
guaranteed delivery procedures set forth in "The Exchange Offer, Guaranteed
Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i)
such tender must be made through an Eligible Institution (as defined below),
(ii) prior to the Expiration Date, the Exchange Agent must receive from such
Eligible Institution a Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the Expiration Date, the
certificates for all physically tendered Old Notes and any other documents
required by this Letter of Transmittal, or a Book-Entry Confirmation, as the
case may be, will be delivered by the Eligible Institution to the Exchange
Agent, and (iii) the Exchange Agent must receive certificates for all physically
tendered Old Notes, in proper form for transfer, and all other documents
required by this Letter of Transmittal, or a Book-Entry Confirmation, as the
case may be, within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
The method of delivery of this Letter of Transmittal, the Old Notes and
all other required documents is at the election and risk of the tendering
holders, but the delivery will be deemed made only when actually received or
confirmed by the Exchange Agent. If Old Notes are sent by mail, it is suggested
that the mailing be made sufficiently in advance of the Expiration Date to
permit the delivery to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date.
See "The Exchange Offer" section in the Prospectus.
2. Partial Tenders (not applicable to holders who tender by book-entry
transfer).
If less than all of the Old Notes evidenced by a submitted certificate
are to be tendered, the tendering holder(s) should fill in the aggregate
principal amount of Old Notes to be tendered in the box above entitled
"Description of Old Notes, Principal Amount Tendered." A reissued certificate
representing the balance of untendered Old Notes will be sent to such tendering
holder, unless otherwise provided in the appropriate box on this Letter of
Transmittal, promptly after the Expiration Date. All of the Old Notes delivered
to the Exchange Agent will be deemed to have been tendered unless otherwise
indicated.
3. Signatures on this Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures.
If this Letter of Transmittal is signed by the registered holder of the
Old Notes tendered hereby, the signature must correspond exactly with the name
as written on the face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
certificates.
When this Letter of Transmittal is signed by the registered holder or
holders of the Old Notes specified herein and tendered hereby, no endorsements
of certificates or separate bond powers are required. If, however, the New
6
<PAGE>
Notes are to be issued, or any untendered Old Notes are to be reissued, to a
person other than the registered holder, then endorsements of any certificates
transmitted hereby or separate bond powers are required. Signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s) and signatures on such certificate(s)
must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
Endorsements on certificates for Old Notes or signatures on bond powers
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States or by such other Eligible
Institution within the meaning of Rule 17(A)(d)-15 under the Securities Exchange
Act of 1934, as amended (each an "Eligible Institution").
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of Old Notes (which term, for purposes of the Exchange Offer, includes
any participant in the DTC system whose name appears on a security position
listing as the holder of such Old Notes) tendered who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
this Letter of Transmittal, or (ii) for the account of an Eligible Institution.
4. Special Issuance and Delivery Instructions.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter of
Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. Holders tendering Old Notes by book-entry transfer may request that
Old Notes not exchanged be credited to such account maintained at DTC as such
holder may designate hereon. If no such instructions are given, such Old Notes
not exchanged will be returned to the name and address of the person signing
this Letter of Transmittal.
5. Tax Identification Number.
Federal income tax law generally requires that a tendering holder whose
Old Notes are accepted for exchange must provide the Company (as payor) with
such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form
W-9 below, which in the case of a tendering holder who is an individual, is his
or her social security number. If the Company is not provided with the current
TIN or an adequate basis for an exemption, such tendering holder may be subject
to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery
to such tendering holder of New Notes may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, or (ii) the
holder has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends, or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status included herewith. If the Old Notes are in more than one name
or are not in the name of the actual owner, such holder should consult the W-9
Guidelines for information on which TIN to report. If such holder does not have
a
7
<PAGE>
TIN, such holder should consult the W-9 Guidelines for instructions on applying
for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied
for" in lieu of its TIN. Note: Checking this box and writing "applied for" on
the form means that such holder has already applied for a TIN or that such
holder intends to apply for one in the near future. If such holder does not
provide its TIN to the Company within 60 days, backup withholding will begin and
continue until such holder furnishes its TIN to the Company.
6. Transfer Taxes.
The Company will pay all transfer taxes, if any, applicable to the
transfer of Old Notes to it or its order pursuant to the Exchange Offer. If,
however, New Notes and/or substitute Old Notes not exchanged are to be delivered
to, or are to be registered or issued in the name of, any person other than the
registered holder of the Old Notes tendered hereby, or if tendered Old Notes are
registered in the name of any person other than the person signing this Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
transfer of Old Notes to the Company or its order pursuant to the Exchange
Offer, the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes specified in this Letter of
Transmittal.
7. Waiver of Conditions.
The Company reserves the absolute right to waive satisfaction of any or
all conditions enumerated in the Prospectus.
8. No Conditional Tenders.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to reserve notice of the acceptance of their
Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. Mutilated, Lost, Stolen or Destroyed Old Notes.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. Requests for Assistance or Additional Copies.
Questions relating to the procedure for tendering may be directed to the
Exchange Agent, at the address and telephone number indicated above. To obtain
additional copies of the Prospectus and this Letter of Transmittal, you should
contact Georgeson Shareholder Communications, Inc., the Information Agent, at:
17 STATE STREET
NEW YORK, NEW YORK 10004
Tel: (800) 223-2064
8
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------- -----------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4) (See Instructions 3 and 4)
<S> <C>
To be completed ONLY if certificates for Old To be completed ONLY if certificates for
Notes not exchanged and/or New Notes are to be Old Notes not exchanged and/or New Notes are to
issued in the name of and sent to someone other be issued in the name of and sent to someone
than the person or persons whose signature(s) other than the person or persons whose
appear(s) on this Letter of Transmittal above, or signature(s) appear(s) on this Letter of
if Old Notes delivered by book-entry transfer which Transmittal below.
are not accepted for exchange are to be returned by
credit to an account maintained at DTC other than Mail: New Notes and/or Old Notes to:
the account indicated below.
Name(s)
--------------------------------------------
Issue: New Notes and/or Old Notes to: (Please Type or Print)
---------------------------------------------------
Name(s) (Please Type or Print)
---------------------------------------------- Address
(Please Type or Print) --------------------------------------------
---------------------------------------------------
----------------------------------------------------- (Zip Code)
(Please Type or Print)
Address
----------------------------------------------
-----------------------------------------------------
(Zip Code)
(Complete Substitute Form W-9)
Credit unexchanged Old Notes for "Debentures"
delivered by book-entry transfer to the DTC account set
forth below.
(DTC Account Number, if applicable)
--------------------------------------------------------- -----------------------------------------------------
</TABLE>
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE
CERTIFICATES FOR OLD NOTES) AND ALL OTHER REQUIRED DOCUMENTS HEREBY, A
BOOK-ENTRY CONFIRMATION OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
9
<PAGE>
- ------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9)
Dated: ,2000
------------------------------- -------------------------------
x ,2000
------------------------------- -------------------------------
x ,2000
------------------------------- -------------------------------
Signature(s) of Owner(s) Date
Area Code and Telephone Number
If a holder is tendering any Old Notes this Letter of Transmittal must be
signed by the registered holder(s) as the name(s) appear(s) on the
certificate(s) of the Old Notes by any person(s) authorized to become registered
holder(s) by endorsements and documents transmitted herewith. If signature is by
a trustee, executor, administrator, guardian, officer or other person acting in
a fiduciary or representative capacity, please set forth full title. See
Instruction 3.
Name(s):
----------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Please Type or Print)
Capacity:
--------------------------------------------------------------
Address:
--------------------------------------------------------------
(Including Zip Code)
SIGNATURE GUARANTEE
(if requested by Instruction 3)
Signature Guaranteed by an Eligible Institution
------------------------
- ------------------------------------------------------------------------------
(Title)
- ------------------------------------------------------------------------------
(Name and Firm)
- ------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
- -------------------------------------------------------------------------------
To Be Completed by All Tendering Noteholders
(See Instruction 5)
Sign this Substitute Form W-9 in Addition to the Signature(s) Required Above
PAYOR'S NAME: THE UNITED STATES TRUST COMPANY OF NEW YORK
- -------------------------------------------------------------------------------
SUBSTITUTE
Form W-9 Part 1-Please provide your TIN TIN
-------------
(either your social security number or
employer identification number) in the box to the
right and certify by signing and dating below.
Department of the
Treasury Internal
Revenue Service Part 2-Awaiting TIN 0
SIGN THIS FORM and THE CERTIFICATION OF
AWAITING TAXPAYER IDENTIFICATION NUMBER BELOW.
Payor's Request for
Taxpayer
Identification Number Part 3-Exempt 0
(TIN) See enclosed Guidelines for additional
and Certification information
and SIGN THIS FORM.
- -------------------------------------------------------------------------------
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) the number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me); or
(2) I am not subject to backup withholding because (i) I am exempt from
backup withholding, or (ii) I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result
of a failure to report all interest or dividends, or (iii) the IRS has
notified me that I am no longer subject to backup withholding; and
(3) any other information provided on this form is true and correct.
CERTIFICATION INSTRUCTIONS --You must cross out item (iii) in (2) above if you
have been notified by the IRS that you are subject to backup withholding because
of underreporting interest or dividends on your tax return and you have not been
notified by the IRS that you are no longer subject to backup withholding.
- -------------------------------------------------------------------------------
SIGNATURE DATE
---------------------------------- ------------------------
- -------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE
BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
- -------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all payments made to me on account of the New Notes shall be retained until I
provide a taxpayer identification number to the Exchange Agent and that, if I do
not provide my taxpayer identification number within 60 days, such retained
amounts shall be remitted to the Internal Revenue Service as backup withholding
and 31% of all reportable payments made to me thereafter will be withheld and
remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
SIGNATURE DATE
---------------------------------- ------------------------
- -------------------------------------------------------------------------------
11
<PAGE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
FOR ADDITIONAL INFORMATION.
12
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN - The Taxpayer Identification Number for most individuals is your
social security number. Refer to the following chart to determine the
appropriate number:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
GIVE THE GIVE THE EMPLOYER
FOR THIS TYPE OF SOCIAL SECURITY FOR THIS TYPE OF IDENTIFICATION
ACCOUNT NUMBER OF ACCOUNT NUMBER OF
---------------------- ------------------------ --------------------- ---------------------
<S> <C> <C> <C> <C>
1. Individual The individual 6. Sole proprietorship The owner (3)
2. Two or more The actual owner of 7. A valid trust, Legal entity (4)
individuals (joint the account or, if estate or pension
account) combined funds, the trust
first individual on
the account (1)
3. Custodian account of The minor (2) 8. Corporate The corporation
a minor (Uniform
Gift to Minors Act)
4. a. The unusual The grantor-trustee (1) 9. Association, club, The organization
revocable religious,
savings trust charitable,
(grantor is also educational or
trustee) other tax-exempt
organization
b. So-called trust The actual owner (1) 10. Partnership The partnership
account that is
not a legal or
valid trust under
state law
5. Sole proprietorship The owner (3) 11. A broker or The broker or
registered nominee nominee
12. Account with the The public entity
Department of
Agriculture
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or
"doing business as" name. You may use either your Social Security number
or your employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
B. Exempt Payees. The following lists exempt payees. If you are exempt, you
must nonetheless complete the form and provide your TIN in order to
establish that you are exempt. Check the box in Part 3 of the form, sign
and date the form.
For this purpose, Exempt Payees include: (1) a corporation; (2) an
organization exempt from tax under section 501(a), or an individual
retirement plan (IRA) or a custodial account under section 403(b)(7); (3)
the United States or any of its agencies or instrumentalities; (4) a
state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities; (5) a foreign
government or any of its political subdivisions, agencies or
instrumentalities; (6) an international organization or any of its
agencies or instrumentalities; (7) a foreign central bank of issue; (8) a
dealer in securities or commodities
13
<PAGE>
required to register in the United States or a possession of the United
States; (9) a real estate investment trust; (10) an entity registered at
all times during the tax year under the Investment Company Act of 1940;
(11) a common trust fund operated by a bank under section 584(a); and
(12) a financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know
your number, obtain Form SS-5, application for a Social Security Number,
or Form SS-4, Application for Employer Identification Number, at the
local office of the Social Security Administration or the Internal
Revenue Service and apply for a number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payors who must
report the payments to IRS. IRS uses the numbers for identification
purposes. Payors must be given the numbers whether or not recipients are
required to file tax returns. Payors must generally withhold 31% of
taxable-interest, dividend, and certain other payments to a payee who
does not furnish a taxpayer identification number. Certain penalties may
also apply.
E. Penalties
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.
If you fail to furnish your taxpayer identification number to a payor,
you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. If you
fail to include any portion of an includible payment for interest,
dividends, or patronage dividends in gross income, such failure will be
treated as being due to negligence and will be subject to a penalty of 5%
on any portion of an under-payment attributable to that failure unless
there is clear and convincing evidence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.
If you make a false statement with no reasonable basis which results in
no imposition of backup withholding, you are subject to a penalty of
$500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
14
<PAGE>
EXHIBIT 99.2
COVAD COMMUNICATIONS GROUP, INC.
NOTICE OF GUARANTEED DELIVERY
This form or one substantially equivalent hereto must be used to accept the
offer for all outstanding 12% Senior Notes due 2009 (the "Old Notes") of Covad
Communications Group, Inc. (the "Company") in exchange for the Company's 12%
Senior Notes due 2009 made pursuant to the prospectus, dated April 22, 1999 (the
"Prospectus"), and the related letter of transmittal (the "Letter of
Transmittal"), if (i) certificates for Old Notes are not immediately available,
(ii) the Old Notes, the Letter of Transmittal and all other required documents
cannot be delivered or transmitted by facsimile transmission, mail or hand
delivery to The United States Trust Company of New York (the "Exchange Agent")
as set forth below on or prior to 5:00 P.M., New York City time, on the
Expiration Date, or (iii) the procedures for delivery of the Old Notes through
book-entry transfer into the Exchange Agent's account at The Depository Trust
Company ("DTC") in accordance with DTC's Automated Tender Offer Program cannot
be completed on a timely basis. See "The Exchange Offer,Procedures for
Tendering" section in the Prospectus. Capitalized terms not defined herein are
defined in the Prospectus.
<TABLE>
<CAPTION>
UNITED STATES TRUST COMPANY OF NEW YORK
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY TO 4:30 PM: BY HAND DELIVERY AFTER 4:30 PM ON
EXPIRATION DATE:
<S> <C> <C>
United States Trust Company of United States Trust Company of United States Trust Company of
New York New York New York
P.O. Box 844, Cooper Station 111 Broadway, Lower Level 770 Broadway, 13th Floor
New York, New York 10276 New York, New York 10006 New York, New York 10003
Attn.: Corporate Trust Services Attn.: Corporate Trust Services Attn.: Corporate Trust Services
FACSIMILE:
FOR INFORMATION CALL: (212) 780-0592
(800) 548-6565 (212) 420-6211
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
1
<PAGE>
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the Letter of
Transmittal, the undersigned hereby tenders to the Company the principal amount
of Old Notes set forth below, pursuant to the guaranteed delivery procedures
described in "The Exchange Offer,Guaranteed Delivery Procedures" section of the
Prospectus.
<TABLE>
<S> <C>
- ----------------------------------------------------- -----------------------------------------------------
Principal Amount of Old Notes Tendered:1 PLEASE SIGN HERE
$ X
------------------------------------------------ ---------------------- ----------------------
X
----------------------- ----------------------
Signature(s) of Owner(s) or Date
Authorized Signatory
Certificate Nos.
(if available): Area Code and Telephone Number:
---------------------------------- -----------------
Total Principal Amount Represented by Old Notes Must be signed by the holder(s) of the Old
Certificate(s): Notes as their name(s) appear(s) on certificates
for Old Notes or on a security position listing, or
by person(s) authorized to become registered
$ holder(s) by endorsement and documents transmitted
------------------------------------------------ with this Notice of Guaranteed Delivery. If
signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person
acting in a fiduciary or representative capacity,
such person must set forth his or her full title
below.
If Old Notes will be delivered by book-entry Please print name(s) and address(es)
transfer into Exchange Agent's account with The Name(s):
Depository Trust Company, provide account number: ------------------------------------------------
------------------------------------------------
------------------------------------------------
Capacity:
------------------------------------------------
Address(es):
Account Number:
--------------------------------- ---------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
All authority herein conferred or agreed to be conferred shall survive the death
or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
- --------------------------------------------------------------------------------
- ------------
1Must be in denominations of principal amount of $1,000 and any integral
multiple thereof.
2
<PAGE>
GUARANTEE
The undersigned, an Eligible Institution within the meaning of Rule
17(A)(d)-15 under the Securities Exchange Act of 1934, as amended, hereby
guarantees that (i) the certificates representing the principal amount of Old
Notes tendered hereby, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or a manually signed
facsimile thereof), any required signature guarantee and any other documents
required by the Letter of Transmittal, or (ii) timely confirmation of the
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC
pursuant to the procedures set forth in "The Exchange Offer, Book-Entry
Transfer; Delivery and Form" section of the Prospectus, will be received by the
Exchange Agent at the address set forth above, no later than three New York
Stock Exchange trading days after the date of execution hereof.
<TABLE>
<S> <C>
---------------------------------------------------- ----------------------------------------------------
---------------------------------------------------- ----------------------------------------------------
NAME OF FIRM AUTHORIZED SIGNATURE
---------------------------------------------------- ----------------------------------------------------
ADDRESS TITLE
Name:
---------------------------------------------------- ---------------------------------------------
ZIP CODE (PLEASE TYPE OR PRINT)
Area Code & Telephone No. Dated:
------------------------- ------------------------------------------
- -------------------------------------------------------- -----------------------------------------------------
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
<PAGE>
EXHIBIT 99.3
May __, 2000
EXCHANGE AGENT AGREEMENT
United States Trust Company of New York
P.O. Box 844, Cooper Station
New York, New York 10276
Ladies and Gentlemen:
Covad Communications Group, Inc. (the "Company") proposes to
make an offer (the "Exchange Offer") to exchange its 12% Senior Notes due 2010,
Series A (the "Old Securities") for its 12% Senior Notes due 2010, Series B (the
"New Securities"). The terms and conditions of the Exchange Offer as currently
contemplated are set forth in a prospectus, dated March __, 1999 (the
"Prospectus"), proposed to be distributed to all record holders of the Old
Securities. The Old Securities and the New Securities are collectively referred
to herein as the "Securities."
The Company hereby appoints The United States Trust Company of
New York to act as exchange agent (the "Exchange Agent") in connection with the
Exchange Offer. References hereinafter to "you" shall refer to The United States
Trust Company of New York.
The Exchange Offer is expected to be commenced by the Company
on or about _______, 2000. The Letter of Transmittal accompanying the Prospectus
(or in the case of book entry securities, the ATOP system) is to be used by the
holders of the Old Securities to accept the Exchange Offer and contains
instructions with respect to the delivery of certificates for Old Securities
tendered in connection therewith.
The Exchange Offer shall expire at 5:00 P.M., New York City
time, on __________ or on such later date or time to which the Company may
extend the Exchange Offer (the "Expiration Date"). Subject to the terms and
conditions set forth in the Prospectus, the Company expressly reserves the right
to extend the Exchange Offer from time to time and may extend the Exchange Offer
by giving oral (confirmed in writing) or written notice to you before 9:00 A.M.,
New York City time, on the business day following the previously scheduled
Expiration Date.
The Company expressly reserves the right to amend or terminate
the Exchange Offer, and not to accept for exchange any Old Securities not
theretofore accepted for exchange, upon the occurrence of any of the conditions
of the Exchange Offer specified in the Prospectus under the caption "The
Exchange Offer -- Certain Conditions to the Exchange Offer." The Company will
give oral (confirmed in writing)
<PAGE>
or written notice of any amendment, termination or nonacceptance to you as
promptly as practicable.
In carrying out your duties as Exchange Agent, you are to act
in accordance with the following instructions:
1. You will perform such duties and only such duties as are specifically
set forth in the section of the Prospectus captioned "The Exchange Offer" or as
specifically set forth herein; PROVIDED, HOWEVER, that in no way will your
general duty to act in good faith be discharged by the foregoing.
2. You will establish an account with respect to the Old Securities at The
Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of the Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Old Securities by causing
the Book-Entry Transfer Facility to transfer such Old Securities into your
account in accordance with the Book-Entry Transfer Facility's procedure for such
transfer.
3. You are to examine each of the Letters of Transmittal and certificates
for Old Securities (or confirmation of book-entry transfer into your account at
the Book-Entry Transfer Facility) and any other documents delivered or mailed to
you by or for holders of the Old Securities to ascertain whether: (i) the
Letters of Transmittal and any such other documents are duly executed and
properly completed in accordance with instructions set forth therein and (ii)
the Old Securities have otherwise been properly tendered. In each case where the
Letter of Transmittal or any other document has been improperly completed or
executed or any of the certificates for Old Securities are not in proper form
for transfer or some other irregularity in connection with the acceptance of the
Exchange Offer exists, you will endeavor to inform the presenters of the need
for fulfillment of all requirements and to take any other action as may be
necessary or advisable to cause such irregularity to be corrected.
4. With the approval of the President, Senior Vice President, Executive
Vice President, or any Vice President of the Company (such approval, if given
orally, to be confirmed in writing) or any other party designated by such an
officer in writing, you are authorized to waive any irregularities in connection
with any tender of Old Securities pursuant to the Exchange Offer.
5. Tenders of Old Securities may be made only as set forth in the Letter of
Transmittal and in the section of the Prospectus captioned "The Exchange Offer
- -- Procedures for Tendering Old Notes", and Old Securities shall be considered
properly tendered to you only when tendered in accordance with the procedures
set forth therein.
Notwithstanding the provisions of this paragraph 5, Old
Securities which the President, Senior Vice President, Executive Vice President,
or any Vice President of
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the Company shall approve as having been properly tendered shall be considered
to be properly tendered (such approval, if given orally, shall be confirmed in
writing).
6. You shall advise the Company with respect to any Old Securities received
subsequent to the Expiration Date and accept its instructions with respect to
disposition of such Old Securities.
7. You shall accept tenders:
(a) in cases where the Old Securities are registered in two or more
names only if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only when
proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Old Securities
provided that customary transfer requirements, including any applicable transfer
taxes, are fulfilled.
You shall accept partial tenders of Old Securities where so indicated
and as permitted in the Letter of Transmittal and deliver certificates for Old
Securities to the transfer agent for split-up and return any untendered Old
Securities to the holder (or such other person as may be designated in the
Letter of Transmittal) as promptly as practicable after expiration or
termination of the Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will notify you (such notice, if given orally, to be
confirmed in writing) of its acceptance, promptly after the Expiration Date, of
all Old Securities properly tendered and you, on behalf of the Company, will
exchange such Old Securities for New Securities and cause such Old Securities to
be cancelled. Delivery of New Securities will be made on behalf of the Company
by you at the rate of $1,000 principal amount of New Securities for each $1,000
principal amount of the corresponding series of Old Securities tendered promptly
after notice (such notice if given orally, to be confirmed in writing) of
acceptance of said Old Securities by the Company; provided, however, that in all
cases, Old Securities tendered pursuant to the Exchange Offer will be exchanged
only after timely receipt by you of certificates for such Old Securities (or
confirmation of book-entry transfer into your account at the Book-Entry Transfer
Facility), a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) with any required signature guarantees and any other required
documents. You shall issue New Securities only in denominations of $1,000 or any
integral multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and upon the conditions set forth in the Prospectus and the
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Letter of Transmittal, Old Securities tendered pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date.
10. The Company shall not be required to exchange any Old Securities
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Old Securities
tendered shall be given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Old Securities tendered because of an invalid
tender, the occurrence of certain other events set forth in the Prospectus under
the caption "The Exchange Offer -- Certain Conditions to the Exchange Offer" or
otherwise, you shall as soon as practicable after the expiration or termination
of the Exchange Offer return those certificates for unaccepted Old Securities
(or effect appropriate book-entry transfer), together with any related required
documents and the Letters of Transmittal relating thereto that are in your
possession, to the persons who deposited them.
12. All certificates for reissued Old Securities, unaccepted Old Securities
or for New Securities shall be forwarded by first-class mail.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank or other persons or
to engage or utilize any person to solicit tenders.
14. As Exchange Agent hereunder you:
(a) shall have no duties or obligations other than those specifically
set forth herein or as may be subsequently agreed to in writing by you and the
Company;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness of any of
the certificates or the Old Securities represented thereby deposited with you
pursuant to the Exchange Offer, and will not be required to and will make no
representation as to the validity, value or genuineness of the Exchange Offer;
(c) shall not be obligated to take any legal action hereunder
which might in your reasonable judgment involve any expense or liability, unless
you shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you to be
genuine and to have been signed by the proper party or parties;
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(e) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution and
validity and effectiveness of its provisions, but also as to the truth and
accuracy of any information contained therein, which you shall in good faith
believe to be genuine or to have been signed or represented by a proper person
or persons;
(f) may rely on and shall be protected in acting upon written or oral
instructions from any officer of the Company;
(g) may consult with your counsel with respect to any questions
relating to your duties and responsibilities and the advice or reasonable
written opinion of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted to be taken by
you hereunder in good faith and in accordance with the advice or opinion of such
counsel; and
(h) shall not advise any person tendering Old Securities pursuant to
the Exchange Offer as to the wisdom of making such tender or as to the market
value or decline or appreciation in market value of any Old Securities.
15. You shall take such action as may from time to time be requested by the
Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, Letter of Transmittal and the
Notice of Guaranteed Delivery (as defined in the Prospectus) or such other forms
as may be approved from time to time by the Company, to all persons requesting
such documents and to accept and comply with telephone requests for information
relating to the Exchange Offer, provided that such information shall relate only
to the procedures for accepting (or withdrawing from) the Exchange Offer. The
Company will furnish you with copies of such documents at your request. All
other requests for information relating to the Exchange Offer shall be directed
to the Company, Attention: Dhruv Khanna.
16. You shall advise by facsimile transmission, e-mail, or telephone,
and promptly thereafter confirm in writing to Meredith S. Jackson, of Irell &
Manella, LLP, and Dhruv Khanna of the Company and such other person or persons
as it may request, daily (and more frequently during the week immediately
preceding the Expiration Date and if otherwise requested) up to and including
the Expiration Date, as to the number of Old Securities which have been tendered
pursuant to the Exchange Offer and the items received by you pursuant to this
Agreement, separately reporting and giving cumulative totals as to items
properly received and items improperly received. In addition, you will also
inform, and cooperate in making available to, the Company or any such other
person or persons upon oral request made from time to time prior to the
Expiration Date of such other information as it or he or she reasonably
requests. Such cooperation shall include, without limitation, the granting by
you to the Company and such person as the Company may request of access to those
persons on your staff who are responsible for receiving tenders, in order to
ensure that immediately prior to the Expiration Date the Company shall have
received
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<PAGE>
information in sufficient detail to enable it to decide whether to extend the
Exchange Offer. You shall prepare a final list of all persons whose tenders were
accepted, the aggregate principal amount of Old Securities tendered, the
aggregate principal amount of Old Securities accepted and deliver said list to
the Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery shall be
stamped by you as to the date and the time of receipt thereof and shall be
preserved by you for a period of time at least equal to the period of time you
preserve other records pertaining to the transfer of securities. You shall
dispose of unused Letters of Transmittal and other surplus materials by
returning them to the Company.
18. You hereby expressly waive any lien, encumbrance or right of set-off
whatsoever that you may have with respect to funds deposited with you for the
payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder.
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter of
Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus and
the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except with
respect to the duties, liabilities and indemnification of you as Exchange Agent,
which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you harmless in
your capacity as Exchange Agent hereunder against any loss, liability, cost or
expense, including reasonable attorneys' fees and expenses, arising out of or in
connection with any act, omission, delay or refusal made by you in reliance upon
any signature, endorsement, assignment, certificate, order, request, notice,
instruction or other instrument or document reasonably believed by you in good
faith to be valid, genuine and sufficient and in accepting any tender or
effecting any transfer of Old Securities reasonably believed by you in good
faith to be authorized, and in delaying or refusing in good faith to accept any
tenders or effect any transfer of Old Securities; provided, however, that the
Company shall not be liable for indemnification or otherwise for any loss,
liability, cost or expense to the extent arising out of your gross negligence or
willful misconduct. In no case shall the Company be liable under this indemnity
with respect to any claim against you unless the Company shall be notified by
you, by letter or by facsimile confirmed by letter, of the written assertion of
a claim against you or of any other action commenced against you, promptly after
you shall have received any such written assertion or notice of commencement of
action. The Company shall be entitled to participate at its own expense in the
defense of any such claim or other action, and, if the
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Company so elects, the Company shall assume the defense of any suit brought to
enforce any such claim. In the event that the Company shall assume the defense
of any such suit, the Company shall not be liable for the fees and expenses of
any additional counsel thereafter retained by you so long as the Company shall
retain counsel reasonably satisfactory to you to defend such suit, and so long
as you have not determined, in your reasonable judgment, that a conflict of
interest exists between you and the Company.
22. You shall arrange to comply with all requirements under the tax laws of
the United States, including those relating to missing Tax Identification
Numbers, and shall file any appropriate reports with the Internal Revenue
Service. The Company understands that you are required to deduct 31% on payments
to holders who have not supplied their correct Taxpayer Identification Number or
required certification. Such funds will be turned over to the Internal Revenue
Service in accordance with applicable regulations.
23. You shall deliver or cause to be delivered, in a timely manner to each
governmental authority to which any transfer taxes are payable in respect of the
exchange of Old Securities, your check in the amount of all transfer taxes so
payable, and the Company shall reimburse you for the amount of any and all
transfer taxes payable in respect of the exchange of Old Securities; provided,
however, that you shall reimburse the Company for amounts refunded to you in
respect of your payment of any such transfer taxes, at such time as such refund
is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder shall
be construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such state,
and without regard to conflicts of law principles, and shall inure to the
benefit of, and the obligations created hereby shall be binding upon, the
successors and assigns of each of the parties hereto.
25. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
26. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
27. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to be
charged. This Agreement may not be modified orally.
28. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar
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writing) and shall be given to such party, addressed to it, at its address or
telecopy number set forth below:
If to the Company:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Facsimile: (408) 844-7500
Attention: Dhruv Khanna
If to the Exchange Agent:
The United States Trust Company of New York
114 W. 47th Street
New York, New York 10036
Facsimile: (212) 852-1626
Attention: Pat Gallagher
29. Unless terminated earlier by the parties hereto, this Agreement shall
terminate 90 days following the Expiration Date. Notwithstanding the foregoing,
Paragraphs 19, 21 and 23 shall survive the termination of this Agreement. Upon
any termination of this Agreement, you shall promptly deliver to the Company any
certificates for Securities, funds or property then held by you as Exchange
Agent under this Agreement.
30. This Agreement shall be binding and effective as of the date hereof.
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Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.
Covad Communications Group, Inc.
By:
-----------------------------
Dhruv Khanna
GENERAL COUNSEL & SECRETARY
Accepted as of the date first above written:
THE UNITED STATES TRUST COMPANY OF NEW YORK, as Exchange Agent
By:
-----------------------------------
Name:
Title:
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SCHEDULE I
FEES
EXCHANGE AGENT FEE $3,500
MIDNIGHT EXPIRATION $ 500
EXTENSIONS (EACH) $ 500
OUT-OF-POCKET EXPENSES
Fees quoted do not include out-of-pocket expenses such as, but not
limited to, travel, charges of foreign depositories, facsimile,
stationery, postage, telephone, overnight courier, and messenger costs.
These expenses will be billed, at your cost, when incurred. In the
event the transaction terminates before closing, all out-of-pocket
expenses incurred, including counsel fees, if applicable, will be
billed to the account.
EXTERNAL COUNSEL FEES
Fees quoted do not include outside counsel fees.
